Published: 30/08/2022 By ECAP
The UK economy, like most G10 ones, is showing a sharp divergence between a resilient services sector that is buoyed by full employment and strong household balance sheets, and ailing manufacturing, hurt by massive hikes in energy prices and lingering supply chain issues. The economy is not in recession as of now, and the Bank of England is focusing squarely on containing inflation. The UK is now the second G10 economy where markets expect overnight rates to go above 4%, after New Zealand. This should be supportive for sterling over the medium-term, though for now markets are focusing on the negatives. With no major economic or policy news on tap, expect the pound to track euro trading closely against the US dollar.The dichotomy between business confidence and labour market strength was evident in the US as well last week. The PMIs were dismal, although weekly jobless claims remain very low and a testament to labour market
strength. The Federal Reserve remains squarely focused on inflation, in spite of some early signs of relief on the inflation front, and Chair Powell made that clear at his short and to the point Jackson Hole speech. The key this week will be the August payrolls report, which is once again expected to show solid job creation, a labour market at or above full employment and strong wage growth, though not strong enough to keep up with headline inflation. Meanwhile, rates continue to march higher, and there is still room for the US to join the UK and New Zealand and price in peak Federal Reserve rates above 4%.