Liz Truss was announced as the new leader of the Conservative party on Monday and the UK’s new prime minister after meeting the Queen at Balmoral yesterday, where she was asked to form a government after the resignation of Boris Johnson.
In a speech outside No.10, Truss revealed her top three priorities for government, which she named tax cuts, immediate action to address the energy crisis, and support for the NHS. Energy bills in the UK were due to jump by 80% from October to £3,548 a year for the average household.
However, plans drawn up by the newly-formed cabinet would look at freezing energy bills at £2,500; a plan that could cost more than £100bn. The pound was boosted by news of plans to bring energy prices under control, and the new budget could also help rein in current inflation expectations.
European stocks slumped at the start of the week whilst the Euro fell to a 20-year low. Russia has blamed Western countries for its decision not to reopen the Nord Stream 1 pipeline on Friday after it was shut for 3 days for maintenance. The closure was announced hours after members of the G7 agreed to a new price cap on Russian oil. US Treasury Secretary Janet Yellen said the price cap helps achieve “our dual goals of putting downward pressure on global energy prices while denying Putin revenue to fund his brutal war in Ukraine”.
Although gas prices spiked following the news, they did not return to last month’s highs. This, coupled with Truss’ new energy budget, helped reassure markets this week. The introduction of the price cap could also help ease rate expectations and dollar strength which in turn would benefit Asia & Emerging markets.
European Central Bank policymakers will meet tomorrow to discuss interest rates; markets have revised their initial forecast of a 50-basis point hike to a larger 75-basis point increase. The change in forecasts comes after record-high Eurozone inflation was announced last week and as the energy crisis in Europe intensifies. As the main drivers of inflation are supply side, aggressive monetary tightening is unlikely to have a material impact on inflation.
Looking to economic data releases this week; Eurozone retail sales rebounded in July following a 3.2% drop in June, a sign that consumer spending remains robust despite high inflation as volume sales increased 0.3% in the month.
The US ISM services index unexpectedly rose in August to 56.9, beating market forecasts of 55.1, the strongest growth in services activity in four months. According to the Institute for Supply Management, business activity and new orders expanded faster, whilst prices rose at a slower pace (the lowest reading since January 2021). This is an indication that inflationary pressures may be easing, and despite GDP contracting earlier on in the year, the economy is not in a recession.
India’s services PMI accelerated from a 4-month low to 57.2 in August, and the economy saw an uptick in employment with the sharpest rise in over 14 years. This is a clear sign that one of the world’s largest populace is coming back online and firms are seeing the continued benefit from the lifting of COVID-19 restrictions.
Also coming up this week we have US trade balances, Chinese CPI and PPI Inflation
Kate Mimnagh, Portfolio Economist