Is the gloom lifting in the UK?

TPP Market Commentary:

The gloom cloaking the UK economy is starting to lift.

Just four months ago, the Bank of England warned that Britain was facing its longest recession in a century as well as a collapse in living standards.?

Neither is the case any longer. The BOE last week effectively cancelled the recession and said the period of falling household incomes is over.

As we always say, read the numbers not the papers.

“The prospects for the economy in terms of growth are now considerably better, and I think it is reasonable to say there is a pretty strong likelihood that we will avoid a recession this year,” BOE Governor Andrew Bailey told the BBC on Friday.

Most measures of UK economic prospects are improving. Alongside its quarter-point hike in interest rates to 4.25% on Thursday, the BOE upgraded its growth forecast for the three months to June to show gross domestic product increasing “slightly” instead of contracting 0.4%.

Employment is forecast to grow 0.2% in the second quarter, not drop 0.4% as predicted in February. Real household disposable incomes could “remain broadly flat in the near term, rather than falling significantly,” the minutes to this week’s Monetary Policy Committee rate meeting said.

Those figures suggest that households will soon feel better off, despite the current 10.4% level of inflation.?

• In April, the legal minimum wage rises 9.7% to ￡10.42 ($12.74) an hour, and benefits rise 10.1%.
• That same month, inflation will drop into single digits and “fall sharply over the rest of the year” as falling energy prices and more favourable comparisons with a year ago feed through, the BOE said.
• Annual energy costs for the typical household will remain capped at ￡2,500 in April and are on course to fall to about ￡1,800 in July.
• Households will also feel richer simply because they spend less on energy in spring and summer as they don’t heat their homes.

Past growth has also proved stronger than projected. In November, output was forecast to shrink 0.3% in the final quarter of 2022. Instead, it flatlined. Private-sector activity, as measured by the purchasing managers’ index, is positive, with order books growing and confidence at its highest level since the invasion of Ukraine 13 months ago.

The closely watched survey added to “signs that a near-term recession has been avoided,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said Friday.?

Consumer confidence is improving, and retail sales recovered in February to pre-Covid levels despite an 18% increase in food and non-alcoholic drinks prices over the past year.

The economy’s resilience has taken forecasters by surprise, given the record terms of trade shock caused by energy prices and the fastest monetary tightening since the late 1980s, as the BOE raised rates from 0.1% to 4.25% in 16 months.?

The last equivalent terms of trade shock in the 1970s did cause a recession, as did the rate rises of late 1980s.

Kallum Pickering, UK economist at Berenberg Bank, said the difference this time has been the UK’s reduced reliance on natural gas and the strength of both household and corporate balance sheets, thanks to savings amassed during Covid. Those savings have insulated the economy against rate hikes.?

The energy-price shock has been less severe than expected because the UK has managed to operate with 15% less gas than previous years, according to Pickering’s calculations using data presented by the Office for Budget Responsibility at this month’s budget.

The fiscal loosening in the budget is expected to add 0.3% to GDP and reduce headline inflation, the BOE said. Now that a deal over the Northern Ireland Protocol has been agreed with the European Union and the prospect of a Scottish referendum receding, the investment climate has also improved.

“For the first time in seven years we have no populists in the UK,” Pickering said. In place of his forecast last autumn for a recession in which the economy shrank 2.5%, he now expects “stagflation with a strong labour market rather than recession.”

The stronger economic outlook makes at least one further rate rise to 4.5% likely, Andrew Goodwin, UK economist at Oxford Economics, said. Markets are priced for a 4.5% terminal rate.

There are risks to the outlook, mainly from the ongoing turbulence in the banking sector and financial markets — with Deutsche Bank the latest institution facing difficulties. Further setbacks could drive up bank funding costs that “result in a tightening in financial conditions” and damage growth prospects, Pickering said.

The BOE has stressed that UK banks are “safe and sound” and there is no reason to think they aren’t. Yes a few banks made poor decisions, but it’s not a systemic problem. The issue was not so much a lack of overall liquidity, but that a few banks tied up all their money in long term investments that do poorly during a period of higher rates.

Bad decisions made by people who didn’t seem to understand what they were doing. This sounds like the banking hierarchy and it sounds a lot like a problem we’ve seen before.?The top jobs can often go to those who make the most noise rather than those who know what they’re doing.

Every bank needs someone at the top who understands the markets.?We saw what happened to Liz Truss when she didn’t realise the consequences of telling the gilt market that you’re about to sell ￡40 billion in gilts. The markets are not grown?up or well behaved. It’s our job as traders to make money, and those who don’t do it for a living, will never understand the nuances that come with a lifetime of trading.

Catherine Mann, a BOE policy maker, said the banking and financial market turbulence could influence the BOE’s forthcoming interest rate decisions, a hint that even she might soon be ready to pause the quickest monetary tightening in three decades.?

If higher perceived credit risk lead to tighter financial conditions, that will be “on the plate” in the May decision as it “would have the same effect as a bank rate rise.”

Ultimately, the headline news is that the UK economy is doing fine, maybe better than fine. The banking fallout was something we could have done without, but it was a US issue that had no real affect on the UK.?Banks were tested in a rout of selling, but ultimately those who sold out on the drop are likely to be the biggest losers. Let’s hope it wasn’t your wealth manger ‘taking action’.

The time to buy is when others are panicking.?That’s why professional traders will always have the edge over the fund managers. The current price drop in banks just makes them look far too cheap. When things are cheap, buy them and wait.?The price will correct itself as it always does but if you’ve sold out, then that’s it, the loss is locked in.

This is the main reason that active fund managers have always underperformed their benchmarks. Our traders have always outperformed theirs; but trading and wealth management are two different worlds.

The current TPP market bias:

The majority of our traders have had an excellent Q1 so far, in what has been a very challenging trading climate.

It seems that many of the ‘buy or flats’ and the ‘active’ strategies have timed many of the short/mid term moves fantastically well.

A few strategies which are mainly long?have struggled but in time- we would expect they’ll be back.

This current level in many global stock markets?most likely provides a great long term buying opportunity.?This banking issue is not the same as 2008 and shouldn’t be treated as such. There isn’t a problem within the banking system itself, just a few mismanagement issues in a couple of places.

For most portfolios globally the recent drops have been?painful, and the drops have been?big, but ultimately,?at TPP we like?these drops so that we can buy in?cheaper or buy back the shorts.?Picking the bottom or the top is just not an option, but making money from something close is.

One this is for sure, our traders will be looking to close out this quarter in style.

If you have an underperforming portfolio or are sitting in cash waiting for an opportunity- contact our team for a FREE consultation.

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