Thoughts From The Divide – Under Pressure

While the saying is that pressure creates diamonds, it can also, as Queen and David Bowie remind us, put people out on the streets.

“A time of great economic and international instability”

Case in point is the UK, where the pressure appears to have not just caused an “astounding U-turn”, but has led to a full-scale reshuffling over the past week. First, Kwasi Kwarteng stood aside. The Ex-minister defended his actions as Chancellor in his resignation letter, saying that “following the status quo” was “simply not an option” and saying that the country must change from being one of “low growth rates and high taxation” However, he also conceded that “it is important now “ to emphasize the “government’s commitment to fiscal discipline”. Then, after another high-level resignation caused by “a technical infringement of the rules”, Liz Truss followed suit, saying earlier today that despite delivering “on energy bills and on cutting national insurance”, she recognizes that “given the situation”, she “ cannot deliver the mandate” on which she was elected. (The BoE, however, is back on track, confirming its postponed gilt sales would proceed, starting November 1.)

“Precipitating an alarming decline”

In the meantime, market pressure in Europe continues. In energy, despite various measures and bailouts (see here and here), Uniper may need another infusion. And broadly, while much of Europe’s natural gas storage is or is nearly full, the energy crisis continues to squeeze European industry, causing companies to implement energy-saving measures or reduce production “even before the winter kicks in”, and some worry that worse is to come, Belgium’s prime minister saying, “We are risking a massive deindustrialisation”. What’s more, at the same time that the price pressures highlighted last week continue, wage pressures also continue a pace.

“Economic wild cards

Stateside, economic pressure may not currently be stifling, but cracks are beginning to show. Retail sales missed expectations, and though they were up 8.2% YoY, this matches “the rise in the consumer price index”. Additionally, the latest data on credit card debt has some worried that “debt loads are piling up just as the U.S. economy appears to be heading toward a recession”. Anecdotally, as Stephanie Kelton shared in a recent tweet, the Dallas Fed noted in the latest Beige Book that “Nonprofits reported increased demand for services among the communities they serve over the past six weeks. Utilization of food assistance rose, and multiple contacts noted seeing increased use by middle-income individuals seeking to subsidize their household budgets amid rising inflation and rent.”