YouSaid · the spoken record

Huw Pill

lines on the record: 34
first: 2023-08-01
most recent: 2023-08-01
sittings or episodes: 1
sources: podcast

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“Yeah, I mean, base case for us is that the UK can avoid a recession, that basically falling headline inflation supports the consumer enough that households can absorb higher interest rates, can absorb the fiscal drag that we talked about. But we're talking about pretty low growth. We have barely positive growth in the second half, then growth picks up a little bit in 2024. And so we do think the risk of recession remains. We have put a probability of about 40% on this over the next year, which is about twice as high as it is in the US because the UK, as we've talked about, is struggling with this combination of shocks that still makes it a more challenging macro outlook, we think.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Which really is about shrinking the portfolio of assets bought under the quantitative easing programs over the last decade or more. But the UK is a little bit unusual in that the Bank of England are selling those assets. And now that interest rates are higher, when you sell them, they actually”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Maybe just to add, there is, of course, as Yari mentioned, a connection. Between the interest rate movements we've seen the inflation repricing that we have seen because ultimately they have a fiscal impact. And if we think about the moves over the last few months of interest rates higher, now they've come down a little bit, but they represent relative to, for example, the last time that the government provided an update. On the finances, on how much might need to be issued this year, there is a pretty significant impact, both from the higher interest bill, the higher inflation bill, given the inflation link debt that the government has already issued. But then also importantly, from quantitative tightening. Now that is something that other central banks are doing as well.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, we basically think it means that fiscal policy needs to turn from a supportive role for growth over COVID and doing the energy crisis into a drag as debt has risen, as interest payments are due to rise. And so our estimates here are that fiscal policy is already deducting from growth this year to the tune of about half a percentage point. And then we think the drag will go up in 2024 to a bit more than one percentage point. Now, of course, there is uncertainty around the fiscal outlook. We also have an election and so on, but we do think bottom line here is that fiscal policy is turning from a supportive role really to more of a headwind to the economy going forward.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Let's just go back to policy for a moment. So much focus on central big policy heading into the BOEs meeting this week and of course off the back as George just said of the Fed and ECB last week. But with the rise in borrowing costs and of course with public finances already being strained, what does that mean for near and long term fiscal policy in the UK?”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“As the cost of those gas imports went up, then those terms of trade deteriorate. And that's a long run driver, if you like, of FX returns. And so if you couple that against an environment where the Fed were hiking and the U.S. economy didn't have such a negative terms of trade impact, that was a recipe for quite weak currencies. Now, we may not be totally out of the woods on the gas situation in Europe, but it certainly looks like gas prices have stabilized much lower than expected at the earlier part of the year. And that is going to be a tailwind not only for the macro fundamentals, including growth, improving purchasing power of the consumer, but also should be a support for the currency as those terms of trade improve. So we expect sterling against the US dollar at 133 in 12 months and expect a similar margin of appreciation against the euro, about 2.84 on euro sterling.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“That have been delivered quite spectacularly through 2022 and much of this year and seem to be closing in toward the end of their cycle. Now, of course, it will depend on what the bank ultimately delivers, but if we are right that there are more hikes to come from the Bank of England, that will come at a time where the Fed will be on hold from here, the ECB might deliver just one final hike. I mean, there's, of course, risks around each of those forecasts, but our baseline view is that the Bank of England will be hiking for longer and typically those higher yields will go some ways to support the currency. Now, I think there's another positive for sterling, which is that last year in 2022, both the pound and the euro were suffering from a very substantial negative terms of trade shock as gas prices increased. So if you think about just the aggregate terms of trade of those economies,”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“It's a really interesting question, and we certainly pick up very strong views on the prospects for the currency. And certainly, I think there's been a link that the prospects of recession, whether gas driven from last year or perhaps because of Bank of England action, would be a headwind for sterling. But we're actually a little more positive on the pound. We think that ultimately the Bank of England do have more work to do to hike rates, to stabilize inflation. Again, thinking about the action delivered in June did go some ways to restoring a little bit of resolve for the Bank of England to get on top of that inflation issue. And if you think about the context here, currencies and FX always need the second leg, if you like. If you think about what's happening in the US and in Europe, we've just had meetings from the Fed and the ECB where they were ever just slightly dovish and perhaps receding a little bit back away from the hike.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“George, we've spoken a lot about the forecasts and outlook for guilt. What about Sterling? It's been out of favor recently. It's been falling against some of the major currencies, but is that likely to last given all of these moving parts?”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Came into the UK to work. And so historically, the UK labour market never really overheated because as soon as labour demand picked up in the UK, you had EU workers flowing in and you effectively had a very elastic labor supply. And we think that Brexit changed this, that the labor supply as a result of this has become much less elastic. And you see that, for example, when you look at the labor market by sector, you see precisely that the sectors that are now most overheated are also the sectors that used to benefit most from the immigration inflows from the rest of the EU. But those are now the sectors also with the highest wage growth. So I think when you look closely, it is clear that the changes in immigration patterns have played an important role here.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“So, the interesting thing is that the total immigration numbers are actually higher than there were before the EU referendum, but that the composition of immigration has changed quite fundamentally. So essentially immigration from the EU has fallen sharply, whereas immigration from other parts of the world has gone up. Now, we think that change in the composition of immigration has important Because the EU migrants that used to come into The UK used to have very high participation rates. They typically went into lower skilled sectors, but effectively”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Touched on earlier that the UK's tight labour market has been an important factor behind the wage pressures and the high services inflation that still looks a bit worrying. Your research has shown that post-Brexit, the change in immigration has contributed to that tight labor market. Give us a little bit more detail there.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“And so, when you look at the effective mortgage rate, so essentially the rates that households are actually paying on average, that effective rate has gone up from 2% to 3% so far. And we think it will go to 4.5% by the end of 2024. So it gives you a sense that there's still a significant amount of drag in the pipeline that probably a bit more than half of that drag into housing is still to come.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“That's right. That's a key headwind as we look ahead. UK Households are more exposed than households in many other countries. That's basically because the borrowing Has a shorter maturity Households tend to have more mortgage debt than in many continental European countries. So the UK looks a lot more like Sweden or Spain in terms of the exposure to higher interest rates. At the same time, we've also seen important changes in the mortgage market in the UK over the last 10 to 15 years, which is that the share of floating mortgages has fallen quite significantly. And so it suggests that the refinancing this time around is going to be quite a lot slower than in the past.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Those interest rate increases generally are also quite evident in the housing market we're seeing monthly mortgage payments rising for millions of homeowners. And the UK stands out because housing is a big part of the economy. Talk to us a little bit about the implications of that.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Now, on top of that, households still have quite a lot of the pandemic savings. So there's an interesting contrast between UK consumers and US consumers. U.S. consumers have already wound down most of those savings, whereas in the UK, households haven't. And so we think that consumption is likely to show some signs of growing again later in the year and into next year. But of course, it is going to remain a fairly subdued growth environment, we think. So we have growth of 0.3% this year and 0.7% next year, so both years. Clearly below trend and weak consumer growth is a key part here”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“I mean, it's certainly been a tough year for UK consumers. There was a big cost of living hit, of course, over the last year with high inflation, high energy prices, rising interest rates. As a result of that, we've really seen a stagnation in consumption has basically gone sideways over the last year. And of course, indicators of consumer confidence, for example, have remained very depressed. Now, when we look ahead, we think it will remain a difficult environment, basically because interest rates are going up and that's feeding into household finances. But at the same time, what's important to realize is that inflation is coming down and wage growth is strong. And so when you think about the real income picture, that's actually improving by quite a lot because you're really looking at a situation where headline, particularly towards the end of the year, is coming down quite rapidly.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“As you said, inflation is likely to remain high for a while. We're likely to remain well above the BOE's 2% target for some time, and households are still struggling with higher prices. Are you seeing any slowdown in consumer spending as a result of that?”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Go some ways to calm worries in other markets as well about runaway inflation. Now, the problem we are getting actually quite a lot more inflation progress out of the US and some in the euro area as well. So those markets are some ways ahead, but it will reinforce a global narrative that inflation, while it remain well above target, is certainly falling relative to the peaks we saw in 2022.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Say Europe and the US in the most recent period since the Bank of England undertook the 50 basis point hike in June and around the inflation surprise that we got to the downside in the latest reading, we've noticed that actually the impact on other markets has been much lower. So if you like other global bond markets are starting to price the UK as a little bit more idiosyncratic. What I do think is important though is that demonstrably, if you look at the level of inflation, the level of inflation uncertainty forecast disagreement. The UK does stand out as having among the worst inflation problems in the G10. If we do indeed find that inflation problem is lessening, it's coming under control, both by the central bank's action and then finally through some of the disinflation that's been long awaited in energy and food prices and so on, I think that will”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“So we have picked up, if you think about the market pricing over the last several months, that the UK has been, if you like, a kind of bearish source of news for global bond markets. What I mean by that is that as the inflation problem has worsened in the UK, guilts have sold off, rates have moved higher, yields have moved higher. And that has spilled over into other bond markets as well. So in a sense, we know that global bond markets are in some sense substitutes as the price of one fluctuates that it can affect the prices of others. And we have seen a very significant repricing of guilts, which again has had an impact on other markets. Now, at the same time, we have seen rate spreads move toward, if you like, much wider in favor of the UK. So UK yields moving higher relative to those other economies, but they do leave an imprint on the bond markets.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“So we forecast that the terminal rate will probably just undershoot market pricing ever so slightly, but that the Bank of England do have more work to do to raise the policy rate from current 5% levels to get the inflation process in hand and under control for the long end of the curve and thinking about, say, the 10-year point on the Gilt curve, which is the global benchmark that we would think about forecasting, we expect it to reach 4.5% as we go through the peak of the hiking cycle around about Q3, staying around that level, maybe slightly lower to 4.4 by the end of the year, but not far from current levels, but slightly higher. So we're currently trading around 4.3%. We think it'll be around 4.5% in steady state. Now that's also in the context that we do expect yields, for example, in European bond markets to be a little bit higher as well, for example, in German 10-year rates. And so in that...”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Growth and inflation in particular. And that means it's much harder to solve back in September, October. The Bank of England were able to short circuit this technical dimension in the market by buying guilts temporarily. This time around, the solution to get inflation under control is actually higher rates itself. And so the front end, if you think about two-year yields, are actually higher now than they were back then. What that means to us is that essentially this time around, the repricing is going to be stickier. It's going to be more long-lasting and why we don't expect yields to fall much from current levels.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“On leverage as they sold off, that forced further selling in the market and led to a huge sell-off in the guilt market, that was predominantly led by longer maturity guilt, so 10 year, 20 year, 30-year guilts. And in fact, if you look at the very long end of the curve, yields were higher then than they are now. What is quite different this time is that this is a sell-off driven by”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Quite far to the pre GFC period where yields averaged, let's call it four and a half to five percent at the 10-year point. Policy rates currently at five, maybe heading again somewhere between 5.5 to 6. That again, you have to go back to the pre-GFC period. But the last time that bank rate was as high as that. And so we are talking about relatively high historical yields and certainly very high contrasting to the previous decade. But I think what is really interesting is the comparison to the episode you mentioned. Back to September, October, where if you like an announcement of a fiscally expansionary budget catalyzed a sell-off in the guilt market that gained its own momentum because of, as you mentioned, leveraged that was deployed in these LDI type strategies. What it means is essentially buying guilt.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“The data surprises have carried rates lower into this meeting, both the inflation and on some of the activity numbers, coming in a little bit weaker. And so that pricing is lower. That's also true for terminal rate pricing, which is slightly above the 575 that we expect, just under 6%, but well off the highs, which was closer to 6.5% at the peak. And just give us some context about those yields relative to where we were historically, relative to where we were during some of the volatility that we saw around the liability-driven investment crisis scenario that we had seen in the autumn of last year. Yeah. So I think we've actually been near the 4.5% level, again, in recent weeks. And so if you think about the recent moves in Gilt Yields, they're in between the four to four and a half percent range. And apart from that episode you mentioned, September and October 2022, you really do have to go back.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“George, let me bring you into the conversation what are markets expecting from the central bank meeting this week? Yeah, thanks, Alison. So market is really stuck with the same mixed views, if you like, that Yari just described and is pricing in between a 25 basis point hike and a 50 basis point hike around about 33 basis points price. So if you think about in just in rough probabilities, it's about a third chance of a 50 basis point adjustment and the rest on a 25. And I think the market is similarly in two minds because of the surprise 50 basis point hike at the June meeting that really revealed that the Bank of England were willing to surprise the market on the hawkish side and if you like over deliver on the expectations at the time. And so the market will retain a little bit of that probability or insurance against that risk. However, as Yari has said,”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“A close call, but on balance, we think they are likely to put more weight on the labor market softening that we've started to see and also more weight on these initial signs of disinflation that we talked about. And we think that's going to tip the balance towards 25 basis points this week. Now we then think that will be followed by two more hikes, by two more 25 basis point steps to a terminal rate of 575 in November, which of course would be notably above where the other major central banks are.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“There's a range of views on the likely outcome of this meeting. The MPC has really said they want to lean against inflation persistence, and they've set out three criteria that they're watching, labor market activity, wage growth, and services inflation are basically the indications of inflation persistent they're monitoring. Now, in June, all of those three indications were to the upside. And that's why they hiked by 50 basis points, they surprised markets in June. This time around, the verdict here somewhat mixed on the labor market activity side. Things have been softer. Wage growth has still been very firm. And then on services inflation, things have sequentially eased a bit, but are still at a very high level. A bit of a split verdict here. Now, there's been very little communication from the Bank of England in terms of how the read the data. And so we think that makes it”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Any science really that wage growth has started to slow. And so we think this inflation process in the UK, as a result of that, is going to be slower and we have core inflation still close to 6% by the end of the year, which is quite a bit above where we see it in both the US and the Euro area.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Was a sizable surprise, and I think we should take some comfort in it. So it's pretty clear that surprises have been correlated, certainly on the upside, and we've now also started to see that surprises have been correlated on the downside in other countries. And so we do think it's the start of a more pronounced disinflation process here. But I would say the composition remains worrying. Essentially, the downside surprises so far have come from energy and have come from core goods prices. And we think those will slow further. You see that wholesale energy prices, at least in gas, have continued to fall, and then indicators of bottlenecks globally that have been important for goods inflation have also continued to ease. But at the same time, it's really the services side that has continued to look really strong, which is related to wage growth. And we have not yet seen”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“Certainly true that the UK stands out here. Headline inflation is at 8%, core inflation around 7%. So that's notably above where both the US and the Euro area are now. I would say the big picture reason is effectively that the UK faces a real confluence of shocks that we've seen in other regions. So basically in the US you have a classic access demand issue, a tight labor market that's pushed up wage growth and inflation in the Fed basically needs to lean against that. In the euro area, you've seen an enormous energy supply shock, which is then started to feed through into wages and into underlying inflation. And in the UK, you effectively have both of those issues. Excess demand in the labor market and on top of it a big energy supply shock. And all of that has been complicated also by constrained labor supply.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“So we have talked so much on this podcast about the inflation problem that most of the developed world has been grappling with, but the UK has stood out in terms of the severity of its inflation problem. Why is inflation so high, Yari?”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT
“UK faces a real confluence of shocks that we've seen in other regions. We have core inflation still close to 6% by the end of the year, which is quite a bit above where we see it in both the US and the Euro area.”
2023-08-01 · Goldman Sachs Exchanges · Why the U.K.’s high inflation has global implications · IDENTIFIED FROM THE TRANSCRIPT