Survey suggests that French retail sales fell

Emily Nicol
Chris Scicluna

UK public net borrowing rises more than expected in August as debt interest payments at record high for that month
Ahead of Friday’s mini-budget statement, this morning’s UK public finance figures suggested that borrowing exceeded expectations in August but that cumulative borrowing so far this fiscal year remained broadly in line with OBR expectations. In particular, net public sector borrowing increased £11.8bn in August, lower than in August 2020 (£24.3bn) and 2021 (£14.4bn), but above equivalent borrowing in the ten years ahead of the pandemic and almost double the monthly amount forecast by the OBR in March.

Within the detail, central government receipts were £5.6bn higher than in August 2021 at £69.6bn, due to higher VAT, PAYE and National Insurance Contributions – the latter in part due to the increase that is about to be reversed. But government spending was little changed from a year ago despite the decline of more than £3bn in pandemic-related subsidy payments, with debt interest payments (£8.2bn) recording the highest August figure since monthly records began in April 1997. Indeed, so far this financial year, interest payments have totaled £49.1bn, some £9bn more than the OBR forecast in March. And with RPI having shifted even higher over recent months to 12.3%Y/Y in July and August, interest payable on index-linked gilts looks bound to remain historically elevated.

Given downwards revisions to public sector net borrowing in the first four months of the financial year (totaling £8.6bn), cumulative borrowing (£58.2) was broadly in line with the OBR’s forecast (which envisages full-year borrowing at a little more than £99bn) and £21.4bn lower than the equivalent period in 2021. Admittedly, it remains more than £30bn higher than the same period in 2019 ahead of the pandemic. And Friday’s mini-budget is set to bring a massive fiscal loosening, confirming among other things the reversal of April’s hike in National Insurance Contributions and abandonment of the planned increase in the main corporation tax rate previously scheduled for April next year, as well as the detail of the government’s interventions in energy markets, which could ultimately cost the public finances upwards of £100bn depending on how wholesale prices evolve. The detail of how the government intends to finance the new energy market proposals, however, remains unclear. Loans to energy suppliers to facilitate the planned freeze in energy bills at £2,500 for the typical household would boost debt but might not score as public borrowing. The nature of the “equivalent support” being promised to businesses over the coming six months, however, remains much less clear and might ultimately boost borrowing as well as debt. The lack of updated fiscal forecasts and objective scrutiny from the OBR to come this week will likely leave plenty of uncertainty about the full implications for the Gilt market.

Fed likely to hike by 75bps and signal a terminal rate above 4%
All eyes on the Fed’s FOMC later today. Another hike of 75bps in the fed funds rate target range, to 3-3¼%, still looks most likely. But there remains major uncertainty over what’s likely to come over the remainder of the year and into 2023. So, the Fed’s updated Summary of Economic Projections (SEP) will give an updated guide as to what the Committee members anticipate. While the June SEP suggested that the Fed Funds Rate would end the year at 3.4%, the strong likelihood of additional tightening to come in November and December means that the updated median view for year-end is likely to be close to 4%. Likewise, the median FOMC forecast for end-2023 seems bound to be above the 3.8% level suggested in June, implying an upwards revision to the Fed’s signal of the likely terminal rate for this cycle. And in his press conference, Jay Powell seems highly likely to downplay the chances – still priced into the market – of a pivot to easier policy in the course of next year. Ultimately, our colleagues in Daiwa America expect the fed funds rate to end the year at 4-4¼% and a peak at 4½-4¾%, with rate cuts unlikely before 2024.

Within the other SEP detail, Fed officials will probably reduce their expectation for GDP growth in 2022 and 2023 (previously 1.7% in both years) given the contraction over the first half of the year and the impact of extra monetary tightening. But while the probability of recession is high, the SEP seems highly unlikely to signal an outright decline in GDP. Similarly, the projections are likely to show only a modest increase in the expected unemployment rate. At the same time, due to ongoing inflation persistence, the FOMC members will continue to signal the likelihood that the core PCE deflator rate remains above its 2.0% target through 2024. Please read the latest weekly comment from our colleagues in Daiwa America for further discussion.

French retail sales on track for drop in Q3
Ahead of a quiet day for euro area economic data, this morning’s Bank of France retail sales survey pointed to a likely notable drop in spending on goods over the third quarter. The survey measure of sales volumes dropped only 0.3%M/M in August. However, that marked the third successive drop. And due to a big step down in June, French retail sales fell 3.1%3M/3M. The volume of sales of manufactured items was down a steep 5.3%3M/3M but sales of food were broadly stable despite significant price pressures. While overall spending on goods looks set to have dropped in Q3, however, spending on services likely continued to grow, not least due to the rebound in tourism. As a result, the Bank of France forecasts GDP growth of 0.3%Q/Q this quarter; we are a touch more downbeat than that at 0.1%Q/Q.

CBI survey to provide an update on UK manufacturing output, demand and firms’ assessments of selling prices
Later this morning will also see the release of the CBI’s latest industrial trends survey, which will provide an update on manufacturing conditions, including output over the past three months, new orders and firms’ assessments of selling prices over the year ahead. The latter indicator will probably be of most interest to the BoE as the MPC meets to decide rates ahead of tomorrow’s announcement.

Existing home sales data to come from the US
Before the FOMC announcement, the US dataflow will bring August existing home sales data. Contrasting yesterday’s unexpectedly vigorous rebound in housing starts, existing home sales are expected to drop for a seventh successive month reflecting the ongoing squeeze to affordability due to Fed tightening and past strong price growth. However, our colleagues expect a smaller drop than the consensus, of just 1.2%M/M.

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