Live on Bloomberg TV

00:00Thank you to everybody for coming. And it's an absolute pleasure to be here. If this sort of June celebration. Fantastic. Coming together of celebrating the launch of the U.K. Web site but also celebrating the new voices program. And what better way to do that than to showcase to as David said of our new voices alumni who can engage in the kinds of conversations that we just being that we just been hearing about. And they've been through the process been through the media training. So I'm really pleased to introduce to you Fiona Boal S & P Dow Jones Indices head of Commodities and Skylar Montgomery Koning T.S. Lombard senior global macro strategist. You did the New Voices program Fiona. Well you remember exactly when. Because it was all on Zoom because it was the pandemic 2000. Is that right. It was April 2000. I was stuck in my bedroom at home. Right. So right at this. Right. Right at the start of the pandemic. And you did it a little while ago Skylar. Yeah. I mean I was definitely during the pandemic and it's all just kind of a blur. So maybe a year and a half ago. So close as they learn through each other. OK. Well what an absolute fantastic time to talk to you because we though what we'd do is have a conversation about the UK economy and the global drivers on the UK economy from a commodities perspective from a macro perspective. And it's a great day to do it because we just got inflation figures out this morning 9 percent inflation the highest since 1982 just about remember 1982. And a significant contribution of that coming from commodities. So a good place to to start our conversation. So we all know that commodities have been. Oil and gas prices heating costs having a big impact on that fit on that number we just got. But what's what's in the future. Bloomberg Economics for example estimates that inflation in the UK doesn't drop below 8 percent this year. The Bank of England says 10 percent in October. So with those kind of levels what's the contribution that commodities are going to be making to that. I think unfortunately we've lost the word transitory haven't we. I think we're we're stuck with inflation. And inflation is often driven by the things that we use every day. We've seen what's happened in the energy markets. I think potentially the next shoe to drop is going to be food prices. I note that both the B B of E and the Fed talked specifically about a potential food price crisis on Monday. And you know sometimes it's energy prices that go into food but there are other reasons as well to be particularly worried about the impact food prices can have on inflation going forward. So it's kind of transitory. It's not a word we talk about as much as we did in maybe 2020. What we learned a lot since then about the ability to to spend that money that was saved up during the pandemic and consumers had some of that. But now that's dwindling. Those savings in the US and UK dwindling. Where do you see inflation in the UK then heading given all the global pressures that are on this economy at this point. Yeah I mean as you said it's at a forty year high. But I think it's also important to note that it's the highest in the G7 and there's a reason for that. So not only is it being driven by everything that's driving inflation everywhere. So the commodities Fiona talked about supply chain issues in China. But it's also being driven by the fact that we've had Brexit. And so you know the wage market or the labor market is super super tight because you're not getting that low income foreign foreign labor and you're also having supply issues coming from Europe. And so you're going to see higher inflation in the UK for longer because that's you know that's a very systematic risk that's happened to the UK economy. And so for us we see inflation peaking kind of Q4 2020 this year but it's going to get as high as 10 percent. It'll fall down next year. But you know for the Bank of England and for every central bank globally what they're worried about is what level does it settle at and how fast does it come down. And being at 10 percent at the end of the year is a very scary thing for the Bank of England. because I'm going to ask you does inflation at the end of the day eat itself. You know does inflation just take us into a place where consumers can't afford to keep up and then it goes away. And from what you're saying yeah maybe but not to a very low level. Are we stuck with elevated levels versus recent history for quite some time. Well that's the issue right. To get to that point the Bank of England has to tighten enough that it cracks demand. And so they're actually going for that. And you know that was the very scary thing we had at the last Bank of England meeting was them admitting that they're going to have to tighten to the point that cracks demand. But liquidity in households is very high right now. And you know the wage market in the labur market is very tight and you're having not as many people participating in the labor market. And so to get to that point the UK has to go further and the Bank of England has to go further than these other central banks. Fiona what things are we getting then from the commodity space. And let's stick with it and gas. We'll come on to food in moment. What clues are we getting into as to where and where where that inflationary impulse goes next. Because I think some of these markets are in backwardation where prices now are higher than that than they are in the future. Does that tell us anything useful about about our expectations for whether demand with a demand is destroyed by these levels of inflation. It tells us now that it's very expensive to fill up the car to take the kids to school. That's what it tells us now and what it tells us for the future is that you know we do expect that there will be a roll over. But I think you know one of the interesting points to make is that it's actually the oil products which is the diesel the jet fuel the petrol that you put in your car. They are already showing some all time highs in prices. And that's really what the consumer feels in the you know in their wallet in their hip pocket. And so while we might have backwardation in the underlying commodity markets it's going to take a long time for that to work through to how the consumer has to deal with those prices. And you talked about food prices Fiona when you cited the Bank of England. We had the words of Andrew Bailey just earlier on this week talking about you know possibly something apocalyptic but he was talking in a global context but also referencing the U.K. there. How serious things get in the U.K. do you think on the food on the food costs front. Well you know we're already seeing that because of the war in the Ukraine that vegetable oil. You know we can only buy a certain amount of vegetable oil at the supermarket here in London. You know that really again shows the consumer exactly how serious this is. And I think you know what's worrying about food prices is that they they act as if as does energy. They act as a regressive tax. So even in a in a very developed economy with a good system of support like the U.K. it's still the lower income consumer that will really feel the inflation impacts the most. And is it just about wheat prices. When I think about soft commodities and Ukraine and Russia and the things we're not getting that that we that we wouldn't have been getting before because some of it tragically of course can't get out of the country. Is that what we're focused on. Is it is it wheat prices and the inflation we see then. Ukraine is often referred to as the breadbasket of Europe and that's a very apt description. They are a major exporter of wheat. They are a major exporter of sunflower oil. But the whole region is also very important with things like seed production with some vegetables and with fertilizer. So while we might be restricting our ability to get out of the current crop the risk is there won't be a crop the following year or if it is that it won't have as high yield because of things like the restriction of infrastructure and the and the availability of fertilizer. I mean Skylar these are pressures that that the world will feel. And tragically some people in less wealthy countries will probably feel that pressure much more than we will in the UK. But we will have food inflation here in the UK then from what you've both been saying. Where does that. How does that compare to other parts of the developed world then. Because as you reference the Fed is dealing with this issue as well. It's not only the Bank of England that maybe was many have said not hiking when it should have done. Many have said that about the Fed and the Fed has said it about itself. So where do we stand in that sort of global context. Is it excusable that central banks are behind the curve. Well I mean there is a very big difference in the type of inflation we are seeing at the beginning of the pandemic and in the last couple of years in the US versus in the UK. So the UK has been more of a mix of inflation and it's primarily been this cost pushed countercyclical inflation. And that's quite worrying because when it's cost push and it's caused by supply disruptions or it's caused by rising commodity prices there's not an equivalent demand. And so it feeds into consumers prices but it's very hard for those consumers to take those prices on. And so it slows growth whereas when it's demand pull which is much more than the environment that we're seeing in the US it's you know it's a cycle where consumer demand is what's bringing that inflation upon itself. And so companies raise their prices margins expand and you're able to take on those higher prices because it's driven by demand. Now that's shifted a little bit in the US especially because of Russia Ukraine and the supply driven issues that are coming from that. But you know because of that the growth mix in the US is much better than it is in the UK. And so I think you know the UK and Europe in general they are recognizing how bad inflation is going to get. And they don't want a kind of have it entrenched. They don't want it going into wages and spiraling. So does it make sense for what you said then. Does it make sense to hike in one of those environments and not in not in the other. Because you know hiking interest rates is not going to help global commodities move around the world more slickly. It's not going to open ports in China and it's not going to plant more wheat anywhere is it. Well that's exactly it right. If it's supply driven then you're hiking and you may dampen demand but you're already hiking into a lower growth environment. And so you're dampening demand even more than it was already slowing your effect kind of forcing the economy into a recession. But you don't really have another choice. And so the US you know we're getting that more stagflationary mix now but they have more room to hike. And obviously they haven't done as much as the U.K. as well at this point. But they have a little bit more wiggle room to get to that point. And you know the neutral rate is arguably higher there as well. And so there is more of a wiggle room for an okay US environment and economy this year. And Fiona we talk a lot about whether the EU might cut off gas from Russia. We certainly have been following what they've been doing with oil recently and there are plans to wean the European economy more broadly off Russian gas. And the UK has said it wants to reduce reliance of course. What do you think the impact would be on the European economy if we were to see the stopping of Russian gas coming to Europe. I mean it might depend on a lot of the detail I suppose on the timelines. Look I mean it's I think it's very hard to argue against a relatively harsh recession. If the taps were turned off immediately without much of a plan. I think you know. I suppose the precedent from the oil conversation though is that there wouldn't be immediate maybe. Then and you would sort of hope that. I think in terms of you certainly as a central banker I would hope that interest rates are a very blunt tool. And if you put higher interest rates on top of such a supply shock then I think the growth picture starts to look very very poor. Yeah Skylar where do we stand on the pound at the moment. Because it was really interesting. Yesterday we got wage data that showed a really tight wage market at the labor market and all of a sudden and the pound flew. It really rose as a result of higher expectations of hikes from the from the Bank of England. Today we got inflation. It was 9 percent. You know by anybody's historic definitely recent history definition of high level of inflation. And yet the pound fell because apparently there's a lower expectation of interest rate hikes on as a result of that number. I mean where do you think we are when the pound is very volatile at this point. Yes. So you saw I mean what you've seen is broad weakness in GDP as well as versus euro against very very strong dollar. Right. And so you've seen this weakening trend against both currencies. And you know what you'll see in 2021 was that euro GBP which is maybe a more pure representation of what GBP is doing that strengthened or sorry euro weakened versus GBP. GBP strengthened throughout 2021 because the Bank of England was ahead of the curve. They were hiking. But what you've seen in 2022 is this turnaround in Euro GBP because people are starting to recognize how bad the economic backdrop is and that stagflation. And I think you know the Bank of England reaction function from euro GBP was very telling and that GBP sold off against everything because people said yes you're hiking but that doesn't matter if you're headed towards a recession. It doesn't matter if you're having this huge stagflationary impulse. And so you know for us we see people heading even lower from here. You know it's not going to get a lot better for the pound. I don't think it doesn't help that freight differential is so much higher and it has that carry advantage if your economy just keeps weakening. OK. So food for thought if anyone has travel plans. Let me just finally on this part of our conversation as we bring this towards a close because I mean I'm also aware that there's a lot of people want to get on with everything this evening. Fiona on China a weakening story in China at this point. Is there anything. Well what do we need to know about that from a UK perspective I suppose from a U.K. economic perspective the links with China. We talk a lot about Germany and the Eurozone and the links are clearer. Look I think the key with China is that it's a consumer led market. So weakness from the consumer because at the moment there are a lot of them are stuck at home will fade more broadly into sort of the global demand picture. And I think you know I think the other thing that we can be sure of is that the Chinese administration will be looking to you know supercharge I should say once the market opens back up. So whether that is additional stimulus or other ways to encourage consumer growth that we will should expect to see that almost like a pop to activities. So even if commodities fall off a little with a slowing China we shouldn't maybe expect that to continue. I think that's a fair assessment. OK we could sit and talk about this forever but probably the audience would would we'd lose them slightly. So let me move this on. Just finally I want to take us to one of the stories. I'm not sure if it was on the page that Dave Merritt showed us from the U.K. Web site but it was getting quite a lot of attention and might be of interest to the room. So we thought we'd close our conversation with this. Bloomberg commissioned a YouGov poll which was to ask financial professionals about the whole work from home return to office dynamic. I'm sure many of you have engaged in these kinds of conversations. And what came back from that survey was 85 percent of respondents said that their new normal the way they saw their lives right now 85 percent of them said it was either working from home or hybrid of working from home in office. So there's just 15 percent who said they were five days off the week in the office. I have to be in the office because I have to present in a studio. Although for three months during the pandemic I presented from home but I'm not sure I want to return to that situation. And what does that chime with your experience. I mean what's the what's the whole kind of return to office vibe been for you Fiona. You know I've been going back to the office for a change of scenery a different lunch and one that I haven't had to make myself. But I think more generally you know I've been looking forward to that return. But certainly it's not going to be five days a week. Skylar. Yeah I think it's the same. It's very nice waking up a little bit earlier having my home coffee. I will say though you know if you poll them I'm sure the majority of them are going in on a Thursday for after work drinks. That's that's the reason. It's definitely busier on a Thursday around our office. Fiona Boal and Skylar Montgomery Koning thank you both very much. I'll hand over to Ruth David.

No schedule data available.

What's Next for the UK Economy: New Voices Discussion

Fiona Boal, global head of commodities and real assets at S&P Dow Jones Indices, and Skylar Montgomery Koning, senior macro strategist at TS Lombard, discuss their outlook for inflation in the UK, stoked by rising commodity prices, supply chain disruptions and Brexit. They spoke to Bloomberg's Anna Edwards at a Bloomberg New Voices event in London. (Source: Bloomberg)

Bloomberg Technology
The only daily news program focused exclusively on technology, innovation and the future of business from San Francisco. Hosted by Emily Chang.
More episodes and clips