10 March 2023: Hunt under pressure over support


  • Is a recession still possible?
  • Biden sees good news, and bad
  • Eurozone banks see growth, not recession, in 2023
GBP – Market Commentary

Childcare costs are out of control

The economy is losing around twenty-five billion pounds annually from the number of (mostly) women who are unable to return to work due to the cost of childcare. The Chancellor is under mounting pressure from his own MPs to provide further support to this sector of the economy in his forthcoming Budget, which he will deliver to the House of Commons next week.

Another area of the economy that is failing, according to Andrew Bailey, is the number of workers who have opted to take early retirement rather than return to work following the recession.

According to Bailey, the UK is unique among its G7 partners in experiencing this phenomenon, which is potentially a further source of both lack of output and rising inflation due to the lack of genuine skills that have disappeared from the jobs market

This situation is exacerbated by the exodus of foreign workers that has happened since Brexit.

The Bank of England has been accused of not being fully committed to using monetary policy to bring inflation under control, as it has steadily raised interest rates close to the level when they will become restrictive on demand.

In the aftermath of the next MPC meeting, where a further increase in rates if expected or the one following, rates will probably enter the neutral zone where they are neither supporting demand nor restricting it.

At this point, the MPC will probably consider halting its programme of rate increases since inflation should see an acceleration in its fall, while there will be growing fears, as has been alluded to recently by independent members, Swati Dhingra and Silvana Tenreyro.

Although fears of a recession remain, Huw Pill, the Bank’s Chief Economist, recently painted a more positive view of the economy. He believes that the current momentum seen in both demand and output is stronger than it is believed to be. This chimes with the belief of the third of the independent members of the rate setting MPC, Catherine Mann, who continues to advocate fifty basis point rate increases until inflation falls close to the target of 2%.

Based on the most recent data, the housing market, which has a knock-on effect on several sectors of the economy, is more likely facing a correction rather than a long-term trend lower. Since the Bank of England is unlikely to continue to hike rates beyond the Summer, the bulk of the tightening of monetary policy has probably already taken place. There is still movement within the market, which bodes well for its resilience.

Sterling remains unable to regain the 1.20 level versus the dollar, as the Greenback has gained from this week’s more hawkish testimony from the Chairman of the Federal Reserve.

Yesterday, it made a high of 1.1938, closing at 1.1918. The market will be held in the thrall of the date due for release later the the U.S.

USD – Market Commentary

Testimony more hawkish than expected

Jerome Powell has left the market in no doubt that he intends to carry on the task of driving inflation down close to the Federal Reserve’s mandated target of two percent.

After a far more hawkish meeting in February, where Powell was clearly outvoted in his desire to see a further hike of fifty basis points, he believes that the FOMC was mistaken in taking the risk of a twenty-five basis point hike, which may have backfired given the strength of the January employment report.

Powell has raised the potential level at which the programme of hikes is likely to be halted to 6% although the Central Bank’s level of proactivity means that the higher the final level is, the shorter the length of time that rates will remain at that level.

Several prominent economists have been persuaded by Powell’s testimony this week to subscribe to the view that short term rates will reach six percent and remain fearful that he may not be able to manage a soft landing, given that only a few months ago, the likely ceiling was expected to be 4%.

The fact that 4% was never going to be sufficient to quell raging inflation was lost on many, even though Powell was consistent in his view that the FOMC will remain data driven.

That premise will be tested again today by the release of the February Employment report. There has been a distinct lack of analysts or commenters willing to raise their heads above the parapet in the wake of the extraordinarily strong headline figure for January.

It is hardly surprising, that while few are prepared to put a figure to today’s NFP, no one is seeing an improvement of the previous headline, and investors are looking at how large the potential revision may be.

The weekly jobless claims data which was released yesterday saw an unexpected rise well above the pivot point of 200k fresh claims in the week ending March 3rd. 211k people made initial claims, up from 190k a week earlier.

The dollar index has been unable to build on the momentum it gained from Powell’s testimony earlier in the week. Yesterday, it fell back to a low of 105.15, closing at 105.23.

EUR – Market Commentary

France lines up against Italy in the row over rates

France has been curiously sidelined as inflation has raged throughout the Eurozone. It has become moderate, although that may be changing as President Macron tries to push through legislation to raise the minimum retirement age from 62 to 64.

This has already brought a wave of strikes as notoriously militant workers vent their disagreement with the proposal.

The Governor of the Banque de France, Francois Villeroy de Galhau, entered the argument over the advance guidance that has been given to the market which appears to usurp the democratic process of the Governing Council of the European Central Bank and has destroyed, in particular, the Bank of Italy’s grudging agreement that rates need to be increased as long as the increase can be justified.

Villeroy de Galhau, spoke yesterday of his belief that inflation should peak between now and June and that the ECB should do whatever is deemed necessary to bring it back to the 2% target.

The peak is close, but more need to be done to return inflation to its target. He went on to say that inflation should be back close to 2% by 2024 or possibly 2025. Food inflation is likely to remain high through the rest of 2023.

His comments were backed by French Finance Minister Bruno le Maire, who added that he sees inflation declining from around the beginning of the third quarter.

The ECB has called for savers to begin to spend again as confidence returns to the market. This is a measure that may see a spike in inflation but would provide a shot in the arm for the economy

The final cut of Q4 GDP for the Eurozone was published this week, and it was cut from 0.1% to flat. While this is a small change, it clears the decks of any lingering fears that the Eurozone economy had fallen into recession.

The Euro regained a little composure yesterday, as it had been buffeted by a stronger dollar this week. It rose to a high of 1.0591 and closed at 1.0579.

Today will see the second cut of German inflation for February released. It is expected that prices will be unchanged from the first cut at 9.2%. This is still uncomfortably high and will see the Bundesbank continue its campaign for further increases in interest rates.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.