11 December 2023: No end to recession fears


  • Stagnation but no recession… yet
  • Fed Urged to consider rate cuts despite November Employment Report
  • The Eurozone is in recession as other major economies “turn a corner”
GBP – Market Commentary

Mortgage costs continue to rise

The economy is going through yet another period of uncertainty as data showed that it remains just above the line between expansion and contraction that is the best that can be expected in the short term.

Although there was a marginal improvement from the previous quarter, where the economy contracted by 0.1% the outlook remains disappointing. The irony of this is that the economy is not sufficiently weak to bring either headline or core inflation down rapidly.

Following Andrew Bailey’s stinging recent critique, in which he said the potential for growth is the least he can remember in his entire working life, the Bank of England’s Monetary Policy Committee meets this Thursday.

The outcome of the vote is overwhelmingly expected to be for another pause in the cycle of interest rate hikes, which will be the third, following fourteen consecutive hikes which took short-term interest rates from 0.10% to 5.25%.

As well as the MPC meeting, there is a great deal of data due for release this week, starting with the November Employment Report tomorrow. It is expected that the claimant count will have risen marginally, while the unemployment rate remains steady at 4.2%.

Although unemployment remaining constant shows that a recession is still some way away, three monthly data for average earnings is expected to show that wages are still rising faster than inflation.

This will be an issue for some members of the MPC, including its newest member, who spoke recently of her fear that inflation is becoming ingrained in the economy.

Megan Greene will, in all likelihood, express those fears by voting for an increase, as she has at each of the meetings that she has attended so far.

It is hard to imagine a situation where Andrew Bailey bemoans the condition of the economy, then presides over a return to tightening monetary policy.

After this week, the market will begin to slow as year-end approaches.

As G7 Central Banks begin to feel the pressure for rate cuts to begin as their economy’s react to a long period of constant tightening, traders and investors are beginning to make assumptions about the first cut in rates.

While it is clear that the Eurozone economy may already be in recession, it is the Bank of England that is favoured to make the first cut.

The pound reacted negatively to the U.S. data on Friday, which was surprisingly strong and will see the Fed forced to delay any cut in rates until at least the second quarter of 2024.

Sterling fell to a low of 1.2502 and closed at 1.2548.

USD – Market Commentary

Can the Fed afford to not hint at a rate cut agenda?

The vote at this week’s FOMC meeting is considered to be a foregone conclusion, with a further pause the overwhelming expectation of almost everyone who is prepared to venture an opinion.

However, the meeting will not be as straightforward as predicted. A pause remains the most likely outcome, but the November Employment Report, which was published on Friday, showed that rates are not as restrictive upon demand as previously thought.

The economy created 199k new jobs last month, while the October figure of 159k was not revised downwards as some had expected. This served as confirmation of Jerome Powell’s continuing hawkishness about monetary policy, which stops him from declaring victory in the fight against inflation.

Although the October data for average earnings year-on-year was revised down slightly from 4.1% to 4% the fall in wages stalled in November, remaining at 4%.

This will also exercise the FOMC and lead to continued hawkishness from its Chairman.

The third leg of the “holy trinity” of data releases is due to be published tomorrow. Having seen Q3 GDP having been revised from 5% to 5.2% recently and a stronger than expected Employment Report, commentators are bracing themselves for a smaller than expected fall in headline inflation, while core prices may have risen very slightly.

The expectation is for headline inflation to have fallen from 3.2% in October to 3.1% last month. Core inflation, which has volatile items like food and energy costs stripped out, may have actually risen from 4% to 4.1%

Jerome Powell is unlikely to change the tone of his comments following the meeting, which takes place on Wednesday.

He retains the backing of the vast majority of his colleagues, and in the immediate aftermath of the meeting they are likely to remain stoic in their belief that rates need to remain elevated for an extended period to bring inflation down.

There are still those who feel that a recession is going to take place next year, but it will take a significant downturn in activity to see those fears realized.

The Dollar is likely to see an extended period of support as pressure builds on other G7 nations to begin to cut rates.

Last week. The dollar index snapped a three-week losing streak. It rallied to a high of 104.27 and closed at 103.98. The reaction to the data was a little more muted than may have been expected, but this is likely to have been a reaction to the proximity of the year-end.

EUR – Market Commentary

Rate to remain on hold as market hopes for a signal over cuts

When the latest incarnation of European unity was created, it was believed that an economy designed to challenge the import demand of the United States and the productivity levels of China was being built, but this has been far from the case, and is likely to remain so for years to come.

Beset by problems, many of which have been of its own making, the Eurozone has been unable to deliver on its mandate as several members are used to being able to use fiscal policy to counter price increases, having economies that see high inflation and high interest rates to combat it as the norm.

It was this boom/bust outlook that the ECB and the European Commission were designed to combat.

While free movement of goods was expected to open up trade between Eurozone members, the undoubted quality of products produced in Europe is beginning to be matched by those from China, while prices remain far higher.

Free movement has seen a tremendous exodus of workers from lower paid jobs in the east of the region to the west.

While unemployment rates continue to fall a potential problem is masked, but this could become a tinderbox should Germans, Belgians, or Dutch or French workers find their ability to find work in their own countries hampered.

Although inflation has been falling consistently, even since the ECB ended its cycle of interest rate hikes, the feeling is that hikes are still feeding through into the economy but even after they have been absorbed the region will suffer from a form of stagflation, where the economy is contracting, but prices either remain elevated or fail to fall at a rate that satisfies the more hawkish members of the Governing Council.

Although it will be glaringly evident by the end of the first quarter that a rate cut is necessary to avoid a major downturn in output, the ECB may remain on hold until June at least.

There is a major difference between the expectation of the market that a rate cut may be forced on the ECB and one actually taking place, which will lead the market into a sense of confusion as the New-Year begins.

Those who see a rate cut as imperative will be bearish, while those who believe that it can resist the pressure will be bullish almost by default.

Last week, the Euro lost ground versus the dollar for the second consecutive week. It fell to a low of 1.0723 and closed at 1.0763.

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.