- Global shock may harm UK recovery – Bailey
- Chase CEO is dubious about the U.S. recovery
- The Eurozone economy may be bottoming out, but recovery will be slow
Traders have cut back their expectations about rate cuts as optimism grows
The Governor made these comments during his testimony before the House of Commons Treasury Select Committee yesterday.
Bailey, who has faced severe criticism from MPs, leading to calls for his dismissal and a total overhaul of how the Bank makes monetary policy decisions, has been accused of being far too reactive when faced with inflationary pressures in the economy and not being aggressive enough in raising interest rates.
A more hawkish attitude would have seen the size of rate hikes increase, which would have allowed the Bank to bring inflation under control more quickly than the fourteen consecutive twenty-five basis point increases that it eventually delivered.
The calls for Bailey to go are unlikely to sway Jeremy Hunt before the election, as every decision he makes now is viewed through a lens of its effect on the Government’s chances when voting takes place.
Bailey has also been accused of not paying sufficient attention to the voices of the independent members of the MPC, who have been generally more hawkish than Bailey’s colleagues who make up the permanent membership.
When asked about threats to the economy, Bailey commented that “global shocks” are a major concern, not just for the Bank of England, but also of his colleagues at other G7 Central Banks.
The attacks in the Red Sea could lead to a significant escalation of the conflict that is currently taking place in the region, particularly Iran’s reaction to the threatened reprisals from the twelve nations that have jointly issued warnings of military strikes on the Yemeni mainland.
Across almost the entire developed global economy, some economists and commentators differ on the ability of Central Banks to cut rates, mostly due to opinions on inflation.
The more dovish researchers point to a need for proactivity to head off a threatened global slowdown, while the hawks see inflation as having bottomed out before rate increases have driven it down to the 2% target, which most CBs share.
The financial markets are not yet reacting to the increased risks that are perceived to be afflicting the global economy. These would normally result in the aggressive buying of U.S. dollars. However, yesterday Sterling saw some buying interest which drove it close to its short-term resistance.
It reached a high of 1.2744 and closed at 1.2734. In early Asian trading, it has continued to flourish, reaching a high (0500 GMT) of 1.2771
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Fed cuts in danger from a rebound in inflation
His fears have so far been proven groundless, but that hasn’t deterred him from continuing to voice his fears.
In a speech yesterday, Dimon spoke of his doubt that the “goldilocks scenario” where inflation continues to fall close to the Fed’s 2% target while employment remains strong is either a fantasy or will not last as long as the market presently predicts.
The Goldilocks analogy comes from the fact that the economy is neither too hot nor too cold, just like the Three Bears’ porridge.
Dimon doesn’t feel that there can be any guarantee that interest rates can be cut this year, primarily due to the Fed’s overt concern about inflation returning, which he shares.
Despite being wrong about the underlying strength of the economy during 2023 and what he called overzealous hiking of interest rates, Dimon is reiterating his concern that there will be a recession in 2024, driven in the main by rates not being cut on a timely basis.
Diamond was also critical of the regulators who continue to seek ways to integrate cryptocurrencies like Bitcoin into the mainstream, which is diluting banks’ share.
He feels Bitcoin contributes to the shadowy worlds of terrorism, drug funding and sex trafficking and has no underlying value.
He made these comments in a classic “do as I say, not as I say” fashion as his bank has just signed an agreement with Hedge Fund, Black Rock to be involved in its exchange-traded fund in Bitcoin.
Today will see the publication of the final inflation report for 2023. It is expected to show that headline CPI rose by 0.2% month-on-month in December, up from 0.1% in November. This led to a year-on-year increase of 3.2% following the 3.1% increase recorded the previous month.
Since this will not affect the likely outcome of the next FOMC meeting, the reaction in the market is likely to be muted.
Yesterday, the dollar index lost ground again, falling to a low of 102.34 and closing at 102.35.
Traders appear to be “keeping their powder dry” while waiting for the appearance of new drivers which will steer the market over the first quarter of 2024.
Since inflation has become something of a non-event, it is likely to be the health of the various G7 economies or the growing conflict in the Middle East which drives volatility.
Governing Council member sees a weak outlook for the Eurozone economy
This was even though she also spoke of her concern that growth will be hard to find in 2024.
Schnable engaged with followers of the social media platform X (formerly Twitter) to answer their questions on a range of topics related to the economy, inflation and interest rates.
One of the more intriguing questions surrounded accountability. She was asked how it could be that such powerful groups as the European Commission and the ECB are not elected by the more than 350 million people they are supposed to represent.
This has been a topic that has been raised more recently as the divisions among members of the Governing Council have become more acute.
Her response was as far as the ECB is concerned, it was an elected body, the European Parliament, which decided upon the independence of the Central Bank, so it performs the necessary governance.
She did not comment on the European Commission.
In response to a question about borrowing costs, she prompted traders to cut bets on the amount of easing that will take place this year by reiterating that the subject is not scheduled to be discussed by the Governing Council until April.
This hawkish outlook encouraged a brief period of euro buying, as the market is still driven by inflation and rate outlooks rather than comparative growth expectations.
Employment is still strong despite interest rates that are felt to be very restrictive. Schnable believes that as inflation falls further, the pressure that is currently being felt in wage settlements will also abate.
Data for industrial production is scheduled for release next Monday, and there are fears that the figures will be even worse than the 6.6% fall recorded in November. If this is indeed the case, the ECB may be forced to discuss rate cuts far sooner than it had hoped.
The single currency managed to cling on to the gains it made during Schabel’s question and answer session.
It rose to a high of 1.0972 and closed at 1.0965 as the market still feels that there are some gains to be found in bets on more risky assets.
Have a great day!
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10 Jan - 11 Jan 2024
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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.