11 July 2024: The UK launches a Public Wealth Fund


  • Mann reaffirms her hawkish views
  • High mortgage rates have discouraged refinancing
  • Significant doubts remain about loosening monetary policy
GBP – Market Commentary

Reeves distributes £7.3 billion in state funds

Catherine Mann, the Monetary Policy Committee’s resident hawk, only stopped voting for raising rates at the MPC meeting in February.

Along with fellow hawk Jonathan Haskel, she tempered her view that inflation was still far from under control.

Speaking earlier this week, Haskel cast doubt on the possibility of an August rate cut, saying that he feels that pressure remains in the employment market, leading to wage settlements continuing to rise faster than inflation.

In a speech yesterday, Mann followed Haskel’s lead by saying that price pressures are still strong, and she believes that despite inflation falling to the Bank of England’s 2% target last month she sees the fall as “touch and go”.

Until I see some you know, deceleration, sustained deceleration in services, I am not in a position,” Mann said after delivering a speech on business investment at Alliance Manchester Business School. She said the fact that inflation would rise later this year “matters for my decision-making”.

The Bank of England’s Chief Economist, Huw Pill also spoke yesterday. His speech was about the changes in monetary policy functionality brought about by a review by ex-Federal Reserve Chairman, Ben Bernanke.

Bernanke’s recommendations have by and large been incorporated into the policies and procedures of the MPC. A comprehensive approach is needed to internalize the spillovers among data analyses, macroeconomic forecasting, interest rate choices and policy communication. ‘The whole is greater than the sum of the parts.

Pill was careful to avoid any mention of the change in Government, which may also spawn changes at the Bank.

Growth has been weak since the end of the coronavirus pandemic, with neither manufacturing nor services barely showing any growth in output at all.

Monthly data for GDP will be published later this morning and the market is expecting growth for May to be 1.2% which may see pressure on the Bank of England for a rate cut at the next meeting of the MPC increase, despite Mann’s views on inflation.

Consumers and the home loan market have been straining under the pressure of interest rates that have stayed at 5.25% since last August. Sterling will also likely be boosted by the data, although any rally may be short-lived if the data leads to pressure on interest rates.

Yesterday, Sterling rallied to its highest close since March, reaching 1.2849 and closing at that level.

USD – Market Commentary

Employment is still strong, but inflation is a concern

Federal Reserve Governor and member of the FOMC, reiterated her concerns about any expectation of an interest rate cut yesterday as she continues to be worried about rising wage settlements.

She still feels that upside risks are still present for inflation, and it is not yet time to begin to loosen monetary policy.

Her remarks jarred to a certain extent with the testimony of Jerome Powell, who has been speaking to Congress this week.

Powell adopted a slightly less hawkish point of view when speaking about price pressures, accepting that inflation and growth are now more balanced.

It will take time for the fall in inflation to affect wage settlements, as there is always some lag between the two.

Fears of a wage/price spiral have faded throughout the year so far.

Observers saw Powell’s comments this week as some of the most positive he has made in “quite a while”.

Powell plays his cards very close to his chest. But the Fed chair was candid about how their tight monetary policy is potentially pinching off economic activity and having a spillover effect on the housing market.

Housing affordability, particularly in urban areas, is creating suffering both in the primary and secondary mortgage markets, while rentals are still rising at an “unhealthy” rate.

Powell believes that one of his goals and those of his colleagues on the FOMC is to bring inflation lower so that it is not a primary topic of conversation among consumers.

President Biden has been hosting NATO member heads of Government in Washington this week.

While there have been further pledges of support for Ukraine, which has seen an increase in Russian bombing of its major cities this week, the focus has also been on the President’s mental state.

Hollywood actor George Clooney, a major donor to the Democrat Party, called on Biden to end his election campaign, saying that “we are not going to win with this President”.

There have been growing concerns about Biden’s mental acuity since his stumbling performance at last month’s televised debate with his rival, former President Donald Trump.

The dollar continues to face pressure over possible cuts to interest rates in the wake of weaker-than-expected employment data.

The dollar index fell to a low of 105.00 yesterday and closed at 105.01.

There is some technical support for the dollar at around 104.60/80, with long-term support at 104.00/20.

EUR – Market Commentary

The German Defence Minister voices his concerns over cuts to his budget

The latest data for wage settlements shows that employers are still facing issues employing skilled labour, with the market still seeing workers able to switch jobs and command a premium from their new employers.

This is a concern for the ECB, which tried to avoid a cut in interest rates until the rate of wage settlements had cooled.

Having agreed on a cut in interest rates at its last meeting, several members of the Bank’s Governing Council have spoken of their unease with inflation which has not fallen as they had hoped and expected.

The Governor of the Bundesbank, Joachim Nagel, spoke yesterday of his belief that the core rate of inflation in the Eurozone won’t fall to reach the ECB’s 2% target until 2025.

He singled out services costs, which are still rising at a “significant” rate. As far as future rate cuts are concerned, Nagel believes that the ECB will be “driven by the data”.

The influential ZEW Economic Institute issued a policy brief yesterday, in which it spoke of the next possible rate cut taking place in September. It feels that there is “little appetite” for a rate cut in July, given the latest wage data and services inflation.

ZEW sees two further rate cuts being agreed this year in September and December. It sees differing views on the future path of both inflation and interest rates from members of the Bank’s Governing Council and Executive Board.

It feels that in one year the key interest rate will be at 3.25%.

German Cabinet Ministers have been reacting to policy statements from Chancellor Scholz over the past few days. The Economics Minister has drawn up a plan to provide tax rebates to foreign workers to attract them to work there.

His colleagues feel that this discriminates against German workers, while the Defence Minister is displeased with the amount that has been allocated for 2025 to the country’s defence budget.

Boris Pistorius is “annoyed” that his ministry was allocated an increase of Eur 1.25 billion, significantly less than the Eur 6.5 billion it has demanded.

In France, there has been mixed reaction to the news that the leftist coalition has agreed on a tax rate of 90% on earnings over Eur 400k and cut the retirement age from 64 to 60.

The Euro regained some of the background it lost earlier in the week. It climbed to a high of 1.0830 and closed at that level.

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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.