11 October 2022: OBR to present outlook

OBR to present outlook

11th October: Highlights

  • Kwarteng brings forward details of his economic plan
  • Bank of America warns of gloomy employment future
  • Eurozone facing catastrophic conditions

GBP – Bank of England faces blame for mortgage increases

The market’s confidence in the UK financial system has been suffering for a considerable amount of time. It began with the Bank of England’s indecisiveness over tightening monetary policy, as Monetary Policy Committee members were unsure of the effect of higher interest rates on economic growth.

Faced with concerns over rising prices coupled with the prospect of lower growth, they tried to manage both, which has proved impossible. Ten months after they first raised rates, the country is still facing a recession and a rate of inflation that is continuing to rise.

Under Rishi Sunak, the Treasury may not have been correct in every decision it made, but he was clear and decisive in his processes, wasn’t afraid of making tough decisions and inspired the confidence of the Cabinet and the Country.

When Sunak hiked National Insurance rates last April, it was an unpopular decision, but he explained that the rise was needed to supply added funding to the National Health Service. The current Chancellor did away with the hike, but apparently remains committed to the NHS.

Kwasi Kwarteng has been Chancellor of the Exchequer for about six weeks now. He came in all guns blazing, making promises he couldn’t possibly keep, and was quickly found out.

A single U-turn during a term in office is unusual but being forced to make two in your first six-week in office smack of either overconfidence or incompetence, or both.

On 31st October, Kwarteng will explain to the country how he proposes to fund his spending plans. Breathing down his neck on the same day will be the Office of Budget Authority, the independent agency which audits the Government’s financial forecasts and will provide its own assessment of their viability.

Kwarteng blundered when he made his proposals the first time around by deciding that the country could do without their input. The pound remains edgy, with traders lacking any confidence that the Government isn’t overstretching itself and the Bank of England could easily be forced to step in again to try to breathe a little confidence.

The Central Bank announced yesterday that it has already increased the amount of Government paper it intends to buy this week as part of its support for the pension market.

The Pound is still under pressure, seeing very little interest to buy, outside commercial transactions. It fell to a low of 1.1015 yesterday and closed at 1.1056.

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USD – Recession begins in Q2 and will last all year.

Bank of America, one of the top financial firms on Wall Street, published an extremely downbeat report on the prospects for the US economy.

It believes that the US economy will begin to shed jobs early next year with the bank estimating that an average of 175k jobs will be lost each month in the first quarter.

The bank admitted that it saw stronger than predicted growth in new jobs created in the September report, but still feels that job growth will halve in the final three months of the year.

Pressure from the Fed’s war on inflation is building, with rates already well into restrictive territory, and will come close to 4% following the next meeting of the FOMC.

Demand for everything from houses and cars to electrical appliances is falling as rates continue to rise.

With inflation still not under control despite close to six months of major interest rate increases, the economy is heading for a severely hard landing. In an ideal world, the Fed would see jobs growth fall, but not significantly, and not the loss of close to half a million jobs between January and March.

The unemployment rate fell again in September to 3.5% from 3.7% in August. It is not expected to fall much more and could begin to rise this year peaking at 5.5% in March or April.

In the past, an unemployment rate of 5% was considered as close to full employment that was achievable. As the participation rate has risen (the number of people working or actively looking for work), unemployment has steadily fallen over several years.

That figure has been balanced by productivity that for many years has been travelling in the opposite direction.

Patrick Harker, the President of the Federal Reserve of Philadelphia, and Loretta Mester, President of the Federal Reserve of Cleveland, will both speak later today. Harker is known to be a moderate, while Mester has spoken recently of her belief that rates will need to stay quite high for some time if the Central Bank is to win its fight with rising prices.

The Dollar stays quite well-supported, but the market is waiting for the minutes of the latest FOMC meeting to turn bullish. The minutes will be released after the end of trading tomorrow evening.

The Dollar Index rose to a high of 113.3 and closed at 113.17

EUR – Russia launches devastating response to attack in Crimea

Russian forces that have been ceding territory to Ukraine since Russian President Vladimir Putin announced the annexation of regions in the east of the country recently.

No sooner was the ink dry on Putin’s declaration that an act of sabotage partially destroyed the only road bridge between what is now Russian territory and Crimea, which Russia annexed some years ago.

While responsibility for the attack has not been claimed, Russia blames Ukrainian Special Forces, and they exacted terrible revenge on several major cities yesterday.

While Russia has been struggling to cling onto territory in the ground war due to the tenacity of Ukrainian forces, their command of the skies is almost total.

They launched several attacks on civilian targets across Kyiv and other major cities in direct retaliation for the destruction of the bridge which caused major damage to Russia supply chains in the region.

Ukrainian President Volodymyr Zelensky again appealed to further support from NATO countries to allow Ukraine to defend its civilian population.

The European Union is in a difficult position. While it wholeheartedly supports Ukraine, it is very guarded about beaconing more heavily involved, given the way in which Russia has reacted to its limited involvement so far.

Its economy is on the brink of catastrophe due almost entirely to Russia limiting the supply of energy as well as a lack of basic foodstuffs, of which Ukraine is a major supplier. Russia now controls several ports from which shipments of goods are made.

The Sentix Economic Survey, a highly respected review of conditions, was released yesterday. It showed that the entire region is now on the verge of a very deep and damaging recession.

Overall, the survey fell to 38.3, its lowest level since 2020. The Euro, which was already suffering following the escalation of the war, fell further, reaching a low of 0.9681 and closed at 0.9701.

The outlook for the economy is still extremely weak with both Brussels and the Central Bank in Frankfurt powerless to arrest the slide into recession.

Have a great day!

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.