12 December 2023: Insolvencies beginning to rise again

12 December 2023: Insolvencies beginning to rise again


  • The CBI expects the economy to improve
  • Buffett’s equity sales set alarm bells ringing
  • Inflation falling faster than expected calls into question ECB policy
GBP – Market Commentary

“Groupthink” takes over at the Bank of England

A leading consultancy firm which specializes in restructuring companies which have become insolvent has seen its turnover increase by close to 15% during the second half of this year.

This is yet another indicator of the gradual decline that the economy is facing currently, and can, in many cases, be directly attributed to the tightening of monetary policy.

Begbies Traynor told shareholders that they expect an increase in turnover in their largest business line to continue to increase as indicators of financial stress in the UK, related to fractured supply chains and continued high interest rates, to continue for another year,

There was better news from the Confederation of British Industry, which acknowledged the challenges facing the country currently but is expecting a gradual improvement in the next few years. The “bosses union” believes that there will be no return to double figure unemployment, as the jobs market will remain tight, mostly due to continuing skills shortages.

They see unemployment topping out at around 5% by mid-2025.

Inflation is expected to be a significant issue, with the Treasury’s target of 2% only being reached at around the same time.

The CBI welcomed the news in the Chancellor’s Autumn Statement, which saw investment in plant, machinery, and tech able to be offset against tax liabilities. This should give a boost to investment, which has been sadly lacking in recent years.

The Financial Times reported a story yesterday that has been a continuing issue for several years.

Banks have become overly cautious over a number of years, demanding levels of security from small businesses that discourage entrepreneurs from taking what had been acceptable risks in order to improve turnover.

The Federation of Small Businesses (FSB) has asked the financial regulator to intervene over “harsh” business practices that it says forces small business owners to put their homes at risk unnecessarily.

The FSB has filed a “super complaint” with the FSA alleging excessive demands from banks for personal guarantees for business loans. With banks charging higher than ever spreads for Business loans as well, they are damaging investment with an overcautious approach to protecting their own business.

These practices have placed a straitjacket on small businesses according to the FSA, damaging their potential to take what are considered acceptable business risks.

Sterling was moderately well-supported yesterday as the final week of “normal” business began. The unemployment data followed by Thursdays’ MPC meeting will provide some interest to market participants as turnover begins to diminish as the holiday season approaches.

The pound climbed to a high of 1.2591 but fell back to close barely changed at 1.2556.

USD – Market Commentary

The next question is how long do rates stay elevated?

The final FOMC meeting of the year begins today, with the market expecting no change to interest rates, as speculation about when the first cut interest rates continue, even though the Fed has not yet even confirmed that rate hikes have come to an end and retains a tightening bias.

Jerome Powell did acknowledge recently that risks to the economy to growth and inflation are now balanced but will probably still find himself unable to agree that rate hikes have come to an end.

Last week’s November Employment Report, which saw the economy add close to 200k new jobs, will have strengthened Powell’s resolve that interest rates will remain “higher for longer”.

As members of the FOMC have been in a “blackout” which precludes them from comment on the economy in the two weeks immediately preceding the meeting, there has been no indication if the increase in jobs has been regional or is similar across the entire country.

Powell will be quizzed by journalists about the prospect for rate cuts during 2024 but is likely to continue to use the “data driven” excuse to avoid being tied down.

The overall picture of the employment market remains mixed with three other reports, job openings, private sector job growth and job cuts showing that openings were lower than in the previous month, private sector job creation was unchanged, while job cuts increased by around 25%.

The weekly figure for jobless claims continues to come in at the higher end of its longer-term average, which shows that there is a steady decline in the employment market overall but also indicates that rates are just about in restrictive territory.

The FOMC has only two meetings scheduled for the first quarter of 2024. They will be held on 31st January and March 20th, while the minutes of tomorrow’s meeting are not scheduled for release until 26th January, when several economic projections will also be released.

The dollar is beginning to settle into a narrow range, which, barring any surprises from tomorrow’s meeting, is unlikely to change before the end of the year.

The index rallied to the top of its recent range yesterday, but quickly ran out of steam, making a high of 104.26. It closed at 104.07

EUR – Market Commentary

Too early to be discussing rate cuts

Even as the Eurozone economy lurches towards its first recession since it was ravaged by the Pandemic, the President of the ECB, Christine Lagarde, is still concerned about the threat from inflation.

The only voice of reason appears to belong to Lagarde’s predecessor, Mario Draghi, who predicted recently that the region would see the mandatory two quarters of contraction by the end of the year.

Draghi resisted the temptation to make any suggestion about possible rate cuts, even as Lagarde still vowed that rates will remain “higher for longer”.

This phrase has become the new mantra for G7 Central Banks, all of which appear shell-shocked by having to deal with inflation which has reached close to or in some cases exceeded 10%.

It seems that Lagarde, Andrew Bailey and Jerome Powell have all turned to page one of their manual on defeating inflation and decided that restricting demand by tightening monetary policy is the only solution.

Now that rates have become restrictive, Lagarde, supported by a hawkish Governing Council, fears that any perceived weakness in resolve will see inflation return.

The ECB’s aggressive tightening of interest rates is coming in for additional scrutiny as inflation is falling at a faster rate than the Central Bank expected. The concerns that the final two hikes were unmerited are being voiced, not least by several high-profile economists.

Even Isabel Schnabel, normally, hawkish German Member of the ECB’s Executive Board, confirmed recently that the preliminary read of Eurozone inflation was “significant”, and expressed doubts over any further rate hikes.

Despite Lagarde’s reticence to discuss the issue, the market has “pencilled in” the first cut in rates for April. Even if the economy is indeed shown to be in recession before that, any cut in rates before the end of the first quarter would fall into the “emergency bracket” an image that the ECB will be particularly loath to portray.

The Euro was virtually unchanged yesterday as the market awaited the outcome of this week’s Central Bank meetings. It opened at 1.0764 and closed at 1.0766.

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.