12 March 2024: The recession is already over


  • Pill still sees incorrect economic models as “useful”
  • Can the economy still achieve a soft landing?
  • The German economy is likely to continue to shrink
GBP – Market Commentary

This week’s data is unlikely to lead to a rate cut

The recession that began in the final quarter of last year is almost certainly already over.

An economy that is struggling to find any meaningful growth runs the risk of “dipping” into contraction, but while it gives opposition parties a “stick to beat it with”, neither the Government nor the Central Bank should be overly concerned.

Andrew Bailey admitted last year that a mild recession would not be a significant issue since it would provide an “anchor” for inflation.

The real story of the UK economy is the continued struggle for a level of growth that will see the Government achieve a level of revenue from

both individuals and companies that will allow it to cut taxes.

That in turn would lead to further growth in a self-perpetuating cycle.

The UK economy is unique in that it has to deal with the challenges of Brexit and although the Trade Minister extols the virtues of the progress she has made securing several free-trade agreements, in truth, nothing can replace the 4% “hit” to GDP that leaving the European Union has meant.

The “Remain” campaign was very poorly run back in 2016 because it was generally believed that the country would never vote for the level of isolation that Brexit meant.

The reality of Brexit was that “getting out from under the shadow of Brussels” meant that the country would take a generation to recover the loss incurred to its global trading position.

A change of Government at this year’s General Election won’t deliver a Party that will be able to grow the economy to such an extent that a recession is not a constant concern.

The opposition has been handed a “golden ticket” since Brexit, and the Pandemic would have been a serious challenge to any Government, no matter its political beliefs.

While there were some poor decisions, history will likely show that trying to deliver on a decision made by the people on leaving the EU, and then dealing with a crisis that meant that any fatalities would bring an acceptable level of introspection, was virtually impossible.

Following a contraction of 0.1% in December, the economy is expected to have grown by 0.2% in January, although it will be the end of next month before the country can officially be declared to no longer be in recession.

The February employment report will be published later this morning. It is expected to show a marginal increase in the claimant count, although the unemployment rate is likely to remain at 4%.

Sterling “ran out of steam” yesterday as the buying interest from last week evaporated. It corrected to a low of 1.2795 and closed at 1.2714.

USD – Market Commentary

Another stunning jobs report, or was it?

The FOMC is looking at a far broader picture of the economy than the market is considering when deciding on a cut in interest rates. Jerome Powell has said so in most of his speeches this year, and he is now backed by most of his colleagues.

There appear to be no dissenting voices calling for an immediate cut to rates to provide some stimulation for the economy.

Both the Bank of England and the European Central Bank are “suffering” from dissenting voices making public their views, which creates uncertainty that the market “feeds off”.

The Fed has the “luxury” of declaring that it is data-driven, which is not available to either the BoE or the ECB since they are both struggling for a level of growth that is “crying out” for a rate cut to provide stimulation.

However, being data-driven is only appropriate when the data is dependable, and it is hard to make decisions based on information that is subject to such large revisions.

The revision to the January headline number of jobs created was unquestionably extreme, changing from +353k to +229, at some point, the FOMC will decide to cut rates without knowing the actual number of jobs that were created in the latest report.

Inflation, whether that is personal consumption expenditures or consumer price inflation, is predictable since most banks and investment houses can “mimic” the models used by the Bureau of Statistics while employment uses so many estimates that a revision is guaranteed.

At some point, the number of jobs being created is going to begin to fall and while it is not of such importance that a rate cut is dependent upon it now, there will come a time when the difference between creating 100k new jobs or 20k new jobs may be of great significance.

There are a growing number of calls from economists for a rate cut to take place before the end of the second quarter. The Fed is unused to being in a position where growth is more than adequate, while inflation is falling and will soon reach the Feds target level.

It is unlikely that a single cut will disturb the equilibrium to a significant extent while reducing the burden on consumers who are struggling with record debt would be a substantial relief.

Following next week’s FOMC meeting, the market hopes for a positive level of advance guidance from Jerome Powell that will allow traders and investors to feel that the Fed is “on the same page”.

The dollar index may have “bottomed out” following its correction of the past two weeks.

Yesterday it rallied to a high of 102.94 and closed at 102.94. It needs a close above 103.10 to confirm its short-term bottom.

EUR – Market Commentary

The Central Bank is offering too much guidance

The ECB is close to overkill in its advance guidance to the market about a rate cut, although it is still being “coy” about when a cut will occur.

While it will never commit to saying that a cut will take place at a specific meeting as long as certain conditions are fulfilled, less “temptation” of the market would be helpful.

When Robert Holzmann, the ultra-conservative Governor of the Austrian Central Bank, confirms that preparations are “well-advanced” for a cut, it is obvious even to the most committed hawk that monetary policy is going to be loosened.

The market now has a firm belief that the Q1 wages data is going to be the deciding factor. However, there has been no sign of what that data needs to show for a rate cut to take place.

The market thrives on certainty, and the period between the data being released and the following ECB meeting will create an unwelcome level of uncertainty and volatility as traders and investors try to second-guess the ECB.

It will not be as cut and dry as saying that if wage growth is below the average rate of inflation, then a cut can take place, and if it is above a delay will happen. The ECB will want to have the change in monetary policy in its own hands, particularly since the first cut will mark a significant shift in emphasis.

Furthermore, once the first cut happens, the market will be striving to know how many cuts will take place and when they will end.

It can be assumed that the ECB will want a pause before rates have to rise again since the geopolitical situation currently doesn’t lend itself to a long period of low rates.

Germany will release inflation data for February today, with price rises expected to have remained at 2.7%.

The Bundesbank published a downbeat report yesterday, in which it said that the German economy is expected to dip even further into recession before any recovery can begin. BUBA has been among the most hawkish of ECB central banks, so it can be assumed that it is not overly concerned about an economic contraction if it stays within manageable boundaries.

The euro has again shied away from the pivotal 1.10 level, falling to a low of 1.0914 yesterday and closing at 1.0925.

It would take a significant shift in policy from either the FOMC or the ECB to see it break

the 1.10 level conclusively, and in the current environment that is extremely unlikely to happen.

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.