15 March 2023: No more money for Public sector pay


  • Wages remain in negative territory
  • Inflation fell in February, but was the fall rapid enough for the Fed?
  • If 0.5% is baked in, what comes next?
GBP – Market Commentary

Hunt promises back to work budget

The year since the last budget has seen major upheavals in the economy and political landscape. There have been three Prime Ministers, while the 2022 budget was delivered by the current one.

There is always speculation about what the budget will contain, and this year is no expectation. With talks continuing over public sector pay, Jeremy Hunt has already indicated that there will be no fresh funds allocated to that sector.

It appears that the biggest additional funding will come in the area of childcare, where around an additional four billion pounds will be allocated to provide free childcare to one and two-year-olds.

Yesterday’s release of employment data showed that the claimant count fell for the eighth consecutive month, although wages are still failing to keep pace with inflation.

Having seen an exodus of EU workers following Brexit, the plan is to plug that gap to a certain extent, by encouraging a return to the jobs market for those who have been providing care for their own children. It is estimated that 90% of those are women.

Another sector that will also receive financial encouragement to return to work are those who have taken early retirement since the Pandemic.

Mostly over fifties with a wealth of experience, this group has contributed to a skills shortage that is badly affecting small and medium-sized businesses.

While the unemployment rate is close to the all-time low seen in the 1970s, there are still around a million vacancies and Hunt aims to fill those by encouraging a return to work for those who have placed work-life balance over lifestyle.

Last year, Rishi Sunak was heavily criticized for adding to the tax burden on both individuals and corporations as he began to claw back some of the support that he had provided during Covid. Jeremy Hunt will be hoping that his budget will be considered boring as he tries to deliver a low-key set of measures designed to get Britain back to work.

The continued fall in real wages is seeing a gap developing between public and private sector pay, although firms trying to pay their workers increases that are close to inflation will soon see a cut in margins and place more pressure as energy costs and interest payments continue to increase.

Sterling saw traders trim long positions as they awaited the budget. The pound fell marginally to a low of 1.2135 versus the dollar, closing at 1.2157. Against the Euro, it saw a low of 1.1316, closing at 1.1327. Its fall broke a run of five sessions of higher closes.

USD – Market Commentary

Fed in a quandary despite hawkish Chairman

Although the Fed has been on a mission to lower inflation through tighter monetary policy for almost a year, it is only now that it is entering a phase where higher rates will begin to affect the economy.

Since rates were close to all-time lows when the FOMC began its current cycle, they are only now adding to the burden of small businesses, who are seeing a significant impact on their cash flow.

The regional impact of rate hikes are seeing heavy industry and manufacturing still having workers job hopping in search of higher pay as their transferable skills are in great demand.

The number of vacancies is still quite high, although the latest employment report showed that that figure is beginning to level off, and in some regions beginning to fall.

The Fed wants to see demand in the economy also level off and encourage workers to see their jobs and pay as precious and not a means to bargain for more money.

The Fed will not be sidetracked by the fallout from the recent bank failures. There doesn’t appear to be any fear remaining of there being any more general weakness in the financial sector, and the collapse of Silicon Valley Bank is being seen as a single institution which became overstretched in what is still considered a volatile and speculative sector.

It is hoped that the valuations of start-ups in the tech sector will begin to moderate going forward as a result.

Yesterday’s release of inflation data for February shows that headline inflation fell to 6% last month, down from 6.4% in January. Although it is still moving in the right direction, FOMC members will want to see their efforts rewarded by larger falls in the coming months.

The Central Bank is keeping the markets on their toes with analysts unsure if they will stick to the lower hike that was seen last month or return to fifty point increments that have been seen recently.

The dollar index continues to be pressured by speculation about when the Fed will end rate hikes, as well as concerns over bank regulation.

Yesterday, it halted its recent fall rising to a high of 104.05, but there was little or no follow through, and it fell back to close at 103.66.

EUR – Market Commentary

Rates versus GDP the question for the ECB

There is a significant gap appearing between the confidence of both the ECB and European Commission on one side and the financial markets on the other about the underlying strength of the Eurozone economy, given the Central Bank’s seemingly unquenchable thirst for tighter monetary policy.

Germany remains in the driving seat, adopting a policy where it appears willing to sacrifice economic growth on the altar of driving inflation lower.

The triumvirate of Olaf Scholz, Joachim Nagel and Isabel Schnabel are prominent in calling for higher interest rates across the eurozone. It is becoming an ever more difficult task to convince a number of nations with weaker underlying economies than Germany that higher rates will eventually lead to significantly lower inflation and greater economic strength.

Consumer and investment confidence is far higher in Germany than it is in other Eurozone nations, which points to the fact that Germans get it and are willing to sacrifice short term gains in GDP for lower inflation. Scholz, Nagel and Schnabel are students of the history of the effect of hyperinflation on the country, and while no one is suggesting that Germany or indeed the eurozone is in that sort of danger, fear of inflation is ingrained in them.

The Italian people, on the other hand, are used to high inflation as a consequence of the amount of support the Italian State is prepared to offer them. The Italian Government will face unrest if they are forced to cut back that support.

Brussels will point to Athens as a model of reform, since Greece as managed to weak its people off state aid and its economy is now the second-fastest growing in the Eurozone.

For now, the ECB has managed to convince the more moderate Eurozone members to go with the flow of higher interest rates, and it will only be when there is some dissent seen, for example in Paris, that the Central bank will take notice. For now, however, the Governor of the Banque de France remains onside, while President Macron is a strong supporter of Germany.

Tomorrow’s rate increase will bring official rates closer to a neutral state, and although the ECB is unlikely to signal an end to hikes soon, greater consideration will need to be given to their effect on the overall economy.

The euro continued to gain support from the hawkish posture of the ECB as it rose for the fifth session in succession yesterday. It reached a high of 1.0750, closing at 1.0733.

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.