15 March 2024: Exiting the recession is “cold comfort”

15 March 2024: Exiting the recession is “cold comfort”


  • Further Analysis depicts a pointless Budget
  • The economy is cooling, but inflation is “sticky”
  • Rate cut hopes drove the stock market to new highs
GBP – Market Commentary

The economy will continue to “bump along the bottom”

In much the same way that the “celebration” of the fact that the country dipped into a recession in the fourth quarter of 2023 by the opposition, there is little to rejoice about in the fact that the recession ended almost as soon as it began.

Growth has become extremely hard to find lately, and it is not just the level of interest rates that is squeezing demand.

The country is on the verge of a “seventies style” collapse despite, according to the Bank of England Governor Andrew Bailey, the country is close to full employment.

It needs a radical shake-up, like what Margaret Thatcher delivered when she became Prime Minister in 1979. The need for urban regeneration that took place then is like what is taking place in high streets currently.

The pandemic ushered in new working practices as technology allows working from home to become common. The need for office space is falling, which is having a knock-on effect on several areas of the service sector that cater to office workers. The economy was not ready for such a radical development, which would usually have taken place over years, not months.

Last week’s budget will have little effect on the malaise that the country finds itself in, since it was simply more “tinkering” and contained no radical initiatives to drag the economy back to health.

It contained several measures which in the long term will have little or no effect on living standards, which have fallen to their lowest level since the Second World War.

This was likely to have been Jeremy Hunt’s final Budget and was little more than a “damp squib”, rather than a clarion call to members of the Conservative Party to fight the coming election.

One could easily be forgiven for believing that although the result of the election appears to have become a foregone conclusion, that it is the Government, not the opposition, which holds an almost unassailable lead in opinion polls.

Labour’s propensity for “shooting itself in the foot” is the issue that could derail a change in Government later in the year, yet there is little excitement in the country about the changes a socialist government will bring. Since Tony Blair “invented” New Labour, with its less radical and more centrist policies, it has seemingly become more “electable” but its appeal to working-class voters has diminished. Keir Starmer is less radical than his predecessor, but also less charismatic.

The country is being forced to wait to learn what policies Labour will enact to cure the ills that the country is facing, and the fear is growing that there will be nothing new simply more of the same but with a red tint, rather than a bluish hue.

Public spending will inevitably rise, as will taxation, but the issues of immigration and NHS waiting lists cannot be solved without fundamental change. Rather than a Thatcher or a Blair, all the political parties have to offer is a Major or a Kinnock clone.

The growth outlook for the entire term of the next parliament will barely make a dent in the 4% hit to GDP that Brexit has delivered.

The last five years have been a “good time” to be in opposition, but now the time is fast approaching when Labour will need to “step up to the plate” and deliver.

The pound has lost ground as uncertainty about a rate cut at next week’s MPC meeting continues. Yesterday it fell to a low of 1.2730 and closed at 1.2753.

USD – Market Commentary

Wells Fargo believes the first cut in rates will be in June

A little like rain falling from an azure sky, it is hard to see why there is concern about the U.S. economy suffering a recession or stagflation. Inflation is falling, albeit at a pace that is slower than the Fed may desire, the economy saw significant growth over the past two quarters and unemployment is close to all-time lows.

Yet Treasury Secretary, Janet Yellen, feels compelled to say that she sees no evidence of stagflation being an issue and J.P. Morgan CEO, Jamie Dimon is still talking in terms of a recession in the next two years.

It is as if the market is missing an issue that is staring it right in the face.

Of course, the economy is cooling, that is what current monetary policy is designed to do. The past three months’ unemployment figures have been picked apart with a “fine tooth comb” as economists look for some anomaly in the data.

It seems that the thought of a soft landing is such an anathema that there must be something wrong.

It may be that the country is unused to having such a conservative Fed Chair after the Greenspan and Bernanke years.

Donald Trump “broke the mould” when he appointed a lawyer rather than an economist as Fed Chair. Janet Yellen who was appointed by Barack Obama was considered to lack the personality for the role, yet he appointed Jerome Powell, whose only qualification for the role was that he is a Republican.

The Democrat majority in the Senate has tried and failed to oust Powell from the role for the same reason.

The country has exited from the Pandemic and the economy is currently performing at a level that is considered better than adequate. The four years of the Biden Administration can be considered “typical” of a Democrat President. Biden has concentrated on domestic issues, although the country has lost a little of its influence overseas, particularly in its seeming inability to influence Israel to commit to a ceasefire in Gaza.

Pressure for an interest rate cut comes not from the necessity for stimulation of the economy, but having paused its cycle of hikes some months ago, the financial markets want a more proactive Fed.

The dollar index is slowly regaining its composure after a period of perceived weakness. Yesterday, it climbed to a high of 103.39 and closed at 103.36.

Next week’s FOMC meeting will be the focus of market attention for the next few sessions. With no change in rates expected, the market will study Jerome Powell’s comments following the announcement for clues about when the first cut will take place.

EUR – Market Commentary

Greek CB wants two cuts in rates before the summer

As part of its policy of cutting the size of the balance sheet, the ECB has announced that the spread between what it pays for deposits and what it charges banks for their borrowings is to be cut.

This mostly technical measure will make Eurozone backs a little more competitive and add liquidity to the market.

ECB Executive Board Member, Isabel Schnabel, said yesterday that the reduction of the spear to fifteen basis points is small enough to contain market volatility but sufficient to encourage banks to manage their liquidity prudently.

Greek Central Bank Governor, Yannis Stournaras, believes that the ECB should cut rates twice before the summer. In an interview on a visit to London, he said that rate cuts need to begin soon to avoid monetary policy becoming too restrictive.

The Greek Central Bank has been one of the silent majority supporting ECB decision-making since it was effectively bailed out by the European Commission at the time of the financial crisis.

Since then, the Greek economy has made significant systemic changes to its economy, particularly concerning public spending, and is now one of the best performers in the region.

Stournaras likely considers the “summer holidays” to be August, so a call for two cuts before then is not unreasonable, even if the ECB wants to wait for inflation to fall to its target of 2% before loosening monetary policy.

The Paris and Frankfurt Bourses, both reached an all-time high yesterday but were unable to keep those levels as fears that rate cuts may not be forthcoming in either the U.S. or Eurozone imminently, dampened demand.

There have been some welcome plaudits for Christine Lagarde this week as she has been praised for her resolute attitude to monetary policy which has seen inflation fall and keep the Eurozone out of recession.

Growth is still hard to find in the Eurozone, and it will be well into next year before it returns to trend. Germany will need to play a key role in the changes that need to be enacted to make the region both competitive and attractive to investors.

The euro has resumed its seeming “long march” lower. Yesterday, it fell to a low of 1.0880 and closed at 1.0883.

Next week will see the publication of monthly sentiment and activity indexes, but they are unlikely to change the sentiment around the single currency.

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.