17 March 2023: Hunt slammed as GDP stagnates


  • Winter of discontent coming to an end
  • Yellen sees the banking system as sound
  • ECB ignores turmoil and raises rates by fifty basis points
GBP – Market Commentary

Prediction of a near miss over recession premature

After a highly contentious few months of industrial action, it seems that the Government and representatives of nurses and ambulance crews have reached an agreement on pay for the current financial teat and the next, which starts in a couple of weeks.

It has been agreed that a one-off payment of a minimum of £1,655 will be made to supplement the pay award in the current year, with a 5% pay rise to follow from April.

Both sides agree that this was the best possible offer that was available. It will go a long way to satisfy the nurse’s demands, while the Government believes that this is the most the taxpayer could readily afford.

The budget remains the topic of severe debate in Westminster, as the Chancellor has been heavily criticized for his comments that there will be no recession this year. Despite the Office of Budget Responsibility confirming that it also believes that the UK will just about manage to avoid a technical recession, several bank’s economists disagree.

They feel that Jeremy Hunt has taken advantage of the fact that the country may not see the regulation of two consecutive quarters of economic contraction that means the country is technically in recession, but conditions will be such that in every measurable way, there it will feel like a recession.

The difference from the current situation and past recessions lay in employment. The figures released earlier in the week show that the unemployment rate remains close to all-time lows, despite the fact that there are still a significant number of vacancies.

With the economy having been shorn of numerous workers following Brexit, there remains a skills’ shortage, which Hunt tried to go some way to solving the Budget by relaxing immigration rules relating to certain skilled positions in the construction sector.

The turmoil that is taking place in the global financial markets, with Credit Suisse receiving more than fifty billion dollars in loans from the Swiss National Bank and a medium-sized U.S. bank receiving marginally smaller support from the Federal Reserve, has so far not had any material effect on the UK. That is not today that the country is immune to being affected should contagion continue to grow.

The markets have seen the return of significant volatility this week, with an increase in risk appetite driving investors towards the perceived safe haven of the dollar.

Sterling recovered part of its losses from the previous session, but is still likely to be in negative territory for the week. Yesterday, it recovered to a high of 1.2127 and closed at 1.2109.

Next week will see the inflation report for February published, with the headline expected to fall below 10%. The following day the March MPC meeting will likely announce a further increase in short term rates with most commentators expecting another hike of twenty-five basis points.

USD – Market Commentary

Housing starts and building permits strong in February

Treasury Secretary, Janet Yellen, confirmed yesterday that in her view the U.S. banking sector remains sound, despite rumblings of concern from Congress that the hawkishness of the Federal Reserve is contributing to the current turmoil.

Yesterday, the Central Bank was forced to give emergency loans to First Republic Bank, which was unable to raise liquidity in the traditional manner.

Testifying before legislators, Yellen worked hard to convince them that despite the second-largest bank failure in American history, the fail safes that were put in place following the relatively recent financial crises are doing their job.

While the Fed likes to avoid the term recession unless it becomes blindingly obvious that the economy is contracting, so the Administration feels the same way about the words bailout and contagion.

Although two regional banks have required significant injections of emergency funding in a week, the funding has been described as a liquidity issue while regulators don’t see the possibility of a significant spread to money centre institutions which remain solid, well capitalized and have access to ample liquidity.

Yesterday, data was released which showed that although the sale of existing homes has been the first to see the effect of higher interest rates, building permits and housing starts are both performing well.

Housing starts rose by 9.8% spurred on by the beginning of several significant apartment projects in major urban areas.

Next week, the FOMC will hold its next meeting. Despite the fact that the two latest employment reports both show that the jobs market remains very strong, a fact underlined by yesterday’s weekly jobless claims data, the Central bank is expected to hike rates by twenty-five basis points.

This will be a nod to the turmoil that is affecting the markets, since it may be considered inappropriate to return to a fifty point hike despite the rate of inflation only slowly falling.

The dollar index lost ground yesterday as the level of risk aversion abated somewhat. It fell to a low of 104.10, closing at 104.45.

As well as the FOMC meeting, next week will also see data for existing home sales, durable goods orders and economic output released.

As part of its deliberations, the FOMC will also publish its monetary policy statement and economic projections.

EUR – Market Commentary

Lagarde prepared to accept risks of a rate hike

The ECB made it perfectly clear yesterday that it feels that countering inflation remains its number one priority despite the turmoil that threatens the banking sector in light of the additional funding provided to one of the largest financial institutions in the wider mainland this week.

The Governing Council voted to hike short-term interest rates by another fifty basis points. This will provide some justification to the ECB President, who was roundly criticized by a number of her colleagues by appearing to pre-empt the decision in recent testimony before the European Parliament.

In her press conference following the meeting, Christine Lagarde acknowledged the problems facing the banking sector, and pledged support should it be necessary. She went on to say that the Central Bank believes that in any event, Eurozone banks are far better capitalized than they were in 2008 and more able to deal with any shocks that may occur.

The feeling in the market was that the Governing Council may temper its recent hawkishness in light of the recent upheavals, but the fact that inflation remains well above target appears to have won the day.

The Central Bank remains ready to pump liquidity into the market if it is deemed necessary, as well as deal with any individual situations should they occur.

Bank stocks remained under pressure yesterday, closing down around 7% overall.

Although the market welcomed the business as usual attitude from Lagarde, several commentators expressed concern that should the situation deteriorate materially that the ECB has lefty itself open to questions about how switched on it is to what is happening on the ground, particularly if, going forward, it were forced to reverse its decision to hike rates.

The euro was buoyed by the rate hike, rising to a high of 1.0635 and cloning at 1.0609.

Next week, the influential ZEW report on the economy in both Germany and the wider Eurozone will be published, as well as data for consumer confidence and economic activity. There will also be an EU leader’s summit held later in the week.

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.