18 October 2022: Hunt forms an economic council

Hunt forms an economic council

18th October: Highlights

  • Hunt reverses most of Truss’s tax cuts
  • Bank profits fall as funds set aside for the coming downturn
  • Lagarde opposed by evidence of slowdown

GBP – MP’s still asking who is running the country?

Jeremy Hunt, the new Chancellor of The Exchequer, announced a mini budget of his own yesterday in which he reversed many of the tax cuts announced by his predecessor.

It must be presumed that Kwasi Kwarteng’s plans were approved by the Prime Minister, which led MPs to ask: who is running the country?

The issue was worsened by the fact that Liz Truss was initially absent from the House of Commons yesterday, although she did appear just as Hunt rose to deliver his plans.

The £64 billion hole in the country’s finances has been reduced by Hunt’s measures and the long-term interest markets rallied, signaling their approval.

However, the reduction of the basic rate of income tax has been indefinitely shelved, and the much-vaunted reduction in the energy cap will now only last until the spring of next year.

Hunt, hinting at further measures still to be announced, has at least steadied the ship for now. It does mean however, that Truss’s dash for growth, which was the cornerstone of her entire manifesto, is dead in the water.

Three MPs publicly called for her to resign yesterday, while there are no doubt other plots being hatched, although it seems that it will be more difficult to get agreements on who her replacement will be than it will be to oust her.

With the publication of the financial statement still due on the 31st of October, coupled with the OBR’s release of its review of the country’s finances, it does feel as though the Prime Minister has just two weeks in which to restore both her credibility and the faith of her Party if she is to survive what has been a turbulent few weeks in power.

The trajectory of the Pound in the foreign exchange markets is considered the acid test of any new economic measures. If that is true, then traders gave the new plans a tentative nod of approval. Sterling flirted with the 1.14 level versus the Dollar yesterday. It reached a high of 1.1430 but lacked momentum and fell back to close at 1.1355.

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USD – President likely to face Primary challenge

Biden is facing a tough enough time in the midterm elections, which take place in less than a month’s time.

While a lot of focus will be on the various systems used to register and record the ballots cast, following the furore caused by former President Trump, the spotlight has now fallen on the handling of the economy during and since the Coronavirus Pandemic.

The rise in inflation is said to have been a direct result of the amount of blanket support the Administration put in place to help workers survive the slowdown that the pandemic created in the economy. Biden’s political adversaries will likely use this slowdown as their primary weapon in upcoming debates.

He has been accused of a lack of action and, unusually, for a Democrat President, diverting his attention overseas rather than concentrating on domestic matters.

Biden has also been accused of being weak in his reaction to Russia’s invasion of Ukraine together with the threat to European security. In addition, He has not reversed any of President Trump’s cuts to the funding the US sends to NATO, which has upset Germany, France and even brought into question relations between the US and UK.

There is a good chance that Biden won’t be waved through at the Democratic Primary, as is usual for a sitting President, and will face an opponent for the nomination for the 2024 election.

While the FOMC is still considering how big a hike to pass at its meeting early next month, several of its more vociferous members have been strangely quiet. The market has taken this as a sign of a more dovish outlook, as projections appear to point to a cooling off of the employment market.

The October employment report will be released in the same week as the Fed meets, but it is certain that FOMC members will see an advance copy of the headline numbers prior to voting on the hike.

The Dollar suffered a little yesterday as the partial settlement of the market upheaval in the UK saw a rise in risk appetite. The Dollar Index fell to a low of 111.92 and closed at 112.09. The next support is at 110.080 and there is a possibility that as the market settles down that could be in trader’s sights.

EUR – Recession fear points to Central Bank disunity

It is not really a surprise that cracks are beginning to show in the fabric of the European Union, given the turmoil the rising inflation and the Russian invasion of Ukraine has brought about. Indeed, it is indeed more of a shock that it has taken so long to rise to the surface.

The message from Brussels is that the Union has more factors driving unity than it does divisions. While that may be true, inflation and a failing economy will always make unpleasant headlines.

The forthright calls for higher interest rates made by both the German Finance Minister and the President of the Bundesbank backed up by both the Belgian and Finnish Central Bank heads has highlighted a clear fracture in economic policy.

Politicians in Brussels see this as an issue for the ECB, although it has clear political overtones. It is incredible that the European Union, which often glories in the fact that it is a separate country in all but name, does not have a finance minister.

Finance and the economy appear to function just below the political surface, which puts a burden on Christine Lagarde and the bureaucrats and technocrats who make up the management of the ECB.

There appears to be a gap in the understanding of the difference between democracy – where all matters put before the board of the Central Bank are considered and voted upon, and politics – in which members of the European Parliament debate and create policy which the Central Bank then acts upon.

The Germans, Belgians and Finnish represent populations who are frugal in outlook, as proved by the far higher savings rates they have compared to the Spanish, Italians, and Greeks who tend to flirt constantly with financial indiscipline.

For now, the Northern Europeans see a reason to tolerate the indiscipline of the South, but the worsening economic outlook is beginning to try their patience and a full-blown recession next year could tip them into a series of actions with dire consequences for the Union.

The Euro received help from the rise in risk appetite yesterday. It rose to a high of 0.9852 and closed at 0.9839.

Have a great day!

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.