19 April 2023: Insolvencies at a jaw-dropping level


  • Construction Sector propping up economy
  • Two out of three Americans fear a recession
  • ECB to review inflation goal once its achieved
GBP – Market Commentary

Large increase in March claimant count

The Government’s recent campaign to try to convince people that the economy is on the right path hit the buffers yesterday as the March employment report showed that claims for unemployment benefit rose by a little over 28k and the unemployment rate, despite being close to all-time lows, ticked up a little to stand at 3.8%.

Another blow to the economy showed that insolvencies have risen to their highest level since monthly records were produced three years ago.

2,457 companies were liquidated last month, up from 1,784 in February. Companies are facing rising costs, especially energy, which in many cases has seen two or three-fold increases.

Higher interest rates have also had a significant impact. While the Bank of England has been using monetary policy to slow demand, it is likely that rates have reached a point where they are restricting growth.

This is expected to have an effect on the MPC’s decision on whether to increase rates at their meeting next month. With headline inflation in March to have possibly fallen to below 10% when the data is released later this morning, the time may have come to pause the hikes which have taken place at every meeting since December 2021.

Andrew Bailey and his colleagues face a dilemma over inflation. While it has undoubtedly topped out, it is not falling fast enough, and it is impossible to say how fast it will continue to fall as Spring turns into summer.

If the rate of inflation stalls, the MPC will not want to reintroduce tighter monetary policy, particularly as many feel that the slowdown in the economy may actually warrant interest rate cuts by the end of this year or early next.

The insolvency details show that although the country is not technically in a recession, the current mood has the feel of one and there is no doubt that the Government’s view that the country is out of the woods, is fanciful to say the least.

One sector of the economy that is showing improvement. Is construction. Although this sector feeds into several others, it is unlikely that it is able to carry the substantial burden of driving the entire economy forward alone.

GDP returned to its pre-Pandemic size in February but it is unlikely to see much further improvement this year.

Sterling bounced off support at 1.2370 yesterday to make a high of 1.2449 and closed at 1.2429 as the dollar’s recent improvement ran out of steam. A better than expected fall in the rate of inflation for March may be seen adding to the pressure on the Bank of England to pause rate hikes pulling the rug from under the value of the pound.

USD – Market Commentary

Independence under threat from the Administration

One of the most prized possessions of Central Banks the world over is their independence. The Bank of England was freed from Government control in the late nineties, and while the makeup of the Monetary Policy Committee has not always been to the liking of either MPs or the financial community, it is considered better than what was in place before.

It is considered vital, especially following the crises that have enveloped the markets over the past twenty-five years, that monetary policy is delivered without political interference.

For that reason, the Fed jealously guards its independence and the growing calls for the administration to have a voting presence on the FOMC has set alarm bells ringing.

Just the premise that the Government feels that mistakes have been made means that a partisan view of monetary policy would render the Central Bank’s decision-making process less effective.

Where some members of congress believe that the continued raising of interest rates has been instrumental in slowing the economy despite the effect that they have clearly had on inflation, many agree with Jerome Powell that the needs of the ordinary man should be placed above those of big business.

It is ironic that Powell was appointed by Donald Trump, probably the most business oriented President in living memory.

The ex-CEO of Home Depot, one of the major retailers in the country, spoke yesterday of his fears that there is going to be a substantial rise in bankruptcies if the Fed continues to hike interest rates any further.

Bob Nardelli, believes that the increases in rates that are already in the system will slow activity and demand to such an extent that businesses will see their margins slashed.

He feels that middle market businesses are unable to invest in their businesses and will have to retrench if they are to even survive the downturn that he expects to see later in the year.

With no tier one data due for publication this week, the market remains transfixed by its expectations of both the Fed’s next move on interest rates and Jerome Powell’s news conference following their decision on monetary policy. Yesterday, traders were of the opinion that rates may not be hiked on May 3rd and the Chairman will provide dovish, or at least, less hawkish comments.

The dollar index gave back the gains it made on Monday, falling to a low of 101.64 and closing at 101.73.

EUR – Market Commentary

Data will determine by how much ECB will hike in May

Philip Lane, the Chief Economist at the ECB risked the wrath of the rate setting Governing Council yesterday by confirming that the Central Bank will hike rates at its next meeting, early next month.

While this is hardly a shock, he held back from predicting the size of the hike preferring to allow the data to provide an answer.

That is well and good, but the members of the Governing Council are far more concerned by inflation in their own countries, and that determines how they vote.

Although ECB President Christine Lagarde has often called for delegates to consider the bigger picture there is still a large amount of xenophobia in the decisions.

Attitudes to monetary policy are ingrained in the national psyche, and it will take far longer than the twenty-five years that the ECB has been in existence for that to change.

For example, in Germany despite it being seventy years since the country suffered hyperinflation, it is still feared as the great bogeyman. For that reason the Bundesbank is always hawkish on any inflationary pressures seen in the economy, and the power that Germany has within the EU is such that it is able to bend the decision makers to its will.

At the other end of the spectrum stands Italy. It has a tradition of social programmes that mean that the Government always wants to provide support at the first sign of a downturn. For that reason Italy has been forced to live with high inflation and a historically weak currency that has led to high interest rates.

The Bank of Italy is confounded by the current situation where rates are comparatively low and inflation remains well within the bounds of its historical level.

Prior to the pandemic, Italy had been making strides towards a far greater sense of financial discipline. Its debt to GDP ratio was falling towards 100 while the budget deficit was getting closer to the 3% Brussels demands.

Then true to form, the pressure of the Pandemic and the relaxing of budgeting rules, saw Rome borrow to fund further social programmes.

Inflation has returned to the entire Eurozone economy and the ECB is tasked with bringing it back under control.

For this reason, the ECB is considered to be the most hawkish Central bank in the G7 and the euro is gaining plenty of support from the expectation of higher interest rates.

Yesterday, the single currency rose to a high of 1.0983 and closed at 1.0972.

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.