19 April 2024: Cheaper food to lead inflation lower


  • Hunt insists on “sticking to the plan”
  • More reports are showing the resilience of the economy
  • Lagarde calls for private capital investment in Europe to increase
GBP – Market Commentary

The BoE Governor and the Chancellor are in sync

In the UK, as in the rest of the G7, the financial market is dominated by the prospect of when the first cut in interest rates will take place.

However, there is another story developing, and that is the improvement that is taking place in the economy.

Government Ministers and Bank of England officials are making the “right noises” as is only to be expected, but there is genuine evidence that the predicted upturn has begun.

The number of new jobs that have been created across the entire G7 has defied the slowdowns that have taken place, particularly in the UK and Eurozone.

There has been little mention of the data made in London this week, about the continuing unemployment rate of 4.2%, even if there was a slight uptick in March is well below the long-term average and well below the level that would be expected from an economy that has been teetering on the edge of a recession.

The primary purpose of the cycle of interest rate increases that ended last year was to slow demand to bring down inflation. As part of this process, less demand leads to fewer workers being employed, and depending on the severity of the fall in demand, may lead to a significant increase in unemployment.

The UK is currently going through a paradigm shift in the makeup of its economy, as the effects of the Pandemic drive a “technological revolution”.

While this won’t have such a dramatic effect as the Industrial Revolution which saw the rural population of the country migrate into the cities in search of work, the development of working from home due almost entirely to the advances in communications technology fits very neatly into the switch from a manufacturing to a services-based economy.

No one in the Government will admit it, but China is on the verge of winning the global battle to dominate manufacturing output. The advantage of a low-cost base was first identified in the U.S. and Donald Trump, during his first term as President, vowed to reverse the process of exporting manufacturing output, but American Manufacturers see more benefit to their shareholders from lowering their cost base which outweighs any patriotic feelings.

In the UK there is far less jingoism, and the country is prepared to see manufacturing output shrink. The motor industry is a prime example. Only luxury vehicles are manufactured from scratch in the country now, with bulk production, particularly in the EV sector, happening in China.

The change in emphasis between manufacturing and services has allowed workers to achieve the improved work/life balance that is craved by the “millennial generation”.

The Chancellor of the Exchequer has said very little in public about the economy since delivering his spring budget, but this week, he has followed the Prime Minister in commenting that the recovery has begun and used the hackneyed phrase that the country needs to “stick to the plan”.

It will need more than simply sticking to the plan if this Government is to achieve the miracle of winning the election, but the current Cabinet lacks the dynamism of a Johnson, Thatcher or Blair to do anything but “go quietly into the night”.

Sterling’s minor recovery was extremely short-lived. It fell to a low of 1.2433 yesterday, closing at 1.2436. In early Asian Trade, the pace of its fall has accelerated as the dollar has benefitted from its haven driven by the news that an Israeli missile has struck Iran.

It has so far (O500BST) fallen to a low of 1.2389.

USD – Market Commentary

Existing home sales are still affected by interest rates

The slow rise in the number of jobless claims that were the final piece of economic data that doves were clinging to in the hope of an early cut in interest rates seems to have ended.

The weekly jobless claims figures have been slowly rising over the first quarter of this year, but the rise has stalled close to its long-term high of 220k per week. The four-week average is now at 214.50k, which was unchanged from the week before, as was the current week’s figure of 212k.

The jobless claims data has been one area of the employment market that has been affected by the hikes in interest rates that ended in September, with the Fed expecting that holding rates at their current level would lower demand sufficiently to cool job creation.

While the shift towards home working is taking place, as evidenced in the fall in both occupancy rates for commercial property and rental values, there is still a reasonably healthy manufacturing sector in the country and low-skilled workers are still able to “job hop” to remain in employment. However, the salary incentive has waned as evidenced by the fall in wage inflation.

Wages are still a significant contributor to the overall rate of inflation and in keeping with headline inflation the fall has slowed recently and this is causing the FOMC to take on a more hawking tone about a cut in interest rates.

The President of the New York Fed, John Williams, the only Regional President whose position allows him a permanent seat on the FOMC, spoke yesterday of his view that Federal Reserve policymakers have coalesced around the idea of keeping borrowing costs where they are until perhaps well into the year, given slow and bumpy progress on inflation, and a still-strong U.S. economy.

“I don’t feel an urgency to cut interest rates given the strength of the economy”, Williams said, going on to comment that “I don’t feel an urgency to cut interest rates given the strength of the economy, eventually, rates will need to be lower at some point, but the timing of that is driven by the economy.

Williams is a Vice Chair of the FOMC and would be expected to echo the sentiments of the Chairman, Jerome Powell.

Output data is due for release early next week, with the economy now well into expansive territory. The composite index of manufacturing and services output is predicted to have 52.1, well above the “watershed level of 50”.

Later in the week, preliminary data for annual GDP growth will be published with YoY growth predicted to be 3.4%, well above any of the country’s G7 partners.

The news from the Middle East overnight has seen the dollar index rally. At 0500 BST, it has reached a high of 106.34, although the news is sketchy so far, with news that explosions have been heard close to the town of Isfahan in Iran.

EUR – Market Commentary

France and Germany need help with growth

Another shift is taking place in the economy, but this one is more geographical than based upon changes in the makeup of output.

This is a distinct North/South divide developing that is seeing Greece, Italy and Spain taking over as the growth engine of the Eurozone, as the more traditional drivers of growth, Germany and France falter.

It may be that the return of tourist numbers in what was previously called the “Club Med” economies is the primary driver, but these countries have also subscribed to new working methods.

The German Chancellor recently visited China, accompanied by the CEOs of several prominent German companies. This was the first visit in a generation by a Chancellor who found themselves “on the back foot” over China’s industrial development.

IT will have been a painful experience for Olaf Schultz, as he was hoping for concessions in the trading relationship between the two nations, whose roles have become reversed over the past twenty-five or thirty years.

China has now reached a point when it no longer needs to use the price point of its exports to gain entry into either the Eurozone or U.S. markets since “Made in China” is no longer an obstacle, and it is Germany that is suffering from the rate at which China has caught up.

Germany is stuck in an economic vortex, which may cause it to need to fall further back before it can begin to catch up with the G7 economy.

It needs to face up to the unappetizing prospect of letting its dominance of high-end industrial manufacturing, where the “Made in Germany” stamp was sufficient to guarantee market share, go.

Germany and China are also at odds over the Russian war with Ukraine. The war is having a serious effect on German output, although the worst of the energy crisis is in the past.

While Germany will remain the de facto leader of the Eurozone for the foreseeable future, change is coming, and the region’s industrial behemoth will need to become nimbler and embrace the shift from manufacturing to services if it is to maintain that position.

The Euro has also suffered from the increase in geopolitical tensions. It has fallen to a low of 1.0610 overnight but has recovered to trade at 1.0638 currently.

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.