- Inflation dips but wages still falling
- Microsoft cuts 10k jobs as tech rout continues
- Inflation falls drives calls for rate hikes to end
Opposition calls Britishvolt failure a disaster
They believe that the collapse of Britishvolt could potentially see the demise of car manufacture in the UK. The sector currently employs in excess of 750k people. Petrol and diesel vans will no longer be manufactured after 2030, so a reliable and efficient source of power is essential to the future production of electric cars.
With the lead in time to going from concept to production of batteries around five years, the clock is now genuinely ticking.
Since the announcement earlier in the week that Britishvolt had run out of money, there have been two expressions of interest from firms interested in taking on the building of the plant on the site that has already been allocated for production.
The most prominent of these is Tata Motors which already owns the Jaguar and Land Rover brands, The other is from the venture capital company which was an investor in the original undertaking.
Former Conservative Party Leader, William Hague, blamed the failure on Brexit since there would have been further investment and subsidies from Brussels were the UK to still be members of the European Union.
The failure of Britishvolt is a major blow to the Government’s levelling up policy, since this was a flagship project to be created in a heavily deprived area of the country.
The Inflation report for December was published, and it showed that although there have been significant increases in the cost of foodstuffs, the overall rate of inflation fell to 10.5% from 10.7% in November. The previous day, jobs data showed that average wages increased by 6.4% meaning that in real terms wages are still falling.
This is one of the main arguments put forward by striking employees in the public sector that appear as far from a resolution as they have been at any stage since industrial action began.
While inflation now appears to have topped out, the Bank of England has what appears to be an unsolvable quandary. Having hiked rates at every meeting since December 2021, inflation is not falling quickly enough and any significant wage increase given to public sector workers will certainly add to inflation if it is anywhere close to what striking workers are demanding.
Sterling rallied to a high of 1.2290 yesterday and closed at 1.2279 as the markets saw nothing in the data to suggest the Bank of England is going to taper interest rates increases imminently.
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Unpredictability could still lead to recession
The most prominent of these have been new job creation and the turgid pace of the fall in inflation. Both should have been more affected by the aggressive hiking of short-term interest rates that has been taking place since last spring.
Against an expectation of a turnaround in retail sales from a drop in November of 0.6% retail sales were considered likely to have rebounded in December and risen by the modest figure of 0.1%.
Instead, sales fell by 1.1% rekindling thoughts of a recession. Business inventories, a significant component in GDP, continued to rise. Improvements in supply chains had seen inventories fall over the summer months, but the jumbo rate rises instigated by the Federal Reserve have slowed demand.
One of the reasons for the confused state of the economy has been the time it took for interest rates to reach a neutral state. Many believed that as soon as the FOMC embarked on a programme of interest rate hikes, that the effect would be close to instant.
Due to the unprecedented period of abnormally low interest rates over the past decade or so, it took longer than usual for the effect of hikes to be seen, particularly since the Fed began tightening quite tentatively given the unknown effect that rate increases may have on economic activity.
Patrick Harker, the President of the Philadelphia Federal Reserve, gave a fairly dovish speech yesterday in which he commented that he is prepared for a downshift in the size of incremental increases in short-term interest rates.
He will vote for a twenty-five point hike at the meeting in a couple of weeks, although market sentiment still points to a fifty point hike.
The size of the upcoming hike is one of the main drivers of the dollar in the short-term. Yesterday, the index was fairly volatile, trading between 102.99 and 101.51. It eventually settled down to close at 102.39, just a single point higher on the day.
Fifty point hikes to be normal for a few months yet
The HICP measure doesn’t have a universal effect on inflation across the entire Union, given the wide range of inflation rates seen in individual states.
This is leading to an unbalanced effect in nations where the rate of inflation is significantly below the HICP average, like Spain and France while in the Baltic States, where inflation is significantly higher, the effect is minimal.
The HICP rate of inflation remained unchanged at 9.2% in December according to data released yesterday, and this is leading to the belief that fifty basis point hikes will remain the norm for at least the first quarter and possibly longer.
While rates are currently at 2.5% across the Eurozone, it is likely that they are still some way away from reaching a neutral rate, which although there is no official definition is anticipated to be around 3.5%.
That is the initial target for the ECB, but the hawks on the governing council are expected to want to drive rates into restrictive territory in order to bring inflation down.
The effect of such an event on the economies of the likes of Spain and France will be significant.
Once inflation has been defeated, which could last most of this year, the European Union will need, with some urgency, to undertake a study to gauge the effect of any move in interest rates across the entire region.
The benefits to trade and bureaucratic red tape from having monetary union are beginning to be outweighed by the inflationary effect of a single interest rate.
Furthermore, the tolerance for higher rates of inflation varies significantly, as several EU members have a long history of putting up with high inflation and high interest rates and see economic volatility as a fact of life.
This is one of the most significant rationales for monetary union, but so far it is failing dismally.
The euro also had a volatile day, but also ended pretty much where it started. It rallied to a high of 1.0887 before falling to a low of 1.0766 and closing just four pips lower on the day at 1.0789.
Have a great day!
Exchange rate movements:
18 Jan - 19 Jan 2023
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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.