Chancellor voices budget concerns
19th October: Highlights
- Sunak’s Autumn budget is set to be downbeat
- Economy struggling to maintain growth
- Energy prices becoming a concern
Pleas for funding overwhelming
He is trying to begin balancing the books but is also facing calls to continue spending. He is receiving requests for funds almost daily from colleagues who believe that the urge to splurge should continue.
When he was doling out support at the height of the pandemic, he was just six months into the job and was fast becoming the darling of his Party.
Now, things have changed almost completely. Far from providing free handouts, he is trying to rein in profligate Ministers.
Sunak sees his role as creating a sustainable path that allows the Government to continue Boris Johnson’s levelling up agenda, while also looking for opportunities to save funds. Every Department is being tasked with contributing to the pot by making savings and efficiencies totalling 5% of their total budget.
While the Chancellor works on mopping up fiscally following the tsunami of spending that took place during the various lockdowns, monetary policy is also beginning a metamorphosis.
Having provided support via historically low interest rates and providing liquidity through asset purchases, the Bank of England also has its own clean up to perform.
With inflation rising, driven by supply side difficulties and rising energy prices, Andrew Bailey has finally admitted that although he still believes that inflation remains transitory, the contributors are not going to become structural.
He agrees with his colleague Silvana Tenreyro that raising rates to solve the current issues would be counterproductive.
Nonetheless, Sterling is powering higher as the market gets a whiff of a change to policy that could be seen at next month’s MPC meeting. Interest rate markets are pricing in an 89% chance of a rate hike.
The pound rose to a high of 1.3765, closing at 1.3727.
Economic slowdown attracting Fed’s attention
The glib comments from the FOMC that supply chain difficulties would disappear as the economy reopened completely have not come true and job creation has fallen off a cliff as evidenced by the two most recent employment reports.
The concerns over continued difficulties in supply chains was underlined by yesterday’s release of data for industrial production. Output fell by 0.7% in September, following a revised 0.4% fall in August.
The market’s expectation had been for a marginal rise of 0.1% in both factory production and industrial output.
The inability of manufacturers to source both raw materials and skilled labour has been a major contributor to the fall despite demand continuing to be strong.
Given the performance of the economy recently, the Fed’s withdrawal of support is beginning to look more than a little tenuous.
The fallout from Hurricane Ida, which battered the eastern seaboard is still being felt and may have contributed around a 0.3% fall in manufacturing.
The most pressing concern is the inability of the economy to escape from the snarl-up in the logistics sector. Output in the automotive sector fell by 7.2%, its largest fall since April.
The crisis over the ethics of FOMC members is threatening to engulf Fed Chairman Jerome Powell as news leaked out that he sold between one million and five million dollars’ worth of stock in a fund that is directly affected by FOMC policy.
This is a story that is refusing to go away and given the Senate’s demand for an improvement in oversight, it could mean that in keeping with the President who selected him, Powell may become a one-term Chairman.
The dollar index continues to fall as the correction threatens to become something more significant.
It fell to a low of 93.86 yesterday, closing at 93.96. There are still several support levels before the major support at 93.50 is in danger of coming under threat.
Transitory inflation becoming a millstone
Several analysts bought the story, while theoretical economists were not so sure.
While Andrew bailey and still to a lesser extent Jerome Powell moderated their tone, Christine Lagarde has been likened to a catwalk model still wearing last season’s outfit as she continues to parade transitory inflation as the means of keeping her more hawkish colleagues at bay.
The Eurozone trade surplus shrank significantly in August to just Eur4.8 billion. This was down from over twenty billion in July. The continued logistical issues that have spread from domestic problems into the global economy are affecting the recovery from the Pandemic.
The inflationary effect of shortages of energy and raw materials cannot be overestimated and could even spread to Ms. Lagarde having to adjust her rhetoric.
For now, the ECB remains committed to keeping its level of support at the same level.
Lagarde is also a strong believer in allowing policy changes to work. She has seen many policies come and go in the past as the ECB’s General Council has gyrated from feast to famine and back again in order to satisfy the desires of several members.
Lagarde has described past policy changes as contributing to a just in time economy where policy has been reactive. During her tenure, she has tried to put in place a solid set of goals and provided long-term policy to satisfy them.
The single currency remains well-supported, but this is still considered to be a short-term phenomenon.
Yesterday, it rose to a high of 1.1622, closing at 1.1610. As the expectation of a reduction of support for the U.S. economy begins to fade, the euro may benefit and market concerns that the euro is set to fall further could also disappear.
About 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.”