1 December 2022: Further support need to be provided

The Conservative Party has been in Government, either solely or in coalition, for well over a decade but have failed in to bring their values to bear on the economy of the country due to a single decision brought about in 2014 by then Prime Minister Cameron’s fear of the rise of the UK Independence Party and the rabble-rousing about the effect of their single policy, which was to cause the UK to leave the European Union.

Their leader, Nigel Farage, has long since departed the UK political scene, but the havoc he wrought, lives on. As recently as yesterday, Brexit was being blamed for the current instability in the economy, which will probably last a generation.

Having taken over a decade to get into the current mess, the Government has no more than two years to turn it around. Unfortunately, they have neither the expertise nor political nous to do so.

The eighty seat majority that was gained in 2019 has been squandered by an incredible degree of arrogance, coupled with failure to deal effectively with either Brexit or the aftermath of the Coronavirus Pandemic. T

The Bank of England’s Governor who took over from the highly effective Mark Carney around the time that the Pandemic was beginning to take hold has been unable to get to grips with the level of inflation that has brought in its wake, a level of industrial unrest not seen in this country since the eighties, and a recession that is likely to see the economy shrink by at least four per cent over the next five quarters as well as lose the Conservatives the next election.

The mess that is Brexit is likely going to be heaped upon the Labour Party if current opinion polls prove to be accurate.

They were unable to agree a salient policy at the time of the last election, and have stood on the sidelines as the current Government’s attempts to achieve the golden age of trade and growth that Brexit was supposed to bring suffer from the indifference of Brussels.

Data released yesterday showed that food inflation has reached its highest level in 45 years. In November, it reached 12.4% compared with 11.6% in October. While the data contains seasonal factors and the effect of the war that still rages in Ukraine, the simple truth is that the Central Bank’s policy of drip feeding tighter monetary policy into the economy has failed abysmally. This fact calls into question the independence of the Bank of England, which has not been seriously tested since it was granted in 1997.

The pound rallied to reach 1.2087 following a dovish statement from U.S. Fed Chairman Jerome Powell that was delivered late in the day and can expect to have a negative effect on the dollar in the short term. It closed at 1.2055.

Despite the dovish nature of the minutes of the latest FOMC minutes that were released last week, the Fed Chairman had been widely expected to reiterate his determination to support continued substantial rate increases until it was clear that inflation had been defeated and had returned close to the Central Bank’s target.

While there had been indications from the data that inflation was possibly close to topping out, no one was really prepared for Jerome Powell’s speech yesterday in which he agreed with the minutes and declared that he believes that rate increases will have scope to begin to slow, possibly as soon as this month.

Despite this he continued to say that borrowing costs still need to rise but not so aggressively as they have recently. That immediately informed traders that the days of jumbo increases of seventy-five-basis-points have come to an end, since Powell believes that they have served their purpose in turning interest rates from accommodative to restrictive, which is expected to have the effect of cooling the employment market.

The data released so far this week has shown that the private sector produced just 127k jobs in November, while job openings fell to 10.334k from 10,667k. The real acid test from a slowing of employment will come tomorrow with the publication of the November Employment Report.

It is highly unlikely that Powell would have felt he had the room to turn quite so dovish without having had sight of an advance cut of tomorrow’s data.

In the wake of Powell’s comments, the entire market has reduced its estimates for the headline non-farm payrolls, a lot closer to 100k new jobs.

One piece of good news was that the economy grew by 2.9% in Q3, up from the previous estimate of 2.6%, continuing the feeling that the economy was in for a period of slow growth rather than recession

The dollar index took something of a beating, as its recent strength has been almost entirely based on the Fed continuing its aggressive policy of rate hikes.

The index fell to a low of 105,77 and closed at 105.99. Overnight, it has continued to lose ground so far (0500 GMT) reaching 105.49.

The timing of both Robert Holzmann and Christine Lagarde making hawkish statements on inflation and the need for continued tightening of monetary policy couldn’t have been made at a less opportune time.

Following on the heels of lower inflation data for Germany and Spain the day before, yesterday saw the data for the entire Eurozone. Headline inflation fell from 10.6% to 10% in November, with the core falling month on month from 0.6% to flat and year-on-year remaining and 5%.

This will make Lagarde’s task in convincing the more dovish members of the ECB’S governing council all the more difficult.

It seems that across most of G7, the prospects for 2023 have suddenly become brighter. Despite the continuation of the war in Ukraine, there has been no significant escalation as Russia has, for now, scaled back the shelling of infrastructure targets, specifically power supply.

The fall in inflation was the first time this had happened since last year and should it continue, it will be tempting to blame the entire inflation bubble on the emergence from the Pandemic.

At its next meeting, not only will the ECB make a decision on short term interest rates, but it will also reveal how it plans to reduce the size of its balance sheet, which has ballooned to a little over Eur 9.2 trillion euros. Depending on the pace it decides to divest itself of its holdings of bonds, the effect could be similar to a hike of approximately 1.5%.

What has been euphemistically labelled quantitative tightening depend on three factors: the inflation outlook, the measures taken so far, and the lag between bond sales and the tightening taking effect.

At this month’s meeting, the framework will be agreed, then laid out for the market’s perusal. It will for the most part be gradual and predictable.

The effect of the inflation data dampened to a larger extent the effect of Jerome Powell’s statement. In which he took on a more dovish tone than has been seen for some time. The positive effect on the single currency was less than it was on other currencies.

The Euro managed to rise to a high of 1.0428 and close at 1.0408 despite the dollar itself being under pressure.

Have a great day!