Will the Bank go early?
Morning mid-market rates – The majors
1st November: Highlights
- Sunak upholds austerity pledge
- Jobs data to confirm staffing issues
- Eurozone banks beginning to tighten lending conditions
Tax increases; a better alternative to cuts in services
Several banks have already shown their hand, expecting the call to raise interest rates at the meeting which concludes on Thursday.
With inflation last month rising to its second-highest level since 2012, pressure is increasing to bring it back under control.
Bailey, together with his counterpart at the Federal Reserve Jerome Powell, labelled the rise in inflation that occurred through the summer as transitory, but it has moved on from that view now as lingering issues with supplies of raw materials and spare parts continue across the entire global economy.
Last week’s report from the Office for Budget Responsibility in its bimonthly report issued last week speculated that inflation could average 4% in 2022 while peaking at 5%.
This will certainly demand action from the Bank of England while having a significant slowing effect on the economy.
One of the mainstays of economic growth in the UK has always been the property market, and when that begins to suffer, the wider economy usually follows closely behind.
While no bubble has yet formed despite ultra- low-interest rates that have existed for several years, the steady growth in prices driven by home sales is likely to be severely hit if interest rates begin to rise.
The next six months are going to be extremely difficult for both fiscal and monetary policy to deal with, particularly as the middle-class engine of the UK economy is set to be hit with higher taxes following last week’s budget.
The pound had a mixed week last week, mostly in reaction to the U.S. data and the reaction of the Fed to weaker growth.
It traded between 1.3829 and 1.3668 never seriously testing the bottom or top of its recent range. The coming week may be different, with Central Bank meeting’s on both sides of the Pond, driving possible medium-term changes in monetary policy.
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Powell doesn’t want to be forced to act, so maybe he won’t
First, he dismissed inflation as transitory. A dangerous path to take which has since come back to bite him. Second, he has been a little too candid over the Fed’s path at this week’s FOMC meeting.
While it remains eminently likely that the Fed Will begin to withdraw emergency support that has been providing additional liquidity to the market, the slump in GDP that was seen last week now calls that assumption into question.
While it is clear, and always was that the rate of growth in the second quarter was exceptional, driven by the country’s emergence from lockdown, it was still expected that Q3 would at least match up to what was seen between July and September, the fact that it was two thirds lower has set alarm bells ringing in Washington.
Powell is a lawyer by procession, used to answering straight questions with straight answers, but in this instance, he would have been well served to be a little more circumspect.
While there are very few observers who believe that the Fed will taper come what may, it will be a very difficult call, something that didn’t seem likely 4-6 weeks ago.
The FOMC will have a first cut of the employment data that the rest of us will have to wait until Friday to see.
There is a degree of optimism that is hard to rationalize, considering the trend in headline NFP over the past few months.
With so many moving parts driving the U.S. economy currently, it would be foolish to base any prediction for the NFP on the outcome of the Fed. meeting.
Come what may this could be a defining week.
Last week the dollar index was pressured by the weaker than expected Q3 GDP, but it recovered following some encouraging words on Friday from Jerome Powell.
It reached a low of 93.27, but rallied to close slightly higher on the week at 94.13
Inflation and a tightening bring fear of more bad loans
Across the entire third quarter, rates have been rising and this is likely to continue at least until the end of the year, at least. Lending conditions are tightening across the region as banks prepare for the focus to shift back to the size of their bad loan portfolios.
The anticipation that the ECB will be forced to raise rates against its will is growing, although the guidance from the latest ECB meeting that took place last week is for continued support to be given to the economy, with growth over inflation remaining the Central Bank’s mantra.
Several German newspapers have labelled ECB President Christine Lagarde Madam Inflation, as she continues to store a dovish path.
The tabloid Bild, one of the most popular newspapers in Germany, has accused Lagarde of destroying both earnings and savings by allowing inflation to continue to rise.
This attack echoes similar words used in an article from 2019 that was critical of Lagarde’s predecessor Mario Draghi.
Germany appears to be paying for its hegemony when criticizing countries, it believed to be profligate in public spending following the financial crisis. Their policies may have been correct for the relative economies, but public opinion saw it differently in Greece, Italy, Spain, and Portugal in particular.
Little sympathy will be shown now that the German public are seeing inflation well above target affect their own incomes.
The euro continues to be under the threat of a significant fall following the continuation of dovish policies from the Central bank. Last week, it fell to a low of 1.15135, closing at 1.1556
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.”