Johnson hanging on……just
Morning mid-market rates – The majors
20th April: Highlights
- IMF expects UK to have slowest G7 growth in 2023
- Supply chains are now being disrupted by Beijing lockdown
- 2022 growth is now expected to be below 3% this year
Bank of England adding to economic risks
The IMF projections are for the country to see more persistent inflation eroding households spending power, and higher interest rates will slow business investment.
The fund has cut its forecast for growth this year from 4.7% to 3.7% and for 2023, it sees whole year GDP at just 1.2%, down from 2.3% previously.
The shock from higher energy prices, while applicable to several countries, will be particularly damaging to the UK given the rate at which household bills are expected to rise.
The Prime Minister faced MPS yesterday for the first time since he was fined for breaking his own Government’s rules over social gatherings during lockdown.
The Opposition were in no mood to forgive Boris Johnson for his transgression, as they smelt blood in the water and attacked his behaviour relentlessly.
While mostly supported by his own MPs, Johnson was labelled a liar by the Leader of the Opposition amid calls for his resignation.
The jury is still out on whether he can survive this latest scandal, and his reasons to stay are beginning to wear a little thin.
As the country reacts to a slowing economy and global issues require a tough stance, the question of who is most able to lead, with suitable candidates looking rather thin on the ground.
Johnson is head and shoulders ahead of his colleagues in terms of experience and personality but his credentials may now have been irrevocably damaged.
Were he to resign and given the issues being faced by Rishi Sunak, it is likely that either Deputy Prime Minister Dominic Raab, or current Health Secretary Sajid Patel would be favourite to replace him.
The only other possible candidate is Home Secretary Priti Patel, but she is probably considered too right-wing to be able to unite the Party.
Yesterday the pound drifted in a range around the 1.30 level versus the dollar.
It reached a high of 1.3040. but fell back to close at 1.2998.
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Small firms unable to pass on full increases to customers
One of the rationalisations that is being seen within households is in subscriptions to premium TV networks. Netflix has seen its first quarterly fall in overall numbers of subscribers in a decade.
Wall Street researchers are now going to have their work cut out in deciding valuations for this and other tech driven businesses, as they will be unable to accept the companies’ own projections for growth given the economies being forced upon the workforce.
At the other end of the scale, small businesses across the country are struggling as their margins are being squeezed by the cost of spare parts and raw materials, as well as having to pay more for finance.
The high level of inflation has seen businesses unable to pass on the full extent of wholesale price increases, while fuel costs are hitting delivery firms hard.
It had been noted by Jerome Powell recently that the issues with supply chains that were seen as the original cause of rising inflation were beginning to ease. However, the new lockdowns being seen in China, in particular around Beijing, are slowing deliveries, and it will be some months before a return to normal can even be considered.
Beijing has been badly hit by a rise in cases of the Omicron variant of the virus.
In its report released yesterday, the IMF downgraded its expectations for global growth to 3.6% this year, close to half of what was seen in 2021. It blames the conflict in Ukraine, which it expected to continue for at least the rest of the year.
The U.S. economy is expected to grow at 3.75% while Russia, battered by sanctions, is expected to contract by 8%.
With the Fed battling to bring down inflation, politicians are beginning to show concern about two major questions; first how long will it take to see price increases return to normal; and even more basically is 4% inflation going to be the new normal?
The country has become used to low inflation accompanied by low interest rates, but those days are at an end.
With the unemployment rate now well below 4% and jobless claims averaging below 200k per week, Jerome Powell has been forced to admit that the labour market is extremely tight.
Currently, the most cited reason for workers resigning is to move to another job with higher pay. This is bringing wage inflation into the Central bank’s considerations and may see the FOMC accelerate the rate at which it tightens policy.
Yesterday, the dollar index made slow progress as it held onto gains above the 100 level.
It reached a high of 101.02 and closed at 100.98. Technically, the charts are looking overstretched and it may be that a test of the 100 level may be needed before the rally can begin again in earnest.
A lot will depend on divergence in interest rate policy. The Fed is set on a path to significant tightening, while the BoE is concerned about falling growth and the ECB continues to sit on its hands.
Stagflation now impossible to avoid
Now, following last week’s ECB meeting, it seems that that is the Central Bank’s central view.
With inflation reaching 7.5% in March and continuing to rise, despite Lagarde’s belief that it will average 6% this year, and economic activity and confidence collapsing, the region finds itself in an almost impossible position.
There are cracks appearing, mostly in how the ECB plans to tackle the twin threats of output and inflation, with rising prices both the most obvious indicator and the hardest issue to tackle.
So far, despite disputes over the economy, there have been no significant public pronouncements regarding the longevity of the Eurozone.
It may be that there are undertones being expressed in several Capitals about the benefits of membership, but so far nothing has come to the attention of the public.
The effect of the Russian invasion of Ukraine has to a certain extent drawn the nations of the Eurozone into a tighter knot group.
Yesterday, German Chancellor Olaf Scholz confirmed that his country would continue to support Ukraine both financially and militarily, despite finding himself having to admit that his country cannot survive without imports of Russian energy.
It is becoming beholden upon Germany to find a settlement to the conflict both to solve its own mounting economic woes but also to demonstrate the level of leadership within the Eurozone that it has tried to express in the past.
The political situation in France is fast approaching conclusion. The way forward will become clearer after Sunday’s run-off in the Presidential election.
If Emmanuel Macron holds on to the Presidency, his position will doubtless be weaker than it was following his initial election victory, and that may force him to make concessions to both wings of the political spectrum.
A Le Pen victory would open the floodgates to a more right-wing Government that would see restrictions upon minorities tightened.
It may lead to a move towards Frexit, but it would take an unlikely landslide victory for her to contemplate the idea during her first term in office.
The euro continues to be pressured by the divergence in monetary policy between the U.S. and Europe.
It fell to a low of 1.0761 yesterday, but recovered to close virtually unchanged at 1.0787.
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.”