21 August 2023: Output data unlikely to deter BoE


  • London is still propping up the economy as levelling-up evaporates
  • Mexico replaces China as America’s top trading partner
  • Inflation is beginning to ease but a hike is still expected
GBP – Market Commentary

A small decline in services output is expected

“Twas always thus.”

Despite grand plans to “level up” the country economically by trying to make investment more attractive to business, London and the South East are still propping up the rest of the country.

Having shattered the “Red Wall” which divides the country when winning the 2019 election, the Conservative Party set about consolidating their position but delivering change to areas that had been socialist for decades has proven far easier on paper than in practice.

Big business has invested heavily in the South East, the infrastructure is already in place, even the geography is against change, with proximity to the Channel Tunnel and another significant driving the status quo.

Conservative candidates who were elected in s 2019 are beginning to see the reality of the future as “one term” MPs as two major hub projects, one in Newcastle, the other in Birmingham have been dumped, after years of postponements.

Government offices remain firmly entrenched in London, with little or no interest being shown on any move northwards.

Levelling up was a Boris Johnson initiative which has died along with his political career.

The only positive advance seen in the levelling up process has been the delivery of offices for the Treasury in Darlington in the North East of the country.

As the chances of a Conservative win in the next fifteen months or so disappear, so do any plans for significant social change in the country.

This week will see the publication of preliminary output data for this month. While manufacturing continues to languish in contraction, services continue to provide what little growth is being seen in the economy.

While services remain in expansive territory, it is expected that output will have fallen from 51.5 in July to 50.8. A reading of fifty marks the dividing line between contraction and expansion.

The composite data for output is expected to have fallen from 50.8 to 50.3.

Last week, as market activity reached its seasonal low, Sterling became becalmed, although it did end the week marginally stronger than when it began.

It staggered to a high of 1.2787 and closed at 1.2733.

USD – Market Commentary

Powell’s speech on Friday to set the tone

This week will be dominated by the start of the annual Jackson Hole Symposium, which is hosted by the Federal Reserve.

Fed Chairman Jerome Powell will “kick things off” on Friday afternoon, making the keynote speech.

This has become a platform for the Central Bank to outline its plans for the final rest of the year, and this year is likely to be no exception.

At last year’s event, Powell “bared his teeth” in the face of historically high inflation, promising that the Fed would not shirk its responsibility to tighten monetary policy sufficiently to bring price increases back to its target level.

He has made good on that promise as the FOMC has hiked rates at every meeting since then bar one.

This year, he is expected to be less hawkish but retain his desire to see inflation defeated. It is doubtful that he will even acknowledge the possibility of a soft landing despite it being ever more apparent that that is what changes in policy will achieve.

The “great and the good” of global financial markets will be in attendance, including the Heads of the Bank of England and ECB. Both Andrew Bailey and Christine Lagarde are expected to provide hints on the outcome of their upcoming meetings as well as the prospects for their economies for the rest of the year.

Before Friday data for the property market will be released. Existing home sales are expected to be broadly unchanged at 4.15 million.

There will also be speeches from several members of the FOMC keen to provide hints as to their voting intentions at September’s meeting. In general, Fed Governors are tending to be more hawkish than Regional Fed Presidents, who have a better feeling for the situation “on the ground.”

The Conference Board Leading indicator index is another super-long-term indicator of the health of the economy. In keeping with an inversion of the yield curve, it has not been wrong over the past sixty-five years in predicting a recession. The latest release shows that the economy will need to “buck another trend” if it is to avoid a recession.

The dollar index has retained slow but steady progress as it recovers from its significant correction in the second quarter. Last week it reached a high of 103.68, closing at 103.43.

EUR – Market Commentary

The German economy remains a concern

Christine Lagarde has clearly returned from her summer holiday fully energised for the fights that are anticipated over the next few months.

The first person to feel the sharp edge of her tongue was Giorgia Meloni, the Italian Prime Minister who Lagarde lambasted over the Italian plan to attach a windfall tax amounting to close to three billion euros to Italian banks.

The expected tax caused a ripple through Eurozone financial markets and raised the possibility that Rome and Frankfurt are no longer on speaking terms, since there was no discussion about the implementation of the tax in advance.

Since coming to power, Meloni has strived to make sure she is not seen as a right-wing firebrand enacting a nationalist agenda, but this may be about to change as the Italian economy recedes into a recession the blame for which they feel the ECB is to blame.

Being even asked to inform the ECB in advance of such decisions as taxation may be seen by Meloni and her Cabinet colleagues as a step too far. While the ECB cannot stop Rome from imposing the tax since there is currently no fiscal union, in the past it has been critical of Madrid and Vilnius over similar actions.

Once Lagarde has settled this domestic skirmish, she will fly to Jackson Hole to address the Fed’s Symposium. There will only be one topic that will exercise the minds and quotations of the assembled financial journalists, “will Lagarde support another rate hike at the ECB’s September meeting?”

It will be refreshing for the market to have factual comment to rely upon rather than the diet of theory and gossip it has been force-fed over the past month or so.

ECB Chief Economist Philip Lane expressed a more bullish attitude to the Eurozone economy when speaking on Friday. While acknowledging that times are tough for the economy presently, he fully expects the Eurozone to begin to exhibit on-trend growth early next year.

The Euro continues to slip further from the watershed level of 1.10 and may see declines accelerate if the crutch of tighter monetary policy is removed.

Last week, it fell to a low of 1.0845 before recovering to close at 1.0871.

Have a great day!

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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.