21 June 2023: UK 27th in OECD investment rankings


  • Chronic underinvestment could plague the economy “for years”
  • Another hike is likely as core inflation remains at an unacceptable level
  • Consumers being “programmed” to believe inflation is higher than it is
GBP – Market Commentary

Infrastructure, R&D, and skills training have been lacking

An eminent consumer affairs expert in the UK spoke yesterday of how he had warned his clients of the impending mortgage “ticking bomb” as long ago as last Autumn.

He also expressed surprise that mortgage advisors who are now scrambling to find new fixed rate deals didn’t act more proactively at the time.

The Chancellor told Parliament yesterday that the Government was not about to provide support for those who have seen the interest rate on the two-year fixed rate mortgages more than treble in the past three months.

A number of City analysts believe that an unwelcome side effect of the Pandemic has been that there has been a growing reliance on Government support. The public has become used to schemes like “eat out to help out” and seeing the property market supported by stamp duty holidays.

Unfortunately, the current mortgage crisis is little more than a tough fact of economic life. Interest rates do go up as well as down, a detail that has become lost on members of the public who have travelled through half of their “mortgage journey” never having experienced a single rate hike, let alone a series of them.

The economy is in danger of falling into a “doom loop” where one negative event triggers another, which in turn triggers a new adverse event or worsens the first. This is due to the chronic underinvestment in the economy that was first triggered in public services by the coalition Government in 2010 and has spread throughout the entire economy over time.

The OECD believes that although underinvestment became policy over the past decade and a half of the Conservative Government, it had been happening for many years under successive political parties.

Only Poland, Greece and Luxembourg have invested less over the past twenty years than the UK.

The economy would have been around £359 billion bigger had the country maintained the average inward investment of its major competitors.

Tomorrow the Bank of England’s Monetary Policy Committee meets and is almost certain to hike interest rates again. Despite the gloom which currently surrounds the mortgage market, the country has become somewhat immune to the further tightening of monetary policy.

It may be time for Andrew Bailey to supply some advance guidance to the market about when the committee will begin to consider ending the current cycle.

The short-term path for Sterling will be decided by the result of tomorrow’s vote. The pound fell again versus the dollar yesterday as the effect of the Fed’s pause continued to wear off. It fell to a low of 1.2713 but rallied to close at 1.2765.

USD – Market Commentary

Powell to make case for more hikes in testimony later

Jim Bianco, a renowned Wall Street investment “guru” spoke yesterday of how he sees the Fed starting more rate hikes as we move into the second half of the year.

Jerome Powell and his colleagues on the FOMC were as clear as they could have been that the pause in the cycle of hikes that it voted to deliver at last week’s meeting was never going to be anything other than a single meeting “skip” to allow the effects of previous hikes to “catch up”.

The reason Bianco is so certain that rate hikes will resume in July is the level of core inflation. While the market was screaming “peak peak peak” when headline inflation reached almost 9%, the Fed stated that it would continue to tighten monetary policy to bring prices back in line with its target.

Inflation was always going to peak at some point as the support provided by the current administration worked its way through the system, but now as fuel prices fall and foodstuffs normalize, the Fed is left with uncomfortably high core inflation. This will only fall due to a combination of Fed action and the “secondary effects of the rise in headline inflation gradually subside.

Core inflation has averaged 5% over the past six months, which is more than double the Fed’s target and will certainly encourage the Central Bank to hike two or possibly three times in the second half of the year. There is little doubt now that the FOMC believes that the economy is sufficiently resilient to withstand another seventy-five basis points of hikes.

Today, the Chairman of the Fed will visit Washington to make the first part of his six-month testimony to Congress regarding the state of the economy and how the Fed has enacted policy over the past six months when compared to his last visit and what it is considering for the next six months.

Powell will not come out and tell members of Congress his intentions, rather he will use well-used terms that imply what he expects to happen.

The dollar index has recovered some poise following last week’s precipitous fall in the wake of the pause. It climbed back to a high of 102.78 and closed at 102.53 as it made back close to 50% of last week’s fall.

EUR – Market Commentary

No mention of a pause yet, but that is most likely the September outcome

Storm clouds are brewing around the ECB as the doves and hawks square up to each other about what will be the appropriate time for the Bank to end its cycle of interest rate hikes.

The hawks have become like that one last person left in the bar at closing time demanding “just one more”, while the doves are trying to “bring down the shutters”.

The focus has become the September meeting of the Governing Council, at which it was generally expected that an end to the cycle would at least be announced.

After the July meeting, at which Christine Lagarde has again staked her reputation on there being a further hike, there is a “natural break” as the entire north of Europe leaves for Spain, Italy, Greece, Portugal or another warm place further afield, for their month-long annual vacation.

While headline inflation is acting similarly to what is being seen in the U.S., it is core inflation that is causing more concern to Central Bankers throughout the Eurozone.

By far the most hawkish view of the fight against inflation was made presented on Monday by Isabel Schnabel, who commented that she believes that the ECB must err on the side of doing too much on rates.

Schnabel, who doesn’t bear the weight of economic growth as most of her Central Banker colleagues do, has the luxury of being able to look at inflation, and its effect on long-term economic growth in isolation without worrying herself overly about what a long series of hike does in the short term.

Luis De Guindos, the former Spanish Minister of Economy, who has been a Vice President of the ECB since 2018, spoke yesterday of his concern about the pace at which underlying (core) inflation is falling. This appears to put him in the “hawkish” camp and runs contrary to his most recent comments.

There is plenty of economic data to be released between now and September 14th, so as Philip Lane commented on Monday, there is no reason for the eurozone to paint itself into a corner just yet.

The Euro lost ground yesterday as the market considered the trade-off between diverging monetary policy and a widening of the rate of growth between the U.S. and the eurozone.

The common currency fell to a low of 1.0892 and closed at 1.0918.

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.