Government pledges energy support
22nd September: Highlights
- The Bank of England set for the biggest hike so far
- The Fed continues hawkish bias
- Deutsche Bank slashes eurozone 2023 GDP to -2.2%
GBP – Support will only last for six months initially
While the details still appear a little vague, the basis is that between October and March, struggling businesses will see energy bills reduced by around half.
The proposal received mixed support when it was announced in Parliament, with several trade bodies believing that it is a sticking plaster over a major wound.
It had been hoped that any support that was planned would remain in place for at least twelve months, since no one expects the energy crisis to have dissipated in such a relatively brief period.
There was also concern voiced by the well-regarded think tank, The Institute for Fiscal Studies, yesterday. They are concerned that the level of debt that the country is taking on is spiralling out of control.
The IFS believe that the Cabinet is gambling on a major upturn in economic activity returning to the country far sooner than is predicted by other observers.
If that fails to materialize, the planned reductions in taxes will need to be shelved or reversed completely.’
It was announced that rising interest rates have raised the interest on the country’s current debt to uncomfortable levels which are likely to deteriorate if the Bank of England, as seems certain, continues to raise rates.
The Monetary Policy Committee will announce its interest rate decision later this morning. They are expected to join other G7 Central Banks in raising rates by seventy-five basis points.
While the financial markets are braced for the news, they are hoping that the Bank’s Governor, Andrew Bailey, will announce that increases going forward will be lower.
A lot depends on how quickly the rate of inflation is rising and an expected rise in the number of people claiming unemployment benefit.
Another innovation expected to promote growth will be announced by the Prime Minister on Friday. Reforms to the financial services industry are expected to unleash growth and boost investment.
The pound fell further over concerns regarding the country’s debt levels. It fell against the dollar to a fresh 37-year low of 1.1237, closing at 1.1266. While it is not considered to be in free fall, concerns over the level of the currency will be beginning to grow as further tax cuts are announced, while how they are funded is still a little fuzzy.
USD – Further increase expected at December meeting
The size of the proposed hike was priced in by the markets, while hopes for less hawkish language had faded over the previous few days.
The Fed’s stance of monetary policy has been labelled ultra-aggressive by commentators, who are growing ever more concerned about the Central Bank’s apparent disregard for economic growth.
Fed Chairman Jerome Powell and his fellow members of the FOMC are staking a great deal on their opinion that even if the country slips into recession, it will be shallow and short-lived.
In hiking interest rates by seventy-five basis points for the third meeting in succession, rates are now seen as restrictive by some considerable distance.
Many market experts believed that the Fed would have cause to pause once rates became restrictive, but there was no sign of it in Powell’s statement following the meeting.
There are two FOMC meetings scheduled for the rest of 2022, to be held on November 1st and December 13th. It is now certain that a further one hundred and twenty-five basis points of increases will be announced at those meetings.
This would mean a fed funds rate of 4.5% by year-end, with projections for where rates would top-out being raised to 5%.
The Fact that the Fed was late to the party, believing right up until the end of the first quarter of this year, that inflation was transitory, and due to the level of support provided by the Administration, has virtually guaranteed a recession. Just how deep the slowdown will be remains to be seen.
The dollar index rallied strongly following the Fed’s announcement, breaking the 111 level for the first time. It reached a high of 111.57 and closed at 110.37.
The September employment report will be delivered on October 7th. It is expected that employers will begin to feel the pinch, and the number of new jobs created will slow significantly.
EUR – 300k reservists called up
Following the announcement that elections will be held in that part of Ukraine that Russia has occupied, Putin declared that any attempt to take back that land would be an invasion of sovereign Russian territory and would be met with extreme measures.
Those measures are expected to to include the use of battlefield nuclear weapons. This would be considered a significant escalation of the conflict and drew a stinging response from the U.S. President Biden at the United Nations General Assembly, which is being held in New York,
Biden accused Russia of a flagrant violation of the United Nations Charter, although he held back from promising any reprisals.
Putin announced the call-up of up to 300,000 reservists, a message that saw protests on the streets of Moscow.
Any major escalation in the conflict will be viewed with great concern across the entire European Community, since its ramifications could go way beyond concerns over the economy.
Deutsche Bank in a regular bulletin to its customers published yesterday painted a particularly bleak picture of the prospects for the Eurozone in 023. It sees the economy contracting by an average of 2.2%, with falls of 3.5% in Germany, while France, Italy, and Spain seeing significant falls.
A lot depends on the next three months. If there were to be a fall in the wholesale price of gas, those estimates may prove excessive, while an unusually harsh winter may see the situation prove to be even worse.
The prediction of a fall of 2.2% in growth followed a prediction of a fall of just 0.3% made in Mid-July.
Inflation is expected to average 6.2% in 2023 which will see the Eurozone fall into stagflation which will be difficult to escape.
The euro fell to a low of 0.9813 yesterday and closed at 0.9837.
The only support that the single currency can expect is for another seventy-five-basis point rate increase to be agreed at the next ECB meeting, but that could have devastating consequences for the economy.
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.