24 April 2024: Pill renews his hawkish vows


  • Sunak announces a significant increase in defence spending
  • Dimon performs a pivot
  • The Eurozone is slowly exiting its slump
GBP – Market Commentary

The risks of cutting too early are greater than cutting too late

On a visit to Warsaw yesterday, the Prime Minister announced a commitment for the UK to increase defence spending to 2.5% of GDP by 2030. This is a significant undertaking that will see the country spend several billion pounds to ensure that it can both defend itself adequately and provide support, as has been seen recently in nations like Ukraine.

It would be cynical to say that the announcement was part of the Conservative Party’s election strategy. Still, it begs the question of which of the major parties is most committed to the safety of the country, as the geopolitical situation around the world has been at its most critical since the end of the Cold War.

By comparison, the Opposition has also pledged to raise defence spending to the same level, but only when the country’s finances allow. Although the commitment is similar, it carries less weight than yesterday’s undertaking by Rishi Sunak.

The Bank of England’s Chief Economist, Huw Pill, spoke yesterday of his view that a cut in interest rates is still “some way off”.

He agreed that the recent absence of “bad news” had brought a cut in rates closer, there is still more risk to the economy from a cut which becomes considered to have been premature, than delaying until the MPC can be confident that inflation is truly under control.

His comments will have been a disappointment to two of the independent members of the Committee, who have been canvassing for rates to be cut since the beginning of the year.

Pill went on to say that his opinion on when a cut will be appropriate is under almost constant review. While the lack of unwelcome news has been accompanied by a marginal fall in the rate of inflation, he still does not have sufficient confidence to vote for a cut imminently.

His constant review of his voting intentions makes him a centrist on the MPC. This contrasts with the views of Catherine Mann and Swati Dhingra who have made several speeches recently in which they have expressed views that are at the opposite ends of the monetary policy spectrum.

Mann is still concerned that there is still sufficient secondary inflation in the economy due to the current level of wage settlements to see price increases flare up again, while Dhingra believes that delaying a cut any longer will cause the economy to return to recession conditions that may be more difficult to exit than has been seen since the start of the year.

Andrew Bailey who has overall responsibility for monetary policy is treading a difficult path in trying to balance these extremely opposite opinions and is enough of a realist to say that rates can be cut when inflation is provable on a path to reach his target of 2% but wants to remain cautious about outside influences.

For example, the average price of petrol in the UK rose above the 150p a litre level for the first time yesterday, as tensions in the Middle East remain high.

The pound is still driven by the market’s view of the timing of the first cut in interest rates. Yesterday, it rallied to a high of 1.2458 against the dollar and closed at 1.2448.

USD – Market Commentary

The Fed chairman’s language remains cautious

JPMorgan Chase CEO Jamie Dimon changed his opinion of the U.S. economy in a speech yesterday, commenting that it was booming, and consumer spending continued to be resilient.

He was unable to say that a recession is not going to happen but tempered his recent view, saying that The U.S. economic boom is “unbelievable,” Dimon told the Economic Club of New York. “Even if we go into recession, the consumer’s still in good shape.”

He is still concerned about the level of public spending, as well as inflation which remains too high and the geopolitical situation.

However, this was a major departure for one of the most prominent Wall Street CEOs.

Meanwhile, the economists at Wells Fargo Bank reiterated their view that a recession has not been ruled out totally. An economic slowdown towards the end of this year and into the next, cannot be ruled out even as growth is predicted to average 3.2% both this year and next, following a stronger-than-expected performance in 2023.

The Chief Economist at the IMF weighed into the debate concerning how many rate cuts there will be this year. Pierre-Olivier Gourinchas is sticking to the three cuts that comply with the latest dot plot, despite recent hawkish comments from FOMC members.

He sees inflation falling towards the Fed’s target of 2% over the summer, and while it may “tick up” in the Autumn, the rise will not be sufficient to deter it from cutting rates beginning in September or October.

Jerome Powell rises well above the daily wrangling over the timing of the first cut. He feels that he has been constant in his belief that the FOMC can be driven by the data, given the pace at which the economy is growing.

Long-term interest rates which affect home loans have been falling albeit at a slow rate recently, and barring any major negative developments may start to encourage the real estate market to see an upturn in activity.

Yesterday’s publication of preliminary PMIs for April was disappointing and saw the return of those who still see a rate cut taking place in the summer. Manufacturing output dipped back into contraction, falling from 51.1 to 49.9, while services fell from 51.7 to 50.9. This led to a composite reading of 50.9.

The dollar lost ground as this may be the start of a minor slowdown in activity, which could tip the balance at the Fed. The dollar index fell to a low of 105.61, closing at 105.70.

EUR – Market Commentary

Lagarde sees inflation easing, but risks remain

Having committed to a rate cut at the ECB’s June meeting, Christine Lagarde is second-guessing herself, finding reasons why a cut may not take place.

She has used the tensions in the Middle East as a reason for rates to remain unchanged and is still unconvinced that the balance of risks in the Eurozone is skewed towards a recession.

In a speech yesterday, she stated that the Governing Council still feels that the balance of risks is roughly balanced.

It is well known that there are hawks on both the Executive Committee and the Governing Council who would not only prefer for rates to remain unchanged through the summer but do not want a cut to happen before the Fed has cut the Fed Funds rate.

Indeed, the monetary policy in the G7 is connected, primarily manifesting itself through the gyrations of the currency, but although there has been a “chink of light at the end of the tunnel”, the Eurozone economy is still struggling for growth.

Lagarde still believes that the threat of inflation is fading but does not want to be seen to sanction a cut in rates until the headline rate reaches the ECB’s 2% target.

None of what she said yesterday is news to traders and investors but, unlike Jerome Powell, she feels the need to continue to make the point.

The German Government will present its latest forecast for its economy later this morning, and for the first time in a while, there is cause for slight optimism.

There have been marginal improvements in key indicators recently, with the publication of services output yesterday showing a significant rise from 50.1 to 53.3.

Manufacturing output is still deep in contraction. It fell again this month, from 46.1 to 45.6. This is another signal that a radical systemic change in the German economy is long overdue.

Joachim Nagel, the President of the Bundesbank spoke yesterday of the rationalizations that he believes need to take place in the eurozone as a matter of urgency, starting with a capital markets union. It is a matter of opinion whether this is of greater priority than fiscal union, but his comments at least show a level of commitment that has been missing over the past few years.

The Euro reacted to yesterday’s data by rallying to a high of 1.0711 and closing at 1,0701. The market only wants to commit to a weaker euro when the ECB finally begins to cut interest rates. In the meantime, it will continue to drift within its current range.

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.