24 January 2023: Services on the cusp of expansion


  • EY see recession as deeper, not necessarily longer
  • Job cuts may spread from tech sector
  • Eurozone wide PMI’s expand but still in negative territory
GBP – Market Commentary

Doubts remain about economy going forward

Top accounting firm Ernst and Young dispute the Governor of the Bank of England’s assertion that while the coming recession may last longer than has been the norm over recent contractions, it will be shallower.

However, they still see the economy beginning to grow again from the middle of this year, which is earlier than Andrew Bailey has previously forecast. While the country will emerge from the recession, it will not see the level of growth it has seen in recent years. In 2023 the economy is expected to shrink overall by 0.7%, in 2024, 1.9% and in 2025 2.3%.

Overall, in 2022 the economy is expected to have grown by 2.3%.

The likelihood of a change of Government early in 2025 clouds the picture, but the Labour Party is unlikely to be able to have either the policies nor the wherewithal to change the outlook substantially, although it will have something of a free ride for a year being able to blame the previous Government for any problems it encounters.

One of the major contributors to the upturn expected in the second half of the year will be falling inflation. While the significant number of rate hikes that the Central Bank has put in place have begun to have an effect, it is only now that interest rates have entered a neutral phase and may turn restrictive as early next week that their effect will be magnified.

One other issue that differs from previous recessions, despite the industrial action that is being seen in the public sector currently, is that the employment market remains buoyant. Jobs still appear to be fairly plentiful, with the December figures showing that the unemployment rate remains below 4%.

Since the global economy has emerged from the Pandemic, there is an interconnectedness about growth and inflation that means G7 economies have been on the same trajectory despite being at a different stage.

The Bank of England is less prone to keeping the markets abreast of its intentions than either the Fed or ECB despite being the first to start hiking rates.

It is also the most fearful of a recession given the additional issues the economy faces in light of Brexit, which is expected to reduce overall GDP by around 4% over the next five years.

Sterling and indeed the other major currencies are heavily under the influence of Central Banks, something that wasn’t a factor during the low-interest rate era, which has now ended.

The pound is struggling for any momentum as the market believes that the taper of rate hikes is likely to begin this quarter. Yesterday, it fell to a low of 1.2323 versus the dollar and closed at 1.2373.

USD – Market Commentary

NFP data on Friday week may see a fall in new jobs

It seems a long time since the market has had either a series of employment reports as well as an FOMC meeting to provide it with a degree of clarity and momentum.

Next week, the JOLTS job openings data, the private sector jobs, challenger job cuts, and non-farm payrolls data will be released.

It has become something of a cliché that the next employment report will be the one which provides a definitive answer to the question about whether the economy will see a recession in 2023.

The CEOs of the firms which now appear to drive Wall Street, Tesla, Apple, Amazon and Google/Alphabet, all feel that the U.S. will see a recession but cannot agree on its depth.

There have been significant jobs losses in the tech sector, with the firms names above at the forefront of global reductions in staffing.

Overall, the job’s data that will be delivered next week will still be in positive territory, but may have begun to see a significant fall. There were still 235k new jobs created, which is a remarkable return for this stage in the economic cycle. Anything above 150K in January will be considered better than has been expected, although the December figure is still subject to a revision.

Previous downturns have been characterized by a significant downwards revision to the estimates at presumptions that form part of the data.

Also, next week there will be a meeting of the FOMC. Jerome Powell and his colleagues have prepared the markets as best they can for another fifty basis point hike. There have been no especially hawkish speeches made since the last meeting, while Powell has not shown himself willing to begin the taper.

One of the Fed Governors who holds a permanent seat on the FOMC, Christopher Waller, commented last week that he is ready to vote for a twenty-five point hike but he is considered to be in the minority.

There is a spate of tier one data due for release next week, including house prices and manufacturing output, but all eyes will be on the employment report and FOMC to look for clues as to the future path for the Greenback.

Yesterday, the dollar index remained close to the bottom of its recent range. It appears that traders and investors are fearful of the outcome of next week. If the employment data shows continued strength, the market may feel that a soft landing is possible and the dollar may see a bout of strength.

However, any other result and it may see a significant fall, but not a rout. The dollar index rose to a high of 102.27 yesterday, but was unable to sustain any momentum and fell back to close at 102.02.

EUR – Market Commentary

Cutting inflation is the only game in town

In the Eurozone, all roads lead to Christine Lagarde as she continues to call for further hikes in interest rates given that inflation remains stubbornly high.

It is becoming increasingly difficult for her to continue to advocate a level of monetary policy which, at best, suits no more than half of the users of the common currency.

If the region is ever free from crisis or even potential crisis, there will need to be a serious discussion about the creation of a Eurozone-wide finance ministry which shoulders the responsibility for a move towards greater fiscal unity. It is impossible for the Central Bank to deliver a salient monetary policy that works for everywhere from Paris to Vilnius.

It was a significant error when monetary union was agreed that there wasn’t so much as a pathway to a unified taxation and social care agreed.

Everyone is aware of the European Commission’s penchant for forming a committee, but to have overlooked the possible arrival of the circumstances that are currently prevalent is nothing short of scandalous.

Frankfurt took a major part of the responsibility for dealing with the nations that were in danger of default during the Sovereign Debt Crisis by being tough on financial indiscipline.

However, Germany is heavily embroiled in the current evolving difficulties and as far as nations like Italy and Portugal are concerned are as much a part of the problem as the solution.

Next week’s ECB meeting promises to be a continuation of the discussions that have been present at the last three or four. Christine Lagarde may have been a little negligent when she hasn’t mentioned that the interest rates hikes that have taken place so far have been fairly ineffective since until rates reach a neutral point, which they may not have evened attached yet, the ECB will still be providing a degree of accommodation.

There will be those who want a seventy-five basis point hike next week, but have to accept fifty, just as there will be those who plead for twenty-five who can be persuaded to accept fifty.

Meanwhile, inflation is falling but not as quickly as hoped, and the Eurozone remains fearful of another energy crisis or an upsurge in the war in Ukraine. Germany is still considered to be dragging its heels regarding supply of further military hardware, while former UK Prime Minister, Boris Johnson, takes on the role of unofficial Advocate for Kyiv.

The euro remains hemmed in, although it retains potential to test the 1.10 level versus the dollar.

Yesterday, it rose to a high of 1.0926, but fell back to close at 1.0868.

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.