24 November 2023: Private sector showing signs of growth

24 November 2023: Private sector showing signs of growth


  • Bailey says it is far too early to discuss rate cuts
  • Corporate America ignores recession risk
  • Composite activity index scrambles above into expansion
GBP – Market Commentary

Services output improves while manufacturing struggles

It is still exceedingly difficult to gain an accurate impression of the UK economy, given that many accounts are driven by a political element.

The IMF, which should be considered an independent arbiter given its international standing, said recently that following the upheaval that was driven by the ill-considered actions of the Truss administration, that the Government has got the country on the right path to sustainable growth and that the Bank of England had acted judiciously to bring down inflation.

The IMF did also say in the Summer that it was too early economically for the Government to be considering cuts in personal taxation. It will be interesting to hear what the Fund has to say about Jeremy Hunt’s actions this week.

One would hope that the cuts in business taxes and the cut in personal National Insurance contributions could be “forgiven”, given the fact that the Government will shortly have an election to fight in which, prior to Wednesday’s Autumn Statement, it was trailing far behind the Opposition in opinion polls.

The latest numbers that were taken at once following Hunt’s speech showed that the conservatives had gained 4%, which is a sign that his actions were a step in the right direction.

Although it has presided over some horrendous gaffes in its handling of various crucial issues, including the Pandemic where the scientists were basically ignored, and Partygate which betrayed an incredible level of insensitivity to what the public were going through, there remains an underlying belief that under the control of Conservative Party, the economy is in safer hands that it would be under Labour.

It is now up to the Opposition to prove to the public that they have the policies to drive the economy forward while supporting what the Bank of England is trying to do through monetary policy.

There was some better news yesterday in the shape of the latest date on output.

The preliminary figures for November showed continued positivity in the services sector, although it was down slightly on last month. Manufacturing is still in contraction, but the data showed that it was moving back towards the break-even point.

Overall activity, as denoted by the composite data, was in expansion, where it was well below the break even in October.

Sterling rallied in thin market conditions, which were not indicative of market sentiment.

It climbed to a high of 1.2575 and closed at 1.2534.

USD – Market Commentary

Rates now look likely to have peaked

While the ECB continues to grapple with a rate of inflation which it considers to be both too high and tough to bring down, the FOMC now looks like it has come to the conclusion that interest rates have now peaked, leaving the Central Bank more “wiggle room” to deal with the economic outcome of its actions.

The Administration now needs to try to control fiscal policy to not add to inflationary pressures, which while appearing controlled, could “flare up” again.

Jerome Powell has exuded a “job done” vibe in his recent comments and global stock markets have reacted positively, while Government bond yields have retreated from seventeen-year highs.

Not wishing to be drawn into a false sense of relief at the end of rate hikes, the market remains wary of several issues that have happened over the past two years that have caused the FOMC to mislead the market.

Even while having the best of intentions, the Fed has wrong-footed markets in its reaction to the Russian invasion of Ukraine, China’s Pandemic lockdowns, Britain’s debt crisis which unsettled the Government debt markets, and the collapse of Silicon Valley Bank, which led to concerns over the strength of several regional banks.

Of course, the situation is constantly evolving and inflation is definitely on the retreat, and even if the Fed’s next move is still likely to be a cut in rates, the situation in the Middle East could escalate very quickly and produce an “oil shock” which could lead inflation higher.

Monetary policy runs with a time-lag, so it is not easy to say the true position about the effect of earlier rate hikes in “real time” but there may still be some “cooling” in the pipeline.

With two weeks still to go before the next crucial economic data event, the market will be content for the dollar to remain in its lower range for now, particularly since both the UK and Eurozone have paused rate hikes, but both Central Banks may be more hawkish in their inflation outlook than the Fed.

With yesterday’s official holiday in the U.S. followed by today’s “unofficial one”, the market was in no mood to take on any new factors yesterday. The dollar index retreated a little yesterday but remained within the boundaries of its weekly range.

It fell to a low of 103.53 but recovered a little to close at 103.75.

EUR – Market Commentary

Lagarde concerned about persistence of inflation

It has emerged that the ECB conducted a “hawkish pause”, if such a thing is possible, at its last meeting.

It seems that the comments from Christine Lagarde in the run-up to the meeting, that the Central Bank was not interested in a pause, and when it announced an end to rate hikes it would mean just that, were usurped by events and the Governing Council remains more hawkish than its public mutterings betrayed.

It seems that there was an agreement that the ECB should be prepared to hike interest rates again should the inflation situation demand it.

That seems obvious, but members’ natural hawkishness precluded them from acknowledging that an emergency cut in rates may also be warranted should the economy tumble into a recession, which, in all honesty, appears to be a far more likely.

There was a chink of light following the almost continual flow of bad news for the economy yesterday from preliminary output data for both Germany and the wider Eurozone.

German composite output data rose to 47.1 from 45.9. Although this remains well below the watershed level of 50, it is a significant improvement, while for the Eurozone as a whole, the composite figure also improved from 46.5 to 47.1 driven almost entirely by an improvement in services output.

In both Germany and the Eurozone as a whole, manufacturing output is still in the doldrums, with little activity in either domestic or export markets due in part to high interest rates and the relative strength of the euro.

France, the only other major Eurozone economy to report output data yesterday, saw its composite index decline, from 44.6 to 44.5. This shows that the wider Eurozone continues to see a decline in activity which could, if it continues, force the ECB into the rate hike which it is trying desperately to avoid.

Bulgaria and Romania are reaping the benefits of their accession to the Schengen area, which allows their citizens access to free movement. Economy Ministers from both nations spoke yesterday of the benefits that their nations are seeing from greater access to the benefits of Eurozone membership.

The Euro drifted a little yesterday, staying within its range from the day before. It reached a high of 1.0931 and closed at 1.0905.

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.