25 March 2022: Cost of living squeeze to worsen

Cost of living squeeze to worsen

25th March: Highlights

  • Economic uncertainty rising
  • Jobless claims hit fifty year low
  • PMIs stay positive, but for how long?

Borrowers next cohort to suffer

The degree of uncertainty that has crept into the UK economy recently is continuing to grow. Data released yesterday showed that manufacturing output fell from 58 in February to 55 in March. Services, which make up 80% of activity, rose slightly from 60.5 to 61. While both sectors are still well above the line which marks a slowdown, this is expected to change going forward

Following the publication of the Chancellor’s Spring Statement on Wednesday, predictions for growth in 2022 have fallen to 2.2% while inflation, rising at its fastest rate since 1992, could reach 9%.

With the rise in inflation having so far reached 6.2% and living standard expected to fall to the lowest since 1955, the Government faces a tough summer as its popularity already dented by the Partygate scandal struggles to retain credibility.

An issue that has not been seen for some time is the matter of rising interest rates.

The housing market in the UK has been buoyed in recent years by the number of deals available from lenders that have seen prices rise. This along with the schemes made available by Rishi Sunak during the Pandemic has seen prices continue to rise.

The tenor of mortgage deals has been beginning to shorten as lenders see interest rates continuing to rise as the Bank of England belatedly begins to tighten monetary policy to try to gain control of rising prices.

The energy war between Russia and the west saw another dynamic yesterday, as Russia demanded that gas sales to unfriendly nations be paid for in roubles.

This will be of significant benefit to the Russian economy as Vladimir Putin continues to weaponize energy.

The pound has had a mixed week so far, as the market continues to digest the Spring Statement.

The consensus is that the Chancellor found himself backed into a corner with his desire to provide a solid basis for investment in the NHS, but was overtaken by the continued fall in living standards.

Sterling fell to a low of 1.3157 yesterday, but recovered to close at 1.3187. The number of drivers at play in the currency markets continues to grow, with diverging monetary policy no longer the major influence.

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FOMC member sees seven more hikes in 2022

Several Regional Fed Presidents and members of the FOMC have spoken this week of the need to step up the tightening of monetary policy in order to fight rising inflation.

The comments made since the turn of the year by Fed President Jerome Powell have centered around hikes in interest rates, with a reduction in the size of the Central Bank’s balance sheet being seen as of secondary importance.

That scenario has begun to change with FOMC members now believing that there is no reason, in the current environment, for the two not to go hand in hand.

This means that at the next FOMC meeting, there is a real possibility that short-term interest rates will be raised by fifty basis points while the Fed begins to sell off some of the assets it has purchased as part of its now defunct strategy of supporting the economy.

One of the FOMC members who goes with the flow, making him act with a degree of dynamism, not present in his colleagues who are more set in their ways, is Neel Kashkari, the President of the Minneapolis Federal Reserve.

Kashkari spoke yesterday of his position for the rest of the year. He believes that inflation will remain significantly above target and has therefore penciled in seven further rate hikes this year.

He went on to say that he has changed his view of the path of interest rates over the past six months.

Furthermore, he believes that there is a danger that hikes could be overdone but is prepared to be persuaded by the data.

Christopher Waller, a member of the Fed’s Governing Board, spoke yesterday of the effect of real estate prices as a measure of the effectiveness of Fed policy.

He believes that the sharp increase in real estate prices, both residential and commercial, poses a risk, since it feeds through into rental costs that in turn drive core inflation higher.

Data for initial jobless claims was released yesterday. It showed that claims unemployment benefit fell to 187k, the lowest level since 1969. This was a fall of 28k from the previous week and underlines the sharp turnaround that has been seen in employment since the start of the pandemic.

The dollar index appears to have regained a degree of strength over the past couple of days. Yesterday, it rose to a high of 98.95 and closed at 98.75. The 99 level still appears to be attracting sellers, although support appears to be found and higher levels than previously seen.

Euro struggling to regain 1.1000

This week has been characterized by Canute-like disregard for the economic facts, started by ECB President Christine Lagarde, and followed up by some of her colleagues.

The precipitous fall in the level of consumer confidence should have been sufficient for alarm bells to ring in Frankfurt, the incredible level of the mother knows best attitude expressed by Lagarde has set alarm bells of its own ringing.

To be able to say that she sees no evidence of the risk of stagflation growing within the Eurozone economy displays a level of disregard unbecoming of someone in her position.

Lagarde’s colleague at the ECB, Isabel Schnabel, believes that the Central Bank needs to leave the door ajar to enable it to continue its bond buying policy beyond the summer if the Eurozone falls into a deep recession driven primarily by the conflict in Ukraine.

Germany yesterday announced that its coalition parties have agreed measures to supply relief to those most affected by rising fuel prices. Finance Minister Christian Linder announced that the measures would be temporary but will last as long as is seen as necessary, although initially for three months.

This didn’t appear to lift the pall of gloom that has descended over the region’s economy, which continues to be beset by issues both domestic and imported.

Manufacturing output fell in the latest period, both in Germany and also in the wider Eurozone.

While it fell from 58.2 in February to 57 this month, the fall was not as serious as had been predicted, analysts who expected a consensus fall to 56. There appears to be a slow, almost agonizing fall towards the 50 level that will constitute contraction taking place, but that is unlikely to be acknowledged by the ECB until it is seen in black and white.

The euro continues to be taking the brunt of the economic effect of the conflict in Ukraine.

Yesterday it fell to a low of 1.0965 and closed at 1.0997. The 1.10 level appears to be pivotal to the market, with the number of sell orders just above there creating an effective cap on any major advance.

Have a great day!
About 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.”