25 November 2021: Will rate hike restrain growth?

Will rate hike restrain growth?

25th November: Highlights

  • Factory Orders hit a record
  • Jobless claims lowest since 1969 as economic rebound continues
  • German Political Parties reach an agreement

Threat to housing market, a tangible risk of rate hike

There is a growing belief that the Bank of England will have little option but to hike rates at its next meeting. Throughout this year, Andrew Bailey has appeared determined to be in a position for the MPC to decide the pace of any monetary policy tightening according to its own agenda.

For that reason, Bailey has been at pains to talk down the threat of inflation and even now wants to make sure that a hike is absolutely necessary before he commits.

The Bank’s Chief Economist, who voted against a hike at the most recent meeting, spoke the other day of the burden of proof now being firmly on the shoulders of those who wish to wait and see.

Hugh Pill appears to want to take as much time as possible before making his mind up, although he does appear to be leaning towards a more hawkish stance.

Three of the independent members, Jonathan Haskell, Michael Saunders, and Silvana Tenreyro appear fairly clear in the view already. Saunders will vote for a hike. He has been in favour of tightening monetary policy for a considerable time, while Haskell spoke of the positives of a rate hike,

From a pure image conscious viewpoint, Haskell believes that a hike would reflect well on the success of the economy as it emerges from the Pandemic.

The issue with that point of view is that the last thing the Bank considers is its image.

Finally, Silvana Tenreyro spoke yesterday in dovish terms of the fact that a hike is probably becoming necessary. She spoke of her view that a rate hike could be seen in either of the next two meetings. The one following the December 15th MPC will take place on February 3rd and will also consider a Monetary policy report

One last item to throw into the pot is the traditional reluctance of the Bank to raise rates so close to the Holidays. That is likely to hold little sway with the hawks, who want the Bank to be seen to be dealing with the growing issue of inflation before it creeps into both sides of the economy.

If the rise in rates is confirmed next month the effect on the housing market will be a significant indicator. Following the removal of the stamp duty holiday a few months ago, there has been something of a downturn in activity which has removed the fear of a bubble developing. However, activity could collapse following a rate hike which will sound a death knell for historically low fixed rate terms.

The pound remains under pressure that has been created by the continued strength of the dollar index. Yesterday, it fell to a low of 1.3321 and closed just one pip higher.

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Next week’s NFP is eagerly anticipated

Today is Thanksgiving in the U.S. and Jerome Powell the Chairman of the Federal Reserve, whose term has been extended until February 2026 will in all probability give thanks to the President for the faith he has shown in him.

Powell was always an interesting choice. He has no background in economics but has brought a lawyer’s eye to the workings of the Central Bank

When Donald Trump chose Powell, it was partly due to his desire to remove Janet Yellen, Powell’s predecessor, from the role as she was considered to be too much of a democrat. Yellen has, of course, resurfaced as Treasury Secretary under President Biden.

It is to Biden’s credit that he resisted the temptation to continue to make the post a political appointment rather than picking the best person for the job.

While oversight is a significant part of the Chairman’s brief, driving the economy towards full employment and limiting inflation is the prime consideration.

Part of that goal, the drive towards full employment received a major boost as new jobless claims fell; to their lowest level since 1969. Less than 200k new claims were made in the latest week, well below the market’s expectation of a fall to around 260k.

This bodes well for next week’s employment report for November, although observers will be wary of this being a number that has been affected by one-offs. In particular, the way the Government’s model strips out seasonal factors is particularly prevalent at this time of year.

In early April 2020, the number was also a record, with 6,149k claims registered in a single week.

FOMC member and San Francisco Fed President Mary Daly spoke yesterday of her desire to see the pace of the tempering of support to be increased at the next rate setting meeting.

The taper is currently set at $15 billion a month, and it would be a surprise if it were to be raised after just a single month.

That is far more likely to happen on January 26 when the following meeting is due to take place.

With the economy continuing to improve and no upsurge in infections has been seen yet, the dollar index continues to improve. Yesterday, it reached a high of 96.94, closing at 96.84.

It remains to be seen how many new highs can be seen before a correction sets in. Traders will be wary of punching too much and driving a bout of profit taking, which could see the index fall to around the 94 level without damaging the overall uptrend.

Germany is close to finding a new coalition

Following an election which feels now to be ancient history, a decision has been made regarding the makeup of a new governing coalition in Germany.

Olaf Scholz is the choice of the three-party coalition since his Social Democrat Party won the election, The Social Democrats will join the Greens and the Free Democrats in forming Government.

The most significant upshot of this will be the departure from the political stage of Angela Merkel.

Merkel has steered Germany for twenty-six years. Her Christian Democrat Party is now entering the political wilderness after a long spell in shaping not just Germany but also the greater integration of the European Union.

Among the policies of the new coalition will be to upgrade German foreign policy and to forge stronger ties with actions who share its vision. They are committed to the continuation of NATO, which is seen as the backbone of its defence.

Poland and France were singled out as being countries where relationships will be nurtured.

With Emmanuel Macron looking weak in the current polls for next year’s election, it is possible, even probable, that Scholz will be forced to deal with a French President who doesn’t share the desire to create a far more Federal Union.

The increase in activity this month is considered to be as good as it gets in the short-term, as the increase in cases of Coronavirus drive individual States towards new lockdowns.

It is unlikely that any blanket measures will be introduced in the short-term, but if the situation worsens such action cannot be ruled out.

Skirmishes with the UK continue around Brexit with a decision due regarding the Northern Ireland Protocol, with Germany threatening retaliation if the UK invokes Article Sixteen and the French still concerned over shipping rights.

It is hoped that following yesterday’s tragic loss of life of migrants trying to cross the English Channel that some agreement can be reached to halt the human misery that is being caused.

Yesterday, the euro was driven lower again by a stronger dollar. In much the same way as the dollar index is looking ripe for a correction, the single currency appears to have now fallen too far too fast.

It reached a low of 1.1186 and closed at 1.1205.

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.”