- Even if rates have peaked, house prices continue to correct
- Unclear if Powell can prevail even as economy shows signs of overheating
- Will the ECB hold its nerve in the face of a slowing economy?
The Bank of England faces a critical decision
Lloyds, now Britain’s largest high street bank, sees growth of 0.4% this year and 0.5% next year, irrespective of the political climate.
While announcing record third quarter profits Lloyds also showed concern for consumers, posting an impairment charge of almost eight hundred and fifty million pounds hinting at customer distress levels, although its CFO believes that given the environment with high inflation and interest rate increases so far this year that number is far lower than it could have been.
The Office for National Statistics paints a slightly different picture of the economy in its latest report. It believes that the economy has reached an inflection point and the Bank of England was correct to pause its cycle of rate hikes last month and should now be more driven by growth data than inflation as CPI no longer looks like becoming ingrained.
With wages no above prices, and job vacancies falling as redundancies and unemployment are beginning to rise.
Another report on consumer habits by TINK, a financial services development platform showed that one in four households are relying on credit to balance their budget and cover essential spending.
Rumours are swirling around Westminster that Rishi Sunak is considering a reshuffle that will see Jeremy Hunt replaced as Chancellor of the Exchequer. This will be seen as a bold but dangerous development given the proximity of the Autumn Statement that is due to be delivered to Parliament next month.
It is rumoured that Hunt was against the decision to scrap the northern leg of HS2 and is unlikely to sanction cut taxes next month or make promises that cuts will be made in the Spring.
Health Minister Andrew Lansley believes the Prime Minister should prove his willingness to change by replacing both Hunt and Home Secretary Suella Braverman.
“It is hard to demonstrate a willingness to change with actually changing”, although this would show a complete change of direction that may backfire given the recent by-election results.
The pound fell further against the dollar yesterday reaching a low of 1.2106 and closing at 1.2112, as the dollar reasserted itself as the crisis in bond markets continued.
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The FOMC decision is about more than the Fed Chairman’s view
Nevertheless, Powell has spoken recently about his surprise at the resilience of the U.S. economy but has touched on concerns over the effect of outside influences on the global economy which, by default, may see growth predictions for next year moderate.
Powell still feels that while short -term interest rates are approaching a restrictive state, they may still need to be “adjusted” further if inflation remains “sticky”.
His colleagues on the FOMC, while committed to lowering inflation, believe that “imported” inflation is not affected by tighter monetary policy and allowing the economy time to adjust. Fed may need to accept that while protecting jobs and
There has been a tentative agreement reached between the United Auto Workers Union and Ford to end the damaging six-week strike that has already cost the economy more than five billion dollars.
This would be the first settlement and would place pressure on striking workers at General Motors and Stellantis to return to the negotiation table.
The deal still needs to be verified by local union representatives and the workforce.
If Ford agrees new contracts that include wage deals and updated working conditions, that will set the standard for deals with GM and Chrysler owner, Stellantis.
With the ECB meeting today and both the FOMC and Band of England meeting next week, this could be a watershed moment for G7 monetary policy.
If all three Central Banks pause or halt interest rate hikes the dollar should benefit the most as the Euro, in particular, is supported by the perception that it is the most hawkish in the G7.
Yesterday, the dollar index resumed its path higher, as it shrugged off potential turmoil in Government bond markets.
It rallied to a high of 106.56 and closed at that level.
Economic situation significantly weakened
There is a significant view in the market that the time has come for an end to the cycle of interest rate hikes that has lasted for fifteen months.
ECB president Christine Lagarde and some of her more hawkish colleagues on the Governing Council see a pause in rate hikes, with a commitment to further increases should they become necessary would be counterproductive since, in their view, conditions that demand a further hike still exist.
Lagarde has made it clear on several occasions that while the ECB does not want to see a recession in the Eurozone, a mild contraction may be preferable to continuing high inflation. Austria, Latvia and, perhaps surprisingly, Germany, given the parlous state of its economy, support that view.
German Chancellor, Olaf Scholz, has seen his popularity rating plummet to a low of just 31%, the lowest since he came to power, replacing Angela Merkel in December 2021.
Perhaps even more worrying is the upwards trend in the figures for the far-right leaning Alternative for Germany, although they would be unable to govern unless that for a coalition with the more centrist Christian Democrats.
At the opposite end of the “hawkish scale” is Italy, which appears to have lost all patience with tighter monetary policy and totally “released the brakes” on its economy.
Giorgia Meloni, the Italian Prime Minister is now in open revolt against both Brussels and Frankfurt. Her actions in approving tax cuts and large salary increases for the public sector stay within the letter of the rules but the spirit of financial discipline has “had a cart and horses” driven through it.
Having spent a year confounding critics who believed that she would introduce radical change, Meloni is now “putting Italy and Italians first” as she praised when she came to power.
She has introduced some social change but has waited until now to really show her radical right-wing credentials.
If 2012 is anything to go by, Italy is playing with fire by raising its debt to GDP ratio to 142% while its budget deficit is close to 5.5%.
So far neither the European Commission nor the ECB has made any statement about Italy’s actions, but both are sure to be concerned about either a bailout or a default.
The Euro is suffering from the poor data that has been released this week and should the ECB decide to leave rates unchanged today, that suffering will not only continue, but likely accelerate.
Yesterday it fell to 1.0565 and closed at that level.
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Exchange rate movements:
25 Oct - 26 Oct 2023
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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.