27 February 2024: The “mini-recession” may have a silver lining

27 February 2024: The “mini-recession” may have a silver lining


  • The average earnings growth rate is slowing
  • Economists have raised their predictions for growth
  • Lagarde needs proof of the fall in inflation
GBP – Market Commentary

Average earnings growth is still well above average

The UK economy’s dip into recession in the fourth quarter of 2023 may have a “silver lining” for future growth.

Earlier last year, Bank of England Governor, Andrew Bailey, replied when asked if his hawkish monetary policies could drive the economy into a recession that it was eminently possible and that a mild recession would not be the worst outcome, given its effect on inflation.

His wish has now been granted, and now Bailey needs to persuade his colleagues on the Monetary Policy Committee that a series of interest rate cuts is necessary in anticipation of inflation falling due to the effect on demand of the economic contraction, as well as the fall in the energy price cap that has just been announced by Ofgem, the Energy price regulator.

There is now an opportunity for the MPC to provide a much-needed boost to the economy which, given Bailey’s comments last week, may now be realized sooner than had been expected.

It was announced by the Office for National Statistics last week, that Average Earnings were falling at the end of 2023 at a much faster rate than was seen earlier in the year, although earnings growth remains significantly higher than its historical average.

In Q4 average earnings, excluding bonuses, grew by 6.2%, down from a peak of 7.9% earlier in the year, but still well above the post-2001 level of 3.2%.

Most workers saw their real earnings contract during 2022 and 2023, so it is unlikely that their representatives will allow wage settlements for 2024 to be squeezed despite lower inflationary expectations.

The MPC will want to see a continued fall in average earnings over the next one, or possibly two, months to feel comfortable in cutting interest rates.

A longer-term issue for employers is the growing trend for twenty to thirty-year-olds to suffer mental health issues. For the first time, this demographic has exceeded the forty to fifty-year-old segment, when measured in total day’s absence.

This will be an issue to be considered over the long term when the Treasury’s economists are looking at trends in the economy to formulate policy.

The pound is still unaffected by the prospect of lower rates. It has experienced seven higher closes in the past eight sessions. Yesterday it climbed to a high of 1.2699 and closed at 1.2685.

USD – Market Commentary

PCE inflation is still falling

Data for new home sales has shown a continued improvement over the past few months, despite the elevated level of interest rates.

Sales rose by 1.2% in January, although the median cost of a new home fell by 2.6% to a little over $420k.

The fall in the cost of new property as well as the rise in sales will encourage the Fed. Although housing costs are not included in the CPI data, they are in the Personal Consumption Expenditures, which is Jerome Powell’s preferred measure of inflation and will be published later this week.

The latest housing data will show that the economy is continuing to improve, encouraging homeowners to “trade up,” house price inflation is continuing to fall.

Last week’s news that the Conference Board’s data is no longer predicting a recession will galvanize the economy. Growth of 2.2% net of inflation is now predicted for 2024, up from 1.2% previously, according to the National Association for Business Economics.

This is a far wider survey than those conducted by Wall Street Banks, which tend to be limited to lending expectations and equity market valuations.

Although the economic data is encouraging, the inflation data is what will drive the FOMC to cut interest rates.

PCE inflation data will be published tomorrow. That is expected to show that headline household expenditures rose by 2.4% in January, down from 2.6% in December, while core expenditures fell to 2.8% from 2.9%.

The February employment report is not due for release until next Friday due to the 1st of March falling on a Friday. The FOMC will still have almost two weeks to consider the data, while CPI data is due for release on 12th March. The FOMC meeting is scheduled for March 19/20.

The market will await the result of the data points to consider the possibility of a rate cut being agreed upon at the March meeting. The most common view is that the “stickiness” of core inflation will persuade the FOMC to delay for another month.

The dollar index made its first close below 103.90 since the beginning of February, yesterday. It is still in a medium-term upswing, which will only be negated by a fall below 103.00. It fell to a low of 103.71 yesterday, closing at 103.79.

EUR – Market Commentary

Lagarde still believes in a restrictive policy stance

There were protests held in several European capitals yesterday by farmers complaining about their falling sales as the EU allows cheap imports of produce grown by foreign farmers who do not have to comply with complex EU regulations.

The protests have been taking place in France, well known for the militancy of its farmers, for some time, but they have now been joined by Belgian and Spanish farmers too.

The protest in Brussels took place outside the headquarters of the European Commission, while a meeting of EU Agricultural Ministers took place inside.

In the Belgian Capital, police were sprayed with manure as the protest looked likely to get out of control. Piles of tyres were set on fire while the queue of more than 900 Tractors slowed traffic to a standstill.

The outcome of the Agricultural Ministers was that they encouraged the European Commission to sanction and increase farming subsidies. There were also smaller protests in Germany and Poland.

Agriculture has long been an issue for the European Union, extending back to the days of the Common Market when there were wine lakes and butter mountains. Farming is an issue that has been “kicked into the long grass,” with no sensible solution having been found to oversupply issues.

In a speech she delivered yesterday, Christine Lagarde acknowledged that disinflation, the rate at which inflation is falling, is continuing, but she needs to be convinced that it will lead to inflation reaching the ECB’s 2% target.

Speaking at the European Parliament, Lagarde emphasized the importance of wage dynamics to the fall in inflation and the eventual cuts in interest rates.

Many observers believe that the Governing Council will want to wait until the publication of the first quarter wage data before sanctioning a cut in interest rates.

Wages as a percentage of corporate profits are falling, which is also encouraging the ECB to cut rates. However, “one more month just to be certain” has become the Central Bank’s mantra.

The euro is threatening medium-term resistance at 1.0880 and there are sure to be significant sell orders placed around that level. The daily increments of the single currency’s recent rise when compared to the highs it is making show that no one is taking long-term positions in favour of the Euro.

Yesterday, it reached a high of 1.0859 and closed at 1.0850.

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.