27 November 2023: The economy may be on the turn


  • Nissan gives the UK a massive vote of confidence
  • Consumer conscience may be beginning to fade
  • The Eurozone is at the front of global debt issues
GBP – Market Commentary

Hunt does little, but it may be enough

The Nissan car company has been producing vehicles in Sunderland for more than forty years. Last week, it gave a massive boost to not only its workforce and the north-east of England in general, but the Government as well.

The company will build two new all-electric models in Sunderland, as well as contributing to the development of the batteries that will power them.

Sixty thousand people who either work for Nissan directly or are employed in the supply chain now have the ability to plan for the future, safe in the knowledge that the jobs are secure.

There had been a cloud over future investment due to the seemingly insurmountable issues created by Brexit, but with compromise on both sides, a deal has been done.

As well as good news from Nissan last week, the delivery of the Autumn statement by the Chancellor of the Exchequer was reasonably well received.

No one was fooled by the giveaways that were included, with most voters aware that they were being “sweetened” with a General Election just around the corner.

In the end, Jeremy Hunt, despite lowering the rate of National Insurance from 12% to 10%, saved any cut to the basic rate of income tax for the Spring.

Hunt proclaimed that the average family in the UK is saving £450 a year, while continuing to take a large slice of the credit for having halved the rate of inflation.

The fact remains that even the Bank of England cannot take full responsibility for the fall in inflation. While they certainly had more influence than the Government, tightening monetary policy for fourteen consecutive meetings of the MPC, global events, also had a major part to play.

Even after the Statement, the overall tax burden is set to rise to a post-war record by 2028.

The City has acted positively to the news, and there is a growing level of confidence that the next move in interest rates will be a cut, although there is still the fear that a cut could be in response to a slowing economy.

Last week’s PMI data showed that growth is still hard to come by. There was a further improvement on services output, but manufacturing is still in decline.

Every comment by the Government and every response by the Opposition will now be viewed through the lens of electioneering, but it will be sometime in the first quarter of next year before election fever really takes hold, driven by speculation about when the Prime Minister will set a date,

The Pound reacted favourably to the Autumn Statement, climbing to a high of 1.2615 and closing at 1.2610 against a dollar that is still driven by an expectation that the FOMC has ended its own cycle of rate hikes.

This week, there is little in the economic calendar to drive the market. The pound could be close to the high in its current trend. There is resistance at 1.2630 and 1.2720 which will hamper, if not, curtail, its advance.

USD – Market Commentary

Higher for longer is becoming an issue

Just when the Fed is about to confirm a soft-landing for the economy, fears are mounting again that a recession is just around the corner.

The doom-mongers are still basing their concerns on two particular economic factors that have not been wrong in predicting a recession since the second world war.

The first is the continued inversion of the long-term yield curve which means that it is more expensive to borrow for two years than ten years, and the fact that the index of leading indicators is continuing to fall.

There has been some weakness seen in retail sales and consumer confidence recently, and the figures for Black Friday will go some way to either confirming or refuting claims about a downturn.

The consumer has historically been the one factor in keeping demand high and with it, inflation.

Although the FOMC has paused its cycle of interest rate hikes at its last two meetings and is likely to do the same at its next meeting on December 12/13, there is still some talk that the more hawkish committee members are still concerned at the level of inflation.

It is a little ironic that just as Fed Chair, Jerome Powell, dials back his more hawkish rhetoric, his colleagues express their concerns.

Recent critics of President Biden don’t have a lot of cards to play, despite the fact that he celebrated his eighty-first birthday last week.

They criticize his seeming inaction, but he has built a solid reputation for surrounding with people who are experts in their fields.

Having overcome a potentially devastating Pandemic and created an economy that, despite the naysayers, is on track to experience a soft-landing where jobs growth remains above 100k per month and inflation is still falling, improved the way the country is perceived internationally and improved the competence of the Federal Government, he has a better than even chance of serving a second term in office.

With the November employment report not due for release until Friday week, the data slate still holds plenty of interest this week.

House price and consumer confidence data is due for release tomorrow, with Q3 GDP and trade data due on Wednesday.

There is still speculation that Q3 GDP will be upgraded from 4.9% to 5% which when compared to other G7 nations shows how well comparatively the U.S. economy is doing.

The holiday last week dampened liquidity in the financial markets.

The dollar index fell to a low of 103.17 but rallied a little to end at 103.78. It has now “given back” approximately 50% of its rally between July and October. It may be close to the bottom of the current correction and a rally may be expected to start soon.

EUR – Market Commentary

Holzmann now sees risks as balanced

Austrian Central Bank Governor, Robert Holzmann has been a leading supporter of raising interest rates to head off inflation, which he saw as a far greater threat to the stability of the Eurozone’s economy than a downturn in economic activity, even as that downturn turns into a mild recession.

However, over the weekend, Holzmann was less effusive about the need for rate hikes and conceded that the balance of risks between a severe economic downturn and inflation rising again through the second quarter of 2024 were roughly balanced.

However, he still managed to make some hawkish comments about monetary policy He called for a premature end to the ECB’s Pandemic Emergency Purchase Programme (PEPP) which is providing liquidity to the government bond markets in the Eurozone.

It is due to run until the end of next year, but Holzmann would like to see it end in March.

He also highlighted several risk factors for the Eurozone economy, including the situation in the Middle East, and the potential effect of the El Niño phenomenon on Eurozone food prices.

A recession in the Eurozone is looking ever more likely, with the private sector suffering particularly badly. Data released last week showed the sixth consecutive contraction in monthly output statistics.

ECB Vice President Luis de Guindos has warned that markets may not be fully pricing in the hit that he expects from interest rate hikes and political tensions.

The lurch to the right in the Dutch election was unexpected and may be a sign that the entire union is having a severely adverse reaction to migration.

While there are controls in place to deal with refugees, it is the influx of undocumented immigrants that is giving the most concern.

With Geert Wilders now certain to have to be included in any Dutch coalition Government and Italy having had a far-right Prime Minister for more than a year, there does seem to be a definite move away from Centrist Socialist Parties.

The Euro gained last week from the Dollar’s continued correction. It climbed to 1.0965 and closed at 1.0944. It continues to “flirt” with the 1.10 level, but it will take a huge leap of faith from traders and investors to see that level conclusively broken.

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.