29 April 2022: First quarter vehicle production falls

First quarter vehicle production falls

29th April: Highlights

  • BoE between FOMC and ECB in tightening stakes
  • 1.3% economic contraction sparks recession fears
  • Wage growth beginning to add to inflation

New car registrations fall by almost 15%

One sector of the economy that has been particularly hard hit is vehicle production.

Although the days of huge plants supplying the country with all the vehicles it needed are long gone, it is nevertheless still an important sector.

The decimation of the UK vehicle industry tells the story of the rise of manufacturing capability in the far east and the inability of the developed world to compete.

While this is not limited to the UK, other countries like France and Italy do still have significant vehicle sectors, although they have seen the benefit of partnering up.

The global shortage of semiconductors has hit the spare parts manufacturers particularly hard, but car sales in the country, which includes imports as well as vehicles manufactured in the UK, fell by 14.3% to its lowest level since 1998.

While supply chain issues have been blamed, and were probably a major contributor, the onset of a slowdown in the economy and fears about the high, and still rising, level of inflation which is contributing to an almost unprecedented rise in the cost of living have deterred the public from making what is still a significant investment.

There have been discussions in Parliament about encouraging the Chancellor to consider a windfall tax on energy companies whose profits have been increasing as the public have suffered higher prices.

To a certain extent, a similar situation is arising in food supply. The four major supermarket businesses, Tesco, Sainsbury Morrisons and Waitrose, have also seen their profits increase, although they have to a degree been held in check by the need to check their prices against the rising value seen in the discounters, Aldi and Lidl.

The UK has not seen much in the way of economic indicators for traders to get their teeth into this week, and that has sharpened even further the anticipation surrounding next week’s Central Bank rate setting meeting.

Right now, the odds still favour a hike in short-term interest rates, but there is still some donut about the size of the increase. If the bank raises rates by fifty basis-points, it will confirm its inflation fighting credentials, while a twenty-five-point hike may be termed as a dovish hike, which would characterize the feeling that the Bank of England feels it is caught between two stools.

The certainty that is attached to next week’s FOMC meeting has seen the dollar surge this week.

Versus the pound, the Greenback has gained significantly. Sterling has now fallen to its lowest level since July 2020, racing 1.2411. It closed yesterday at 1.2456.

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Q1 Contraction due to special features

The U.S. economy produced a surprise yesterday by contracting in the first quarter by 1.4% against a market expectation of growth of around 1%.

In most circumstances, that would have led to the dollar falling as the data rekindled fears of a recession but the proximity of next week’s FOMC meeting at which the market is convinced that short-term interest rates will be raised by fifty basis points led to continued buying with multi-year and in some cases, multi-decade highs being seen.

Despite traders’ concentration on the prospects for the Eurozone and the UK, the fact that the Bank of Japan confirmed that its ultra-easy monetary policy would continue indefinitely saw the yen fall to its lowest level in more than twenty years.

It reached a low of 131.25, closing at 130.85, levels not seen since the Federal Reserve and Bank of Japan would intervene to support the currency.

The Bank of Japan commented that the fall in the value of the Yen should be seen as a boon by exporters as it will make their products far more competitive in global markets.

The U.S., will tolerate a particularly weak Yen for three reasons: it is likely to be a relatively short-term phenomenon, it provides a degree of competition to China and lastly, in the current environment, the U.S. Treasury would be swimming against the tide if it decided to interfere with significant market forces.

The level of hawkish comment continues to drive the dollar higher, with one prominent commentator saying yesterday that she expected three fifty-point hikes to be followed by three of twenty-five at the next six meetings.

That would leave the fed funds rate at 2.50% which would concur with the majority of expectations about what constitutes the neutral rate.

Given the dollar’s spectacular rise this week, it is likely that the market will consider divesting long positions following the FOMC meetings, although traders will want to hear what Jerome Powell has to say first.

He is likely to remain hawkish but may temper his words with a note of caution about the slowing economy and since he will have an advance copy of the April employment report his words will affect market thoughts about the headline NFP which is due for release a week from today.

Yesterday, the dollar index rose to a high of 103.94 and closed at 103.66.

Little to commend Eurozone to investors

It has been the case for some time that there has been very little in terms of growth or activity to commend the Eurozone to investors.

The Pandemic drove a high level of disunity in the Union, with nations making their own arrangements while the arrival of the vaccine heralding supply issues and an unedifying pat between EU Commission President Ursula von der Leyen and the UK Government.

As the region finally began to emerge from the Pandemic, the ECB, mostly in the shape of its President, Christine Lagarde, continued to want to support weaker economies ignoring rising inflation.

The conflict in Ukraine has come at about the least opportune time for the European Union, although there is no preferable time to have a war on your borders.

The conflict has seen a relatively unified effort over sanctions, although it was seen yesterday that one major German energy importer is trying to use a technicality to enable it to get around the Russian demand to be paid in Roubles for its energy exports.

Such a move could clearly be detrimental to the spirit if not the letter of the response to Russian aggression, and may well undermine the entire sanctions regime.

The market’s perception that any tightening of monetary policy will feel forced is keeping the single currency under pressure.

Over the course of the Pandemic, G7 Central Banks repeated several times that their most important desire was to be able to control the monetary policy implications of the emergence in order not to fan the flames of inflation.

Unfortunately, in just about every country, this test has failed miserably. The European Union is a classic example, and remains so. It is obvious that the real desire is for support to stay in place for longer, but it is now fairly certain that the dovish hike will take place in July and coincide with the end of asset purchases.

Taking rates back into positive territory will signal the beginning of the normalization of policy but it may be a slow and, in some cases, excruciating journey.

There is growing talk of the euro reaching parity versus the dollar, but for now, there is acceptance that the current dollar strength cannot go on indefinitely.

Yesterday, the euro fell to a low of 1.0478 closing at 1.0491.

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.”