29 September 2022: Bailey beginning to lose credibility

29 September 2022: Bailey beginning to lose credibility

Bailey beginning to lose credibility

29th September: Highlights

  • Markets will be calmer with more guidance, say analysts
  • Recession now considered inevitable
  • Germany/Italy spread above 250 BP

GBP – Central Bank is looking confused and out of touch

The Conservative Party leadership contest which took place over the summer was supposed to usher in a new period of Government. The arrogance of the Johnson era was supposed to be replaced by a time of accountability in which the Cabinet would tackle the issues facing the country head on and sweep sway deceitful incompetence.

Instead, the futures of sixty-five million people have been decided by around one hundred and sixty thousand Conservative Party members who are out of touch with reality and living in the past.

Liz Truss championed the most diverse group of ministers in history when she announced her Cabinet, but that diversity has been a mask for inexperience, which is vital when the country is falling into a grave economic crisis.

The broad-brush strokes of Kwasi Kwarteng are fine when they can be backed up by sound economic theory, but he is behaving like a spoiled child who has been given a Christmas gift and is determined to make it work without any reference to the instructions.

Criticism is flowing from all quarters over last week’s package of cuts in taxation designed to introduce a level of growth to the economy that is close to unachievable unless every part of the plan works perfectly, and when challenged Kwarteng has promised to do more, rather than consider reining himself and his ambition in.

Liz Truss, meanwhile, has remained in Downing Street allowing her Chancellor to proceed with a plan that is universally condemned, content that all is well.

It was extremely easy for the opposition parties to condemn Boris Jonson as an untrustworthy buffoon but when faced with providing an alternative to the mayhem which has been delivered so far, they can only agree with cutting the lower rate of tax and reintroducing the top rate. They have no more idea of the reality of balancing the books than Truss or Kwarteng do.

The stunning disregard of the comments of the IMF and the lack of concern exhibited over that fall of Sterling to an all-time low against the dollar is rightly driving serious concerns in financial markets.

The Bank of England has been forced to intervene to bring down the government’s borrowing costs, which have nearly doubled, while sterling languishes close to the level it reached on Monday morning.

Truss has shown herself good at being a good lieutenant, but her inexperience at making the tough decisions of a Prime Minister shone through like a beacon.

Yesterday, Sterling continued its highly volatile while, but while the Government continues to press on with its economic agenda, it is in danger of further falls. It closed at 1.0890, having reached a low of 1.0530

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USD – A lot will be riding on next week’s jobs data

Today will see the release of the Fed’s favoured measure of inflation, Personal Consumption Expenditures.

The reason the Fed favours the measure is that it provides a far broader snapshot of the economy, which is more relevant than core consumer prices.

It is expected that the rate of growth of PCE will slow significantly and although the Fed has not confirmed it, they believe that the fact that monetary policy is now restrictive, it will begin to have a significant effect on the economy.

It is at this point that the Central Bank will need to act more like a surgeon than a butcher. There may still be room for heavy-handed seventy-five basis point hikes in interest rates, but they will hope to be in a position where the heavy lifting is complete, as the effect on equity markets is causing concern.

The effect of the tightening of monetary policy over the past few months and the fact that rates have moved from accommodative to restrictive will begin to influence the property market, which tends to lag the market by a quarter.

There have already been indications of a slowdown in housing permits and new home sales and that is expected to accelerate into winter which brings a seasonal slowdown as well.

The effect of the Fed’s monetary policy actions have not so far had any significant effect on the jobs market, although we may see the start of a slowdown in recruitment in the September data which is due for release a week tomorrow.

Weekly jobless claims will be released later today. They have been falling steadily for the past few weeks but are reaching an inflection point at around 200k new claims.

Last week there were 213k new claims and that figure is expected to rise marginally in the latest period.

Also published today is the latest estimate of Q2 GDP which is expected to be unchanged at -0.6 which will confirm a technical recession following contraction in Q1.

The dollar index reached a new high a t 114.78 yesterday but fell back on profit taking to close at 112.71.

EUR – Inflation becoming increasingly ingrained

Stagflation and an increasingly weak currency are driving the Eurozone economy into the ground as an increasingly ill-equipped Central Bank tries to deal with just one part of the problem.

Ironically, Inflation which has been rising unchecked for several months is a consequence of the war in Ukraine and Russian cuts in gas supply.

German fears over inflation are based on a bygone era and while the effect is the same, the degree to which it is rising, and the reasons are completely different.

The European Union is built as a giant bureaucracy with a department for every conceivable eventuality, but there is no single person who is responsible for the economy.

The Eurogroup of Finance Ministers is plagued by self-interest, which is completely reasonable, but it is obvious after twenty years monetary union without some form of fiscal union is impossible to reconcile.

Christine Lagarde and her colleagues at the European Central Bank are virtually making it up as they go along. It is impossible to plan for the long term as it is impossible to anticipate the stresses that will be in the system that they will need to contend with.

In the last thirty months they have been forced to support an economy that was ravaged by the Pandemic and every country closed their borders ignoring one of the four pillars of the Union. Italy was the hardest hit initially by Coronavirus, so it was virtually quarantined.

Supply of the vaccine when it was eventually developed and became available was handled centrally but, again, the problem of self-interest raised its head. The countries that developed it believed that they should have greater access than the other nations of the Union.

Now, as the amount of support that was pumped into the system drives higher inflation exacerbated by higher demand and the issues created by the war, the only remedy is to tighten monetary policy which has negligible effect on supply side issues.

An energy crisis cannot be averted, but a wait and see policy without forward planning will only make matters worse. Emergency regulation needs to be introduced that will allow the burning of fossil fuels while a long-term energy strategy is completed that is adopted from Paris to Vilnius and Helsinki to Madrid.

The euro remains weak despite climbing to a high of 0.9751 yesterday. It closed at 0.9734 and is considered susceptible to any dollar strength.

Have a great day!

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.