30 April 2024: Potholes are a sign of infrastructure failure

30 April 2024: Potholes are a sign of infrastructure failure


  • Sunak is facing “Election Armageddon”
  • If a soft landing is going to happen, it needs to happen soon
  • “Sticky” German inflation means a rate cut could be delayed
GBP – Market Commentary

Declining jobless numbers may advance a rate cut

The potholes in Britain’s roads are an authentic symbol of the Government’s cutting off the financial lifeline to local councils.

Since it came to power fourteen years ago, the Conservative Party has embarked on a policy of austerity, which has led to the cutting of many services which are vital to local councils.

Of course, the potholes are an annoyance but are estimated to be costing the economy around fourteen billion pounds annually.

Local elections often deal with local matters. That is why the array of Parties who see their candidate elected is often broader than in a General Election.

The pothole issue has been elevated from a local issue to a national one and is symbolic as one of the reasons the Government appears “out of touch”.

Several councils are on the edge of disaster due to the lack of funding they are receiving. For example, Birmingham City Council has entered extraordinary measures as it has declared itself bankrupt. There are accusations of profligacy from the Central Government, but when what are considered to be basic services are unable to be provided, the problem is both real and urgent.

The Conservative Party is facing a rout in the local elections that are taking place in what will be a massive test of public opinion before the General Election, which must take place before next January.

Ten Metro Mayors are up for election, with the three biggest, London, Manchester, and the Tees Valley among those voting.

Thursday night will almost certainly be a defining moment for Sunak’s premiership. A bump in the road it may well be, but that road is strewn with potholes of his own making.

The Bank of England is on record as saying that it expects the headline rate of inflation to fall close to its two per cent target over the next two or three months. The jobless figures for April may well be one of the catalysts that make that more of a reality.

The persistent decrease in job vacancies is underscoring a cooling labour market, fuelling optimism for potential interest rate cuts in the coming months. The Bank’s Governor has been extremely clear that if the headline rate of inflation is showing clear and verifiable evidence the MPC will be able to make its first cut in rates.

The rate-setting committee is at odds with the financial market since economists and investors see the decline in jobless numbers as fulfilling Bailey’s criteria. There has been a 17% decline year-on-year in the number of vacancies advertised on prominent job-search sites.

If the Bank of England delays a rate cut, the pound will keep its current range versus the dollar. Yesterday, it climbed to a high of 1,2569 and closed at 1.2562, testing the top of its current range. It is likely to run out of steam and make a mean reversal to close to 1.2520.

USD – Market Commentary

The fixation with 2% leaves the Central Bank in limbo

Historically, the Federal Reserve and its rate-setting Open Market Committee have never been concerned about market sentiment, often setting trends and making bold decisions which have turned out to be correct in the long term.

The current Chairman of the Fed, Jerome Powell, has already broken several traditions., most prominent of which is his lack of training in economics as he comes from a background in law. Indeed, appointing Powell may be the single enduring outcome of Donald Trump’s first term as President.

Powell has brought a “lawyer’s eye” to the determination of monetary policy and has formed an effective partnership with Treasury Secretary Janet Yellen, even if the level of fiscal support that she and President Biden must frustrate him intensely.

Powell has been as straight as he can with market practitioners, providing a level of advanced guidance that must make Greenspan and Bernanke have nightmares.

These two former Fed Chairman used advance guidance as a policy “tool”, not being afraid to “mislead” the market if it suited their intentions.

Powell has been criticized from several directions for his almost seeming infatuation with the Fed’s 2% target for inflation. It may well be that he is “chasing rainbows” since the conditions where the economy can continue to create a considerable number of jobs are not complemented by a fed funds rate that is at a multi-year high.

Powell’s fixation, which is followed by his colleagues on the FOMC, is leaving the Central Bank in a kind of limbo that means they appear to some like a “deer in the headlights”, afraid to make a move in case it disturbs the current equilibrium.

It will need to decide, and it has a further opportunity tomorrow, if it wants inflation to fall to two per cent, or if a monthly job creation figure of over 200k since it seems the two are no longer compatible.

The Fed’s economists are most likely modelling the effect of a headline rate of inflation of between 2.5% and 3% since that is becoming more and more likely to the bottom in this monetary policy cycle.

The outcome of tomorrow’s meeting, as well as the meetings for the rest of 2024, will be determined by their projections.

The dollar index is also in limbo, driven by the odds of a rate cut happening before September. Yesterday, it fell to a low of 105.46, reversing almost exactly the gains it made on Friday, before closing at 105.65.

EUR – Market Commentary

Economic confidence fell again in April

With every week that passes, it is becoming more evident that the Eurozone is in desperate need of a rate cut to bolster economic confidence.

While “rearview mirror” data is showing nascent signs of a recovery, or at least a bottoming out of the economy, leading indicators, such as economic confidence are faltering at the continued comments coming from Governing Council members.

The view that the “sticky” state of inflation in the region’s largest economy may delay the cut in rates that is widely expected to take place in June is gaining traction.

Germany is still “trading off” its earlier dominance, bordering on hegemony, of the Eurozone’s economic policies.

It is time to “cut the cord” even if it does risk the rise of nationalism and calls for Germany to exit the Union since it is becoming clearer by the day that it is holding back its progress and competitiveness.

It is ironic to note that the current state of the German economy, despite its ingrained inefficiencies, means that it is one of the nations that would benefit the most from a cut in rates if it could only put aside its historical, some would say hysterical, infatuation with inflation.

Germany’s economic prospects are looking up after two gruelling years of near-zero growth. The consumer-led revival, though, papers over enduring industrial weakness for which there’s no quick fix.

Germany, along with France, have the two weakest economies in the Eurozone. In General, Eurozone companies have been hobbled by high inflation coupled with record-high interest rates. It is time to “loosen the purse strings” even if it means a moderate rise in consumer prices.

As Germany and France have continued to falter, Italy and Spain have begun to flourish. This may be simply due to the vast improvement in tourist numbers since the end of the Pandemic, but if that is the case, why is France continuing to struggle?

The answer lies in the new-found nimbleness of the Italian and Spanish economies and their “progressive” Governments. In Italy, there was concern over the election of its most hard-right government in two generations. Still, Giorgia Meloni’s approval rating is only a little below 50% which has more to do with the radical nature of Italian politics than her policies that have seen the economy drag itself out of recession.

The elections for the European Parliament will be a test of just how the dominance of France and Germany has waned recently.

The euro made good gains yesterday as the market grappled with the possibility that the June rate cut could be delayed. It rallied to a high of 1.0733 and closed at 1.0720.

Have a great day!

Exchange Rate Year Featured

Exchange rate movements:
29 Apr - 30 Apr 2024

Click on a currency pair to set up a rate alert

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.