30 October 2023: Will Hunt cave in?


  • Bank of England Expected to continue pause
  • Economy starting to outpace the FOMC
  • Looming recession caused the ECB to end rate hikes
GBP – Market Commentary

Are tax cuts the final throw of the dice?

In three weeks’ time, Jeremy Hunt will deliver his Autumn Statement to Parliament. He had been expected to deliver an upbeat budget which should have been the launch pad for the Conservative Party’s attempt to win the General Election that must be held during the next year or so.

However, Hunt and his boss, Prime Minister Rishi Sunak are still suffering for the effect of four year of almost total mismanagement of almost every aspect of the Government, from the completely unexpected arrival of a global Pandemic, through the country’s departure from the European Union to the almost farcical scenes that accompanied the appointment of an inexperienced Prime Minister who almost wrecked the country’s economy and reputation in less than fifty days.

Several international bodies, including the IMF and the World Bank have praised Hunt and Sunak’s efforts to “steady the ship” given the complete mess that ensued following Kwasi Kwarteng’s “rush for growth” at around this time last year.

Sunak promised that the rate of inflation would be halved and according to Bank of England Governor, Andrew Bailey, that looks likely to be achieved.

The Bank’s decision to pause the cycle of interest rates that it began in December 2021 may have saved the economy from entering a recession, and the signs are that that pause will be continued when the MPC meets later this week.

Hunt is under pressure from his backbenchers to deliver a series of tax cuts next month, and so far, he appears to have resisted the temptation.

Although he considers it too early to begin to cut the overall level of taxation that has been at record highs since he became Chancellor, the feeling in the City is that there may still be time for a surprise.

Given Hunt’s resistance to the idea, it will be seen as blatant electioneering should he “finds” the funds to deliver on his colleagues demands and even that would be unlikely to supply any change in the Government’s fortunes.

Last week, there were signs that the jobless rate is beginning to creep up, a sign that the series of interest rate rises is beginning to restrict demand.

For now, it is a moot point whether the Bank of England would have been effective if it had increased the incremental size of the hikes particularly given that there are several global outcomes that have had a significant effect on inflation.

This week, apart from the MPC meeting, there is no tier one data released to provide any further insight into the medium-term fat of the pound. It has been under pressure against both the dollar and Euro recently and that trend is unlikely to change.

Last week, it fell to a low of 1.2105 versus the dollar and closed at 1.2120. Versus the single currency, it stabilised its recent fall, staying in its recent range and closing at 1.1473.

USD – Market Commentary

FOMC won’t need to cut before the Nominations take place

Yet another month will start with a potential “watershed”.

The FOMC will meet on Wednesday and the likelihood is that despite Fed Chair, Jerome Powell’s misgivings, interest rates will remain on hold. It is impossible when a pause becomes permanent, but with only one further meeting due to be held this year, there is a better than even chance that the Fed will have halted its cycle of rate hikes.

There may still be a further rate increase in the future but if there is no hike delivered this week then that would be considered an “outlier”, being in response to a specific issue and not part of an overall programme.

The October Employment Report will also be published this Friday. It will. As ever, be preceded by two further data releases relating to the jobs market that appear to have very little correlation with the non-farm payrolls.

The JOLTS job openings due to be released on Wednesday will be overshadowed by the FOMC announcement but is a good indicator of how the economy is faring from a demand perspective since it is extremely sensitive to output.

The challenger index of job cuts also shows the strength, or otherwise, of the economy, since it shows how many jobs have been lost during the month.

The ADP index of private sector job creation is delivered by America’s largest payrolls provider and is considered by many as a leading indicator of the NFP numbers.

Taking last month’s numbers as an example debunks that theory somewhat. In September, there were just 89k new private sector jobs created while in the wider sector denoted by the NFP there were 336k new jobs created.

Data that has been published regarding output shows that not only was the third quarter particularly strong, but the fourth quarter has started in a similar vein.

While there is lingering doubt that the economy can escape a recession before the Presidential election that is now a year away, it is also fairly well agreed that the Fed is unlikely to cut rates before the Candidates are nominated.

The dollar index trod wanted as global events took precedence. It closed the week just four pips lower at 106.58.

EUR – Market Commentary

The ECB will have to concentrate on growth now

Finally, the ECB decided to end its programme of rate increases that had been in place for ten meetings. It is hard to say why this was considered the optimum time to end the cycle since although the economic data published over the past few weeks has been uniformly poor, it was not much worse than what has gone before.

There had been mixed messages from various members of the Governing Council over the past few weeks, with Austria and Latvia, the most vocally hawkish Central banks calling for a further hike, and even Germany which is suffering s major economic slowdown that will almost certainly be renamed a recession, saying that it still favours tighter monetary policy.

No one is saying what finally persuaded the Council to vote for a pause. It is unlikely that it was a single event over what was a busy month that saw another conflict flare up which will doubtless see a further slowing of the global economy on which the Eurozone is dependent and may see another spike in energy costs.

Italy’s actions in introducing a “Truss-like” set of measures to inflate its economy which will send its budget deficit close to 5% while its debt soars to 150% of GDP will have caused a flutter in both Brussels and Frankfurt but while there is are no measures in palace to rein in financial indiscipline that is a fight for another day.

While Christine Lagarde made no reference to anything other than an end to the cycle of rate hikes, she was fervent in her claim that it is far too early to even countenance any cuts to interest rates.

It is hard to believe that the entire council came to a view that rates have now reached a level where they are sufficiently restrictive on demand and will remain so for a significant period, although the data does suggest that to have been the case for a while.

The Euro didn’t suffer from the removal of its “crutch” as much as may have been expected. It fell to a low of 1.0535 in the aftermath of the ECB meeting but recovered to close marginally higher on the week and 1.0564.

This week, Inflation, growth and confidence figures will provide a more overall view of the comparative strength of the Eurozone economy and some of its major components.

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.