- Any more rate hikes could tip the economy into recession
- Bank turmoil could drive a credit crunch and recession
- Inflation fell significantly in March but core rate rises marginally
New deal to only provide minimal boost to the economy
This is especially true given that, in its own words, the Bank expects the economy to be flat this year. Any further tightening of monetary policy runs the risk of being the final straw.
Former Chief Economist at the Bank, Andrew Haldane, spoke last week of his fear that any further hikes would set aside the progress that has been made in the balancing act between growth and inflation.
The fifteen-month-long sequence of rate hikes hasn’t completely fed through into the economy yet, and the Monetary Policy Committee would do well to pause to allow the total effect to be seen. If after a pause inflation remains uncomfortably high, there is no reason that further tightening could take place if it was deemed necessary.
With the base rate of interest now at 4.25, its highest since 2008 when rates were cut to provide a significant amount of support to the market following the financial crisis, Haldane believes that the MPC has an opportunity to view the effect of a natural fall in inflation without placing the economy in further jeopardy.
The feels that the Bank has become too stuck in its current policy and would do well to adopt something of a lighter touch.
Output is likely to remain well above the line between expansion and contraction when the composite purchasing managers index is published later this week. It is expected to be unchanged at 52.2, with services index also unchanged at 52.8.
Last week, Sterling continued its recent strength versus the dollar, although it struggled to make much headway against the single currency.
Against the dollar, it rose to a high of 1.2423 but lacked the momentum to challenge strong resistance and fell back to close at 1.2337.
There is a possibility that a lack of liquidity due to the Easter Holiday at the end of the will see an increase in volatility. With crucial data due to be released in the U.S. on Friday, its effect on the market may well be magnified.
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Odds of a recession, growing again
The FOMC declared several months ago that it is very much data driven and, with employment being the most significant driver of its actions, will have two months of data to contemplate before meeting again.
It appears to have been well established that it is a fruitless task to try to predict the headline number of jobs created on a monthly basis, given the number of imponderables that the figures contain.
While the figures have been exceptionally strong for several months, there remains a fear in the market that the tightening of monetary policy will have a major effect on the data over a single month.
It remains to be seen if that will be the case this week. Analysts are beginning to look at the unemployment rate and hourly earnings as more of a clue to the underlying trend.
It is expected that the unemployment rate will have fallen to 3.5% from 3.6% in February, while hourly earnings will have risen by 4.3% down from 4.6% last month. This means that real wages are still falling, but the gap is far less pronounced and may well have closed completely during April.
The next FOMC meeting will take place in the second week of May, which means the Committee will have an opportunity to form its opinions on monetary policy with two sets of employment data to contemplate.
Last week, the dollar index closed weaker for the fourth time in five weeks. It fell to a low of 102.04 but recovered to end the week at 102.58. There is a pattern on the weekly chart which looks like the recent weakness may end around the 102.00 level, although a lot depends on the data due at the end of the week.
With the UK and most of Europe on holiday on Friday, a headline NFP data that is out of line may well have a magnified effect.
Will the fall in inflation slow the programme of hikes
This was despite a significant fall in the fate of inflation. The preliminary reading of the headline rate of inflation for March was 6.9%, down from 8.5% in February. There has been no comment yet from the more dovish Central Banks, but the data is sure to encourage them to call for the next hike in interest rates to be smaller or possibly paused altogether.
In Germany the headline rate fell to 7.8% from 9.3%, while in Spain and Italy there were similar falls.
Data for business and consumer confidence was also released last week, and the figures pointed to the fact that interest rates are close to becoming restrictive on demand.
Should next month’s figures be similar, there will be a significant easing of the pressure on the ECB from the frugal five to continue the policy of further rate hikes.
Indeed, the expectation that the rate will need to continue to rise after the end of the currency quarter will have almost completely dissipated.
Once the programme of rate increases has ended, the Central Bank will be faced with the dilemma of how it encourages growth without seeing inflation return.
The European Union is attempting to wean itself off a reliance on energy imports from Russia, and is having some success. The recent announcement from OPEC that it will cut supply by one million barrels a day will have been somewhat unwelcome.
The euro continues to gain support, rallying last week to a high of 1.0925, although traders, fearing the lack of continued support from tighter monetary policy in view of the inflation data, drove it back to a close at 1.0839.
This week sees the release of PMI data for the Eurozone and several of its member nations. Overall, manufacturing output is expected to remain in a start of contraction, with Germany remaining in a significant slowdown. Elsewhere, the news is expected to be better with Spain and Italy both seeing expansion, and France also seeing some expansion despite its current social unrest.
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31 Mar - 03 Apr 2023
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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.