3 May 2022: Director’s Union warns of slowdown

Director’s Union warns of slowdown

3rd May: Highlights

  • UK facing year’s fourth rate hike
  • Inflation remains Fed’s top priority
  • Inflation at 7.5% as economy slows

Bank of England set to hike but with less hawkish outlook

It is still almost certain that the Bank of England’s Monetary Policy Committee will agree to a fourth hike in the current cycle to curb the rise in inflation when it meets this week. This is despite further warnings of an approaching recession from the institute of Directors.

The cost-of-living crisis is leading to crumbling consumer confidence which, in turn, is hitting retail sales, while uncertainty caused by the conflict in Ukraine is affecting the availability of several products in stores.

The Institute’s own measure of economic confidence plummeted from -4 to -36 in the most recent period. This is in measure of the IoD’s members investment intentions over the next year.

One of the major factors in the lead up to any recession in the UK since the 1970s has been a significant fall in the level of business investment as Directors switch from expansive to protective mode.

At this week’s meeting, it is likely that the Bank’s Governor Andrew Bailey will move to dampen market concerns over the level that rates will eventually reach.

It has been noted that recent comments from MPC members have concentrated more on fears of a significant slowdown in activity than rising inflation.

If the Bank signals a possible break in interest rate hikes, it is certain to damage the pound even more than divergence fears have already.

Yesterday, the pound reversed its gains from Friday versus the dollar, falling to a low of 1.2491 and closing at 1.2494. It remains mired below the 1.20 level versus the euro. It closed yesterday at 1.1895.

As well as the MPC meeting, data for economic activity will be released. It is expected that services activity will have held up well over the past month, while industrial and manufacturing output will continue to suffer.

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Fed Chairman retains market support

FOMC members will gather in New York from Today as the Federal Reserve’s rate setting committee is set to lay out its plans for tackling inflation, which has risen to multi-decade highs.

The Bank has indicated in the strongest terms possible that it believes that sufficient attention has been paid over the past few months to propping up the economy, while allowing inflation to rise almost unfettered.

The twenty-five-basis point hike agreed at that last meeting is set to be overshadowed as the Central Bank votes to hike by fifty basis points at this week’s meeting.

Fed Chairman Jerome Powell has been noticeably more hawkish about monetary policy in comments made recently, which culminated in almost promising a fifty-point hike in his speech at the IMF’s annual meeting recently.

The Federal Reserve appears to want to act in a set pattern, wanting to tackle its most pressing issues in order.

Having done all, it can to set the economy on a path to continued growth, it will now deal with inflation.

Not only will interest rates be hiked by fifty basis points at this meeting and probably the next, but it will further tighten monetary policy by beginning to shrink its balance sheet.

As the Fed sells off $90 billion in assets per month, it will have the effect of withdrawing liquidity. This will see longer term interest rates rise as the Fed funds target also increases.

The dollar has been gaining over the past few weeks as expectations have growth of both a fifty-basis point hike but also diverging monetary policy between G7 economies.

The Japanese authorities agreed that they would maintain the country’s ultra-easy monetary policy for the foreseeable future, and this sent the Yen to twenty-year lows.

The rise in the dollar index is now beginning to look overdone. Yesterday, it climbed to a high of 103.67 and closed just one point lower. This appears to be becoming something of a stumbling block for continued strength. It is possible that in the aftermath of the FOMC meeting it will begin to correct, although continuing to show strength on dips.

The economic calendar is dominated by this week’s release of the April employment report. It is predicted that 400k new jobs will have been created, down a little on March’s 431k.

This will bring a degree of comfort to those fearing the economy beginning to falter.

Time is running out for ECB action

The ECB is still showing its indecisive side to the market. While inflation is ravaging the economy and the conflict in Ukraine is driving activity lower, the board of the Central Bank is seen to dither.

The Bank’s President Christine Lagarde is beginning to promise that there will be rate hikes, most likely in the third quarter, but her timing appears to conflict with her deputy who sees policy being tightened sooner rather than later.

It is hard to understand Lagarde’s stubborn belief that support for the economy overrides high and rising inflation.

It is almost as if she is blind to the decimation of the savings and pensions of the wealthier nations, while being economically biased towards those who are struggling.

Likewise, it is an economic fact of life that there is a significant divergence between how certain nations deal with crises and how they eventually emerge.

Taking Italy and Germany as an example. During a slowdown, Italy will increase public spending in order to support the population, while Germans will save in order to emerge from the downturn better equipped to move forward.

Rising inflation is hitting the German economy far harder than Italy, given how German future planning is being hit.

The ECB has a virtually impossible task to knit together these wildly varying policies while maintaining its targets for growth and inflation.

The situation in Ukraine continues to be an issue. With Russia turning off gas supplies to Poland and Bulgaria, it will be vital that Brussels is able to provide a suitable response.

The euro has been under pressure since it became clear that G7 monetary divergence would be significant. The ECB will fall well behind the Fed in tightening policy, and this will see the euro continue to suffer.

Yesterday, the single currency fell to a low of 1.0490, where it is seeing a little buying interest. It closed at 1.0498, If there is to be recovery, it is likely to come post-FOMC, as the market indulges in buying the rumour and selling the fact.

There is a swathe of economic data due for release in the Eurozone this week. Several confidence indicators were released yesterday, and every one was lower than last month.

Producer prices and unemployment data will be published later this morning.

Later in the week figures for retail sales are due for release and these are expected to see the biggest fall in what may turn out to be a tough week economically.

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.”