Negative growth or contraction?
Morning mid-market rates – The majors
4th April: Highlights
- Workplace absences set to rise to rival worst of Pandemic
- Fed doesn’t believe in a recession but should prepare anyway
- Inflation hits another record
The Bank of England won’t revert as the economy falters
It is now considered that the second quarter will see a contraction in GDP or as market analysts like to call it, negative growth.
The most significant factor has been the increase in the cap that is placed upon energy companies to ensure that domestic bills remain reasonable.
It is hard to believe that the first of two increases this year (the second will be in October) will see the average domestic electricity bill rise by £750 a year could be considered reasonable.
The Government loves to draw the attention of the electorate to the performance of the economy in comparison to other G7 nations. Yes, of course the UK is performing better now than the Eurozone. This is almost entirely due to the fact that Europe has a war on its doorstep and has been buying energy from Russia for several years and is now expected to find another supplier.
The Chancellor was extremely generous in supporting the economy during the first part of the Pandemic. This carried favour not only with the public, but also with his boss, who lives in the now to such a degree that he actively encouraged Rishi Sunak’s perceived profligacy without any thought for the chickens that have now come home to roost.
As businesses began to make provision for the approaching storm, manufacturing output in the UK began to slow. Output in March was only marginally lower than in February but was nevertheless significant since it is not that much above the line between expansion and contraction.
Export orders are suffering primarily due to the uncertainty being caused by the conflict in Ukraine, although the fact that Brexit is still not creating the predicted upswing in activity is still a concern.
Three members of the Bank of England’s Monetary Policy Committee will make speeches today, Andrew Bailey, Jon Cunliffe and Catherine Mann are expected to say that the MPC not only speaks with one voice but believe that the Bank’s current monetary policy stance is correct.
Data for services output will be released tomorrow and although expected to be unchanged, this area of the economy has performed well since the end of lockdown and continues to do so. Housing price information will be released later in the week, but the pound is expected to continue to react to global risk attitudes.
Last week, Sterling fell to a low of 1.3051. It attracted buyers as it approached the crucial 1.30 level but was unable to gain sufficient traction to break above the selling interest between 1.3180 and 1.3200.
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Recent record on proactivity must improve
While the FOMC has been mostly forgiven for that miscalculation, some leeway being given due to the unprecedented nature of the reaction to the Pandemic, it is unlikely to be given another chance.
There are growing concerns that the Fed’s aggressive reaction to the current level of inflation may slow the economy to such an extent that it slips into a shallow recession.
The next FOMC meeting doesn’t take place until May 4th, so there is plenty of time for its members to make their intentions clear. The market is expecting the Bank to hike by fifty basis points this time.
However, it is still unclear whether that is in reaction to the current level of inflation, or if it is merely to allow it to make its inflation fighting credentials clear to the market.
The minutes of the latest FOMC meeting will be released on Wednesday of this week. This will be the most significant event this week, following Friday’s payrolls data.
The headline showed that 431k new jobs were created. This was below the market’s expectation, but that was covered by the larger than expected upwards revision of the February number.
The unemployment rate continued to trend lower, reaching 3.6% from 3.8% previously.
While there have been plenty of comments from FOMC members recently, they do constrain a degree of bluster, while what is said at FOMC meetings tends to be more constructive, so what was said at the last FOMC regarding where the Fed sees the neutral rate will be significant for the market.
Last week, the dollar index was under pressure, reaching 97.68. This was mostly in reaction to some progress in talks between Ukrainian and Russian officials.
Once risk appetite settles down, the divergence in monetary policy and the better, if not fantastic, fundamentals of the economy should see the index recover.
Forget fuel, Russia and Ukraine are also Europe’s larder
Russia and Ukraine have also become Europe’s larder. For example, 80% of the world’s sunflower oil production comes from these two nations. While this doesn’t rival oil and gas for strategic importance, it shows the importance of the region.
The Governor of the Dutch Central Bank and ECB Governing Council Member, Klaas Knot, spoke last week of the need to wind down its Asset Purchase Programme as quickly as possible, although he believes that it will take until the end of the third quarter if it is not to see markets lose stability.
Knot was expressing his concern about rising inflation, which climbed to 7.5% in March, up from 5.8% in February. While these are preliminary figures, they are unlikely to be revised any lower.
Knot would like to see the ECB be in a position to hike rates before the end of Q3, but that remains unlikely. His comments were probably the first salvo of calls from the frugal five for the ECB to take action.
Politically, rising inflation has a direct effect on voters as they see their savings and pension pots diminish in real terms.
So far, ECB President Christine Lagarde has been more concerned about the ability of the poorer nations to put bread on the table, rather than what class of Mercedes German retirees can afford.
It would be a mistake for the market to believe that the lack of comment from the new Bundesbank President to be interpreted as agreement with ECB policy. Joachim Nagel is beginning to face pressure to act, both internally and from nations considered to be most affected by rising prices.
ECB Chief Economist Philip Lane fell short of calling for immediate action to curb rising inflation when he was asked for comment on Friday. He said that he expects the Bank to review the timing of its withdrawal of support in the face of increasing prices in the energy sector.
Last week, the euro benefitted from a chink of light emanating from peace talks being held in Turkey.
The single currency rose to a high of 1.1184 but closed at 1.1047 as the dollar recovered.
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.”