- Economy shows signs of steadying
- Consumer spending is still “exceptional”
- Downturn beginning to ease as rate hike end
Rate pause is helping the economy to stage a minor recovery
It is now generally accepted that the country won’t fall into recession since the cycle of interest rate hikes has come to an end, but that is as far as the Bank of England can or will go in providing support without risking a rise in inflation through an injudicious rate cut.
The shocks that have been driven by the ongoing conflict in Ukraine are now well known and are being dealt with, although the availability of certain foodstuffs is still exercising supply chains as alternatives are sourced.
It is interesting to note that the Prime Minister was able to secure around thirty billion pounds of fresh investment in “UK PLC” at the conference he arranged last week to tell the story of successes in several areas of the economy, while the Governor of the Bank of England was providing a particularly downbeat analysis in which he said the country’s potential for growth was the lowest he had witnessed in his entire working life.
The Opposition Labour Party gave a muted response to Jeremy Hunt’s Autumn Statement. This fired a debate about what will radically change if they win the next General Election, which still feels highly likely.
Sir Keir Starmer, the Labour Leader, gave a wide-ranging interview over the weekend where he warned that his Party would not “be the opening spending taps” were it to be elected.
Starmer’s words were less triumphalist than in recent times, perhaps betraying his recent confidence as more bluster than tangible proof of his Party’s credentials to govern.
He feels that Labour must “leave no stone unturned” in the search for growth.
If labour is not planning to spend its way to growth, there must be concerns about investment in the National Health Service, which has suffered from underinvestment from the time that the current government took office.
Labour has made some bold pledges about waiting lists, but they will clearly need fresh investment and, since the “pot” is finite, savings will need to be made elsewhere.
There is likely to be some further income generated by the addition of VAT to private school fees and the ending of non-dom status for tax purposes, but Labour will need to avoid the mistakes it has made before if it is to be a more than one term Government.
As predicted, the pound was unable to maintain its forward momentum last week as the dollar ended its recent correction, although it did manage to end the week higher. It reached a high of 1.2733 and closed at 1.2709.
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FOMC to still is cautious on rates
The Central Bank came as close as it is likely to about the end of its cycle of interest rates recently, with Jerome Powell agreeing that the current risks to the economy are generally balanced between higher growth and rising inflation.
The revised Q3 GDP data that was published last week showed that the economy grew by 5.2% between July and September, outstripping the already significant 5% that had been delivered earlier.
Warren Buffett, the legendary investor and Chairman of Berkshire Hathaway, spoke last week of his belief that an “incredible period of growth for the U.S. economy is coming to an end”.
This was a reference to the fact that interest rates are unlikely to fall to the level they have been at for more than a decade. Although rate cuts were in response to the financial crisis and then as they began to rise, the Pandemic hit, which brought a significant and necessary loosening of monetary policy.
As the market begins to wind down towards the end of the year, it is hard to imagine anything other than a positive end, with the November employment report due for release at the end of this week, followed by inflation data and an FOMC meeting next.
The headline non-farm payrolls are likely to be somewhere between 130k and 180k, although it does have the propensity to provide a shock.
The Personal Consumption Expenditures data released last week pointed to another fall in CPI, while the FOMC has been clear that a further pause in rate hikes can be expected, even if Powell does maintain a “hiking bias”.
In his most recent speech, Powell maintained that the FOMC is unlikely to cut rates according to the market’s timetable. He would prefer to keep rates at their current level unless there is a major downturn in output.
The flame of expectation about a recession next year has been all but doused, but there will remain a concern about a major downturn until longer term indicators turn positive.
The dollar index slowed its rate of descent last week as it prepares for a rally into the year-end. It fell to a low of 102.46 but recovered to close marginally lower on the week at 103.22.
ECB to remain on alert despite the pace of the fall in prices
Christine Lagarde has developed a knack for persuasion in her time as first a Minister in the French Government, then as CEO of the International Monetary Fund.
It has taken all her powers of persuasion to convince first the dovish members of the Governing Council to back a continued series of rate hikes, which maybe lasted possibly one or two meetings too long, and then to persuade the hawks to end the cycle.
At every turn, what looked like indecision, was little more than the nations of the Eurozone acting following their natural instincts.
Germany has long been the most hawkish member of the Eurozone.
Even as its economy was descending into recession, the President of the Bundesbank remained at the forefront of those calling for continued tightening of monetary policy.
In fact, even last week, Joachim Nagel, spoke of the need for rate cuts to be delayed for as long as possible.
The other side of the argument is represented by Italy.
While other nations which have been traditionally less financially disciplined, like Spain and Greece “tightened up their act”, Italy first voted in a far-right Prime Minister who, after a year of “playing by the rules”, then enacted a series of policies which drove the final nail in the coffin of the growth and stability pact.
Lagarde’s powers of diplomacy have so far meant that the region has not imploded, but the question still is whether the European Commission has the political will to enact the changes, particularly the introduction of fiscal union, to allow the Eurozone to not just survive but to flourish.
There were signs in the data released last week that the downturn in output that has been taking place since the first quarter is beginning to slow. While there is no prospect of expansion soon, the rate of contraction is at least slowing.
The euro didn’t have the momentum to break the 1.10 barrier conclusively, and now looks set to drift lower as year-end looms.
Its medium-term path will be decided by the market’s perception of when rates will be cut on both sides of the Atlantic.
Last week, the common currency fell to a low of 1.0828 but recovered to close at 1.0879.
Have a great day!
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01 Dec - 04 Dec 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.