4 October 2023: Conservatives flip-flopping to win votes

4 October 2023: Conservatives flip-flopping to win votes


  • MPC likely to remain split for the rest of the year
  • Job openings top all estimates
  • Plummeting unemployment piles pressure on the ECB
GBP – Market Commentary

Home Secretary woos Tories with attack on immigration

Consensus will be hard to find for at least the rest of 2023 as monetary policy reaches a restrictive state. There are those, like Catherine Mann, who believe that interest rate rises should continue, even to the extent that they become “overly restrictive” bringing the economy closer to a recession, while Swati Dhingra has the polar opposite view.

Dhingra believes that there is a significant degree of tightening still to be fully realized that is an overhang from previous rate hikes.

The permanent members of the MPC were split for the first time at the most recent meeting when John Cunliffe, the Deputy Governor for Financial Stability “broke ranks” and voted for a hike.

Given the increased likelihood of the country falling into recession in the coming quarters, it is increasingly likely that the cycle of rate hikes has ended.

The latest inflation report will be published on October 18th. With the oil price levelling off it is likely that it will continue its downward trajectory.

There has been substantial agreement with Catherine Mann’s recent assertion the era of low interest rates has ended as inflation is unlikely to return to the Government’s target of 2% given the extraordinary circumstances that saw it fall and interest rates to come close to zero.

The level of interest rate until two years ago, lulled with the market and first-time buyers entering the property market into a false sense of security. With mortgage rates at historic lows, the cyclical nature of the economy, where the only real change is the length of the individual cycles, meant that rates were going to return to their long-term average at some point.

To some extent that lack of education and forethought has played a part in the cost-of-living crisis.

The Home Secretary, Suella Braverman, began her bid for the Conservative Party Leadership should the Election go as badly as feared. She continued her uncompromising warnings over a coming “hurricane of immigration” which cheered the Party’s right wing.

Later, the Prime Minister wraps up the conference with a keynote address. He is expected to announce the scrapping of the Manchester extension of the HS2 project but offer some sweeteners in the shape of other initiatives.

Sterling fell again yesterday, reaching a low of 1.2052 and closing at 1.2076. There was a significant lull yesterday as the dollar is now heavily undersold, although traders are showing no inclination to close short positions.

USD – Market Commentary

First of the jobs reports shows a rise in job openings

The strike that is currently being held by members of the United Auto Workers Union in Detroit that is currently affecting Ford and General Motors production has so far cost the U.S. economy four billion dollars in a little over two weeks.

However, the news is not all bad from the auto industry. General Motors third quarter sales leapt by 21% as confidence in long-term strength of the economy returned.

The two pauses in the Fed’s cycle of rate hikes in the quarter helped boost confidence while inflation continues to fall.

Data released yesterday showed that job openings rose after three consecutive months of falls. The market’s interpretation of the numbers was that it may drive the FOMC to consider a further hike in rates at its next meeting which takes place at month end.

The latest figures show 9.6 job openings up from an adjusted 8.9 million in August. While there is little or no correlation between the JOLTS data and Non-Farm Payrolls, the market is now more positive about this week’s employment report.

While the Fed closely monitors the data, it is most interested in changes in trend across the entire jobs market and, even then, that is only part of the economic picture it paints that also includes output, economic activity and of course inflation.

Today sees the release of ISM data for services activity. While remaining strong, and well into expansive territory, a slight dim is expected to 53.6 from 54.5 in August.

The odds in favour of a soft landing are shortening daily considering the continued shows of robustness in the economy. However, there are still lingering fears of a recession late next year as the long-term indicators still point to a contraction.

There is little standing in the way of the dollar index’s march towards the 110 level. Yesterday it closed at 107.02, having spiked earlier in the day to 107.34.

EUR – Market Commentary

Nagel remains both bullish and hawkish

The Bundesbank is one of the most revered Central Banks in the world, and for that reason the market respects its actions and the words and its President.

Although in recent weeks, indeed since the beginning of August Bundesbank President, Joachim Nagel had fallen silent it was never doubted that he remained a hawk about inflation and monetary policy, although there were fears that he was softening his attitude given the parlous state of the German economy.

Those fears are misplaced as he clearly supported the hike in interest rates agreed by the last meeting of the ECB’s Governing Council and since then has remained bullish about the long-term prospects for both Germany and the wider Eurozone.

In the past couple of weeks, he has endorsed unequivocally the rise in interest rate and even called for tighter fiscal policy at home.

The rise in domestic inflation would be dampened by removing the additional support that was provided in 2022. Nagel accepts that the support was necessary even if it was a little “generous,” but now the challenging work of driving the economy forward must recommence.

He wants to avoid inflation becoming entrenched in both Germany and the Eurozone at all costs and one way to achieve this would be to tightly control the level of wage increases.

He readily acknowledges that interest rates are close to their peak but says that view is “natural” since rates are at historic highs. Furthermore, he also subscribes to the view that rates should stay high for a considerable time. It would send out the wrong signal for rate cuts to commence immediately after the final increase.

A period where monetary policy, hand in hand with fiscal policy, works to provide stability will be necessary.

Data for retail sales and producer prices will be published later this morning. Producer prices will give an indication of the inflationary pressures that remain in the economy. While retail sales provide a guide as to the attitude of consumers.

The euro fell again yesterday reaching a low of 1.0448 in a thin market and closed at 1.0466.

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.