5 October 2022: Kwartengs’ climb down – part two

5 October 2022: Kwartengs’ climb down – part two

Kwartengs’ climb down – part two

Morning mid-market rates – The majors

5th October: Highlights

  • Truss two weeks away from the wilderness
  • Lack of capital investment dragging down productivity
  • Spain suffering from being in EU

GBP – Financial plan brought forward to the end of the month

Kwasi Kwarteng, Chancellor of the Exchequer, was forced into a second U-turn yesterday as he brought forward the publication of the Government’s financial statement from mid-November to the end of the month.

At the time of the mini-budget, he was questioned why he was not presenting full financial figures to back his arguments regarding growth and taxation.

The Conservative Party’s annual conference has been anything but a victory parade for the new leader.

Former Party Chairman, Grant Schapps, was the first of the old guard to break ranks and criticise the first month of Liz Truss’ policies.

There is another row brewing about benefits: Rumour has it that benefits paid to low income households and the unemployed would only be raised by the level of average earnings and not by the rate of inflation, despite a pledge by Boris Johnson last spring that they would keep pace with inflation.

So far, Truss refuses to confirm this, only saying that the decision has yet to be made, Minister Penny Morduant appeared to preempt the decision by the Cabinet, saying that of course, benefits would rise by the level of inflation.

The cost of increasing benefits by the rate of inflation would cost the Government a further five billion pounds. When Truss was asked in a TV interview, she appeared very uneasy when commenting on her intentions.

Schapp further muddied the waters, by commenting that the Party Truss has only ten days to do the right thing on benefits or the knives will be out, and she may not survive.

The row that is brewing over benefits caused the Home Secretary, Suella Braverman, a staunch Truss supporter, to accuse former Ministers now a powerful group on the back benches of staging an attempted coup which had been done in a disloyal and unprofessional manner.

Truss went on to say that she stood by her new plans to avert a recession by creating growth and confirmed her belief in trickle down politics despite being forced to abandon her plans to abolish the 45p rate of income tax for the highest paid. She called the proposed cut a very minor part of the overall package, while her opponents likened it to pulling a rabbit from a hat which was very hastily stuffed back in.

The pound continued to recover from its recent turmoil yesterday. It rose to a high of 1.1489 and closed at 1.1477. That made it its sixth consecutive positive session.

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USD – Openings fell by over a million

Predictions for headline new jobs created have been slashed following yesterday’s JOLTS data on job openings, which revealed that the number of openings fell by more than a million in August.

It follows that with fewer openings being available, there will be less new positions filled. That in turn will confirm that the FOMC’s continual tightening of monetary policy, which is designed to cool the labour market, is having the desired effect.

That means that the more dovish members of the FOMC may be justified in voting for a hike of fifty basis points rather than the seventy-five point hike that have been approved by the past three meetings.

Loretta Mester, the President of the Cleveland Fed and an unreserved hawk on monetary policy on the FOMC, spoke yesterday of her belief that the Fed will continue to tighten rates even if the economy is tipped into recession.

A slightly more liberal member of the FOMC, John Williams, the President of the New York Fed, was more conservative in his view. He believes that the Fed is right to continue to tighten monetary policy, but believes that inflation has reached an inflection point and will return to earth at a rapid rate.

Yesterday’s data raised the stakes on Friday’s release of non-farm payrolls while a further indication will be published today with the publication of the ADP Employment report which details the new jobs created in the private sector.

132k new jobs were created in this sector last month and that number is still predicted to increase to 200k, although some downward revision is expected today.

The market is becoming more obsessed, almost by the day, about the Fed’s actions. With a base case of one hundred and twenty-five basis points of hikes to be made at the final two meetings of the year, the market still believed that the Fed will remain hawkish.

Of course, that perception will change should there be weak numbers on Friday. Despite this, Jerome Powell is unlikely to be anything other than wary in commenting on a single set of data.

Although the Central bank professes to be driven by data, they are looking at trends rather than one-offs, that point in any particular direction.

The dollar’s retreat, looking for levels of support,110.05 cloning at 110.18 continued yesterday. It fell to 110.05 and closed at 110.18 as buy orders were executed at the close to the day’s low.

EUR – Factory gate costs rise at 43.8% versus 38% last month

Factory gate prices continue to rise at an alarming rate, driven by a crisis in commercial energy prices. Gas and electricity prices contributed 44% of the rise in Producer prices.

This prompted urgent calls from the weaker economies of the Eurozone as well as those still emerging from the ravages of the Pandemic to call for a cap on all energy prices as winter threatens to bring greater hardship.

Eurozone Finance Ministers, meeting this week, pledged that their actions taken state by state to alleviate the crisis would be better coordinated by the Central Bank and targeted so as not to provoke a wages/prices spiral in the region.

It is hard to fathom that there are still such decisions taken at a national level when their effect is felt by the entire Community.

The EU still appears unwilling to consider taking the final steps into a single Federal State, which would surely make it far easier for such long-term strategic decisions to be taken as well as to deal with crises which appear to pop up with alarming regularity.

Energy is a case in point. Although Germany is far and away the largest consumer and therefore has the loudest voice, there is no regulated body which draws upon the purchasing power of the entire region, and this leads to anomalies in both prices paid and supply.

Christine Lagarde has utilized the meltdown in UK financial markets to show the rapid effect of excessive financial stimulus can have.

The ECB president has warned against wholesale support for families across the entire region, preferring targeted support which will have less effect on inflation. She told the meeting of Finance Ministers that she believes only 20% of the support that has been agreed meets the Central Bank’s criteria.

With the weaker economies holding sway for now within the hierarchy of the EU, the danger is that the ECB will be forced to continue to hike rates as fiscal support continues to be aimed at supporting weaker economies.

While the conversation continues, the ECB is probably going to be forced to hike by seventy-five basis points later this month, edging rates every loser to restrictive territory.

The euro came very close to parity, but again ran into selling pressure. It reached 0.9999 and fell back to close at 0.9986.

Have a great day!

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.