6 December 2022: Bosses’ union blames Brexit


  • CBI sees 0.4% contraction in UK economy in 2023
  • Strong service sector output spurs possibility of a hawkish Fed
  • PMIs point to winter recession
GBP – Market Commentary

Government not providing sufficient support for business

The Confederation of British Industry, nicknamed the Bosses Union, yesterday condemned the Government for the lack of support industry has received while Brexit regulations have caused chaos for businesses trying to continue to do business in Europe.

It called the Conservatives ten years in power the lost decade, as it predicted that the economy would shrink by 0.4% in 2023.

Inflation is likely to continue to rise and investment by businesses in their own development, already down, would dry up entirely.

This grim outlook has been attributed to a decade of missed opportunities, the most telling of which has undoubtedly been the UK’s departure from the safety net that is the European Union.

Stagflation has arrived in the UK economy, with rising inflation, an economy that is contracting and already in recession, low productivity, and business investment.

Banks have reduced their lending to business as they fear that they face a deluge of bad debts, hitting their profits over the next three to five years.

The CBI believes that opportunities still exist with the Government providing limited support to firms willing to look further afield, but the economic situation makes businesses more likely to batten down the hatches.

The war in Ukraine and the rise in the wholesale cost of gas have also created issues, although they are clearly outside the control of Rishi Sunak and his Ministers.

The upheaval in the political landscape and the impossibly optimistic budget published, by Kwasi Kwarteng and Liz Truss, has driven the cost of borrowing for capital projects higher, causing businesses to either shelve or abandon expansion plans.

One ray of light from the report is that the CBI sees inflation falling over the second half of next year and reaching around 6.5% by year-end. This is still appreciably higher than it has averaged over the past decade, but with energy prices remaining unpredictable and the conflict in Ukraine showing no sign of ending, inflation is likely to remain raised up until the next general election.

The CBI believes that the Government and Bank of England should consider raising the inflation target to relieve the pressure to continually tightening monetary policy to achieve a target which may prove impossible to meet

Sterling lost ground versus the dollar yesterday as the Fed minutes and a speech by the Fed Chairman threw into question the likelihood of another jumbo rate hike this month.

It fell to a low of 1.2161, and it closed at 1.2178.

USD – Market Commentary

Jobs data misleading hawks

While the economy created 263k new jobs in November, which was significantly higher than the market had expected given the minutes of the latest FOMC and a speech from Fed Chairman Jerome Powell in which he appeared to prepare the market for a less hawkish outlook, the rest of the report was roughly in line with the advance guidance that had been provided.

Other than the headline non-farm payrolls, which is notoriously inaccurate given both its reliance on predictions in certain sectors of the economy and the delay in the Bureau of Labour receiving the most current data, every other aspect of the report was in line with the latest view of the strength of the economy.

Yesterday’s figures for output across most sectors of the economy pointed to a slowdown although, despite more than 50% of CEOs surveyed still believing that recession is imminent, the data only really predicts a significant slowdown.

The last FOMC meeting of a volatile year takes place next Wednesday, with Jerome Powell conducting a press conference following the announcement of the decision of short-term interest rates.

The overriding view of the market is that rates will be hiked by fifty basis points. The effect of this hike and any that are made subsequently will be more dynamic, given that interest rates are now seen as restrictive.

In truth, the weakness displayed in the Employment report was exactly what the Fed has been striving for at meetings over the second half of the year. The Committee is trying to slow activity to such an extent that it will dampen demand, which will in turn see inflation fall.

The latest figures show that inflation fell in October, but the Central Bank must be confident that the November Inflation Report will show a trend for them to inform the market of the likelihood of a small hike being agreed next week.

There is still a hawkish element in the FOMC that will vote for a bigger hike, but it must be assumed that Powell has a strong idea that he can carry the committee with him.

The expectation that the Fed will begin to taper its rate hike next week has seen the dollar index lose growing over the past couple of weeks. Yesterday, it saw renewed buying driven by a degree of confidence that the economy will avoid a recession, certainly in the first half of next year,

It rose to a high of 105.40 and closed at 105.28.

EUR – Market Commentary

Will a jumbo hike drive recession?

It has been true of the past few ECB Governing Council meetings that they have been fractious, given the disagreement between the hawkish and dovish members about the future path of interest rates,

As inflation has been rising for most of this year, the hawks have held sway and rates have risen,

Now, just as the markets were finding their task of predicting the path of interest rates comfortable, inflation may have topped out and the need for a jumbo rate hike may have receded.

The more hawkish members of the European Union, in particular the Austrian and German Central Bank Presidents, consider it too soon for the Central Bank to be considering tapering interest rate increases, but there is sure to be a clamour for the weaker nations whose dovish expectations are divine by the potential weakness of their economies.

The output data that was released yesterday points to the possibility of a recession having already begun. Italy bucked the trend by producing higher PMIs than it has seen recently. Output rose from 46.4 to 49.5 a significant increase except for the fact that Italian data is both unreliable and volatile.

Germany saw a fall from 46.4 to 46.3 in its composite index that includes both services and industrial output. The overall figures for the Eurozone saw output unchanged at 48.8, while services alone were marginally lower.

Next week’s ECB meeting will be impossible to predict, with three outcomes possible but only two likely. A pause in rate hike is hard to imagine while there are strong personalities on both sides of the argument whether a proposed hike should be fifty basis points, or seventy-five.

It would be prudent to agree a seventy-five-point hike and given her comments last week, it appears that Christine Lagarde favours that course of action.

The immediate fate of the Euro lies in the hands of the Federal Reserve, but the size of the hike agreed next week will have a bearing more on the future direction of rates and therefore the currency.

Yesterday, the single currency lost a little ground to the dollar. It fell to a low of 1.0480 and closed at 1.0485.

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.