6 September 2022: Truss becomes Prime Minister

Truss becomes Prime Minister

Morning mid-market rates – The majors

6th September: Highlights

  • UK economy slips into contraction
  • Inflation could cost millions of jobs
  • Euro slips below 0.9900

GBP – Now the real work begins

Liz Truss was voted in as the new Leader of the Conservative Party when the result of the poll was announced yesterday. She received 57% of the vote, comfortably beating her rival Rishi Sunak.

Despite her margin of victory being decisive, the race was close that had been predicted by opinion polls. In fact, it was less decisive than either Boris Johnson’s or David Cameron’s.

Today, Boris Johnson will officially resign as Prime Minister and Truss will be invited by the Queen to form a government. The announcement of her Cabinet will then begin, with the most senior posts announced later this afternoon.

One person who will not be a member of Truss’ first Cabinet will be Johnson Loyalist, Priti Patel, who resigned yesterday and decided to return to the back benches. She wouldn’t have been retained in her role as Home Secretary, so in fact jumped before she was pushed.

Once her ceremonial duties are out of the way, she will immediately begin to tackle an economy which is overflowing with issues that require her immediate attention, as well as that of her new Ministers.

Although we await official confirmation, the faces of the Cabinet are mostly known, although they haven’t yet been matched to the jobs. Kwasi Kwarteng, a major supporter of Truss is expected to be Chancellor of the Exchequer, He has already held informal talks with the heads of the energy companies to try to agree a package of support.

The most likely outcome, likely to be announced on Thursday, is the freezing of domestic bills for gas and electricity, although help is also needed for businesses, and that is still being worked on.

The length of time that prices will be frozen is still being discussed but logic dictates that it will be for the rest of this Parliament. The cost will be in the region of £90 billion. Among other as pressing issues are cutting NHS waiting times, the war in Ukraine and trying to unite the Party behind her.

The latter issue will be vital if the Conservatives are to win the next General Election, which, Truss announced in her victory speech, will take place in 2024.

The scale of the task facing the new Cabinet was underlined as data released yesterday showed that the economy slipped into contraction last month according to the latest figures for output,

The markets took news of Truss’ victory in its stride, more relieved that there is now a captain at the helm after a two-month hiatus.

Sterling finished the day unchanged at 1.1516, having earlier fallen to a low of 1.1443.

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USD – Economists still undecided on recession

The fallout from the various reports on the state of the employment market that were released last week continues, with economists split equally on whether the economy is headed for a recession.

There is even a school of thought that the Fed is driving the economy towards the rocks deliberately, as it sees a recession as the only way to bring inflation under control.

This is almost impossible to imagine, but the data has called into question the continuation of the recent policy of increasing rates at every meeting. There are several FOMC members making speeches this week, most notably Deputy Chairman Lael Brainard and Loretta Mester, the President of the Federal Reserve Bank of Cleveland.

Mester said recently that she believes that the fed funds rate will top out at 4%, and she doesn’t see any cut in rates until early 2024. This is about as hawkish as any member of the current FOMC, and it remains to be seen how much support such a view attracts.

Following recent fears of a fall in the number of Netflix subscriptions, which in the end proved to be unfounded, another of the stocks which dominates the market caused concern, Amazon announced that it is closing several warehouses.

It has either closed down or mothballing plans to open 42 warehouses due, it says, to the economic downturn. It is unclear whether it is experiencing poor trading conditions already, or if it is preparing for the worst by battening down the hatches. This creates a fall of 53 million square feet and is in sharp contrast with the breakneck speed with which it added capacity as the country emerged from the Pandemic.

To give some idea of scale, 53 million square feet is the size of 1200 football pitches!

In Q2, Amazon shrunk its global workforce of roughly 1.5 million by around 100k. This is more a rationalization than anything more sinister, although it could also be the beginning of a worrying trend,

A statement by the National Retail Federation yesterday stated that while it is seeing a slowdown in the economy, it is too early to make a firm judgment on whether it is headed for a recession.

The dollar index looked as if it was going to make a decisive break of the 110 level yesterday., It reached a high of 110.27 but was unable to sustain momentum and fell back to close at 109.82

EUR – Eurozone economy driven to the brink

The Eurozone was plunged even deeper into economic free-fall, as Russia announced that it will not resume full supply of gas to the region until sanctions are lifted.

It blames sanctions enacted by the Governments of Germany and the UK for its decision to cut supply of gas through its Nordstrom 1 pipeline. A spokesman for the Russian Government admitted that no other reasons exist for Russian actions.

Data released yesterday showed that retail sales showed a marginal improvement yesterday, but the overall trend is still lower. However, business activity continues to contract, and business sentiment is the lowest since before the pandemic.

The crisis in the cost of living is deepening, with gas prices set to rise again. The difficulties with having monetary union without consequent fiscal policy are again being highlighted. It is impossible to agree any subsidies to alleviate the cost of living, with each economy free to decide its own strategy.

Clearly, the Russian action on gas supply is aimed directly at Germany, as it knows that where Germany leads, the rest of Europe will follow.

This week’s meeting of the ECB meeting of the ECB will be crucial to the expectation of a recession which may have already begun, it is expected that the economy will have been pulled into recession, primarily by the fallout from the conflict in Ukraine, and the length and depth of the slowdown depends on how long it lasts,

With inflation now running at 9.1%, the odds have shortened on a seventy-five point hike this week, although given the news from Russia that gas supplies won’t recommence any time soon, they may settle for fifty basis points.

No matter what is decided, a rift is developing with the heavily indebted nations who haven’t shown much fiscal discipline demanding further support, while the wealthier nations struggle with inflation and slowing economies.

It is hard not to feel for Christine Lagarde, who is trying to navigate her way through a minefield.

The euro fell to 0.9878 yesterday and now appears to have said goodbye to parity. It did recover very slightly, however, to close at 0.9927.

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.”