7 July 2022: Wanted: a raft of new ministers

Wanted: a raft of new ministers

7th July: Highlights

  • Johnson’s Premiership hanging by a thread
  • Job openings fall, but the labour market is still red-hot. Lay-offs non-existent
  • What happens below parity?

GBP – Starmer: sinking ships deserting a rat

Prime Minister Boris Johnson appears to be reaching the end of the road as support for him to stay in the role collapses.

Previously loyal supporters like Transport Secretary Grant Shapps and Home Secretary Priti Patel joined many of their colleagues in calling for him to step down. Even the new Chancellor of the Exchequer, Nadhim Zahawi, only appointed twenty-four hours earlier, has agreed that it is time for Johnson to leave.

The 1922 Committee, which decides the rules under which the Parliamentary Conservative Members act, has hinted that at its next meeting it may consider changing its rules to allow for more than one vote of confidence a year to take place as is the case currently.

Johnson remains defiant, commenting that he will still be leader at the time of the next General Election, a claim which now appears ludicrous given his crumbling support.

Michael Gove, the levelling up minister, was dismissed from his post yesterday for disloyalty. Gove was one of the most senior members of the cabinet, and his departure will further weaken Johnson’s position.

It now seems highly unlikely that the current Prime Minister will be able to survive the tirade of criticism that is raining down upon for much longer than the end of the week, and the scramble to be his replacement could begin as soon as next week.

Candidates for the post will include all the usual suspects; Patel, Sunak, Javid and Raab as well as a few outsiders including the Attorney General, Suella Braverman, who, while denouncing Johnson yesterday, took the opportunity to confirm that she would stand.

Huw Pill, the Bank of England’s Chief economist made a speech yesterday in which he said all the things that he should give the issues facing the economy, but given the blow that his credibility took recently when he admitted to mistakes made by both his team and himself over the rate at which inflation has risen, his words appeared to be a little hollow.

He is open to a hike of more than twenty-five basis points at the next MPC meeting early next month, and that economic growth would slow to a crawl in the coming months. He blamed the effect of the war in Ukraine for accelerating the cost of fuel, energy and foodstuffs that was impossible to predict at the turn of the year.

Yesterday, the pound continued to lose ground against a rampant dollar. It fell to a low of 1.1876, but as the pace of its fall slowed, day traders took profits, and it managed to crawl back above 1.19, closing at 1.1928.

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USD – Powell seeking to cool private sector employment

The first of the week’s labour market reports was released yesterday, and it showed that private sector jobs show no sign of cooling off as job openings fell but remain close to an all-time high, while lay-offs remain at a record low.

The data appears to confirm that this is a period in which the economy is almost impossible to predict. With the FOMC battling to bring down inflation, which appears to be set to rise even further despite a series of interest rate hikes that are not only set to continue but grow in size, the influences that are slowing supply side continue to worsen.

Jerome Powell will be waiting for tomorrow’s main employment report, Non-Farm Payrolls, to provide further advance guidance to the market.

Yesterday’s release of the minutes of the most recent FOMC meeting show that the Fed is set to remain in a hawkish mood for months to come, but the content of the meeting told the market little it wasn’t already aware of.

It appears that the Fed will consider even more restrictive monetary policy, considered by traders to mean that the size of hikes will increase and that there may even be moves between meetings if the situation is believed to warrant them.

Fears that the Fed’s actions will tip the economy into recession, but Powell firmly believes that the current level of inflation is the biggest danger to the economy while a slowdown in economic activity can be dealt with, once inflation is under control.

This is a decision that is being mirrored through the G7 as interest rate hikes are happening in most developed economies.

Intellectual or theoretical input into the current state of the economy is leaning towards the economy not yet being in a technical recession, although several members of that community believe that it may be impossible to avoid contraction in the coming months if the Central bank is to bring price rises down to a more acceptable level.

It is also considered likely that given the level of the neutral rate, the use of a 2% target for inflation may become outmoded.

Yesterday, the dollar index continued to rally as global risk aversion continued. It rose to a high of 107.26, closing at 107.08.

Tomorrow’s NFP release will be the next significant influence on the market. The latest prediction is for 270k new jobs to have been created, down a little from May, but a little higher than had been expected earlier.

EUR – Nagel is lacking the will to put euro survival above Germany

For some time, Brussels has been relying upon political will to provide the stitching that keeps the European Union together as the economic fabric of monetary union is ripped apart by crisis after crisis.

The new President of the Bundesbank Joachim Nagel may not be as outspoken or as critical of the ECB as his predecessor, but he appears to be even more pragmatic in his views as Jens Weidmann.

Weidmann was apparently content to try to change things from within until it became impossible to bend the Central bank to his will and he decided to depart. The fact is that he was probably mortally wounded by the decision of Angela Merkel to support the candidacy of Christine Lagarde that ruined his credibility.

As the ECB approaches a critical meeting of its Governing council at which it will raise interest rates for the first time in thirteen years, Nagel has been hinting that there may be life outside monetary union.

Looking at the history of the experiment, it is clear that the one size fits all philosophy has failed. While at the time of the Eurozone debt crisis and the global financial crisis that preceded it, several nations were able to rise above it and provide limited support, at a cost to highly indebted members who were on the brink of default despite low interest rates.

In fact, their profligacy was probably caused by the fact that rates were low as was inflation.

Now, not only is fragmentation causing the likes of Italy, but base interest rates are set to rise for the foreseeable future.

One of the other pillars of the European Union had been the belief that it could extinguish the threat of war in Europe, but this didn’t take into account the fact that the enemy was lurking just outside its borders and has brought conflict to its doorstep again.

The rise in inflation that has been seen would have been snuffed out had Germany and other members of the frugal five been free to hike rates months ago without having to consider supporting those who still don’t subscribe to financial discipline.

There is a considerable mopping up operation to be undertaken, and it remains to be seen just how keen some members are to get involved.

The euro has sunk to twenty-year lows versus the dollar over the course of this week. Yesterday it reached a low of 1.0161 and closed at 1.0183.

With parity beckoning, there may be some profit taking but should the ECB disappoint markets with a twenty-five-basis point hike, it could sink below that level and remain there for some time.

Have a great day!
About 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.”