8 February 2024: MPs are concerned about QT


  • Workers must accept lower pay deals to drive inflation lower
  • Trade deficit with China falls to its lowest in a decade
  • Schnabel believes that lower rates could drive a flare-up in inflation
GBP – Market Commentary

Bond sales are a “leap in the dark”

Several MPs have voiced concerns about quantitative tightening and the cost of the programme to British taxpayers.

Over more than a decade, the Bank of England has bought around £875 billion of Gilts using freshly created reserves to stimulate the economy in a process called quantitative easing or, more colloquially, printing money.

As rates have risen, the Bank has reversed the process and begun to divest itself of its stock to reduce the size of its balance sheet. The Bank currently has holdings of approximately £737 billion. As rates fell in the 2010s, the QE process became profitable, but as rates have risen, the losses have grown.

The Treasury must “make good” the losses the Bank has incurred, and this has led to issues for the Government at a time of stretched budgets.

A Parliamentary Treasury Select Committee report believes it should be consulted if the programme is ever restarted. The Bank of England welcomed the report and will consider it carefully before responding. A spokesman went on to say that the Bank welcomes debate around its monetary policy decisions and their implementation.

Parliament is getting into “election mode” as exchanges become ever more fractious. At yesterday’s Prime Minister’s Questions, there was a heated exchange between the Prime Minister and the Leader of the Opposition, which led to calls for Rishi Sunak to make a formal apology for his remarks, something he has refused to do.

The Labour Party is beginning to face questions over its plans for the economy should it win the General Election, which is scheduled to take place this year.

First, it is understood that Sir Keir Starmer is said to be considering “watering down” the Party’s commitment to investing £28 billion a year in green initiatives due to budgetary constraints, while the Trades Union Congress has called for clarity in the Party’s investment plans for the public sector.

Rachel Reeves, the Shadow Chancellor, has so far only spoken at the highest level about public spending and is now facing calls to add some “meat to the bones” This is something she has so far been unwilling to do since she doesn’t want to allow the Government to “pick apart” pledges that may well be unfunded.

MPC member, Sarah Breedon, spoke yesterday of the need for British workers to begin to moderate pay claims if inflation is going to fall close to the Bank’s target of 2% in the coming months and allow rates to be cut.

The pound drifted in the financial markets due to the lack of any fresh drivers. It has now recouped the losses it incurred following the rise in the dollar following last week’s monumental increase in U.S. job creation, rising to a high of 1.2642 and closing at 1.2627.

USD – Market Commentary

FOMC members appear with their views on rate cuts

This week has seen FOMC members released from the shackles that are placed upon them by the blackout that takes place around every meeting of the rate-setting committee.

Raphael Bostic, the President of the Atlanta Fed spoke of his willingness to “take a look” at cutting interest rates sooner than expected, should there be “convincing evidence” that inflation is falling faster than expected,

This highlights the “desire” versus the “necessity” for rates to be cut.

Jerome Powell is against cutting rates “for the sake of it” and wants to be convinced that there is a need for moderating monetary policy before he agrees to cuts.

Meanwhile, Neel Kashkari, the President of the Minneapolis Fed, believes that the FOMC can take its time to ensure that the first cut is both appropriate and timely.

As things stand, he believes that two or three cuts would be right, although he refused to be drawn on the size of each cut.

The market assumes that each cut would be twenty-five basis points since the pressure on the Fed is significantly less than is currently being experienced by other G7 Central Banks.

Given that seventy-five basis points of cuts would still leave the fed funds rate at 4.75%, this will be supportive for the dollar.

Cleveland Fed President, Loretta Mester, was a little more hawkish in her assessment when speaking yesterday. She believes that rate cuts will take place later this year and feels that an earlier cut could “be a mistake”.

The narrative provided by FOMC members gives some context to the committee’s decision-making, particularly since the minutes of the latest meeting won’t be published for another two weeks.

For the first time in two decades, the U.S. bought more from Mexico than it did from China in 2023.

During the Pandemic, heavy industry manufacturer Caterpillar, saw the cost of shipping a container from China to the U.S. rise twenty-fold and decided to shift production from China to Mexico and has been reaping the benefits ever since.

The dollar index has paused for breath after seeing some solid gains over the past few sessions.

Yesterday it fell to a low of 103.94 and closed at 104.05

EUR – Market Commentary

Schnabel comments lift the Euro

Isabel Schnabel is a member of the rate-setting Governing Council of the ECB, as well as a member of its Executive Board. This is despite her having no affiliation with any of the twenty Central banks that make up the Eurozone.

The fact that she is unelected, means that the influence she has over both the ECB and the wider financial markets is considered excessive.

There is no question that her hawkish comments support the Euro.

In an interview with the Financial Times published yesterday, Schnabel believes that a cut in interest rate could “invigorate” the Eurozone economy and cause a flare-up in inflation. The rest of the market feels that invigoration is exactly what the Eurozone needs!

She believes that the sharp decline in Eurozone inflation reflects the “quick wins” of deflation as the supply shock faded.

However, she maintains that the “last mile” in the journey to defeat inflation will be the most difficult.

She called for patience from the Governing Council and for its members to learn from “historical experience.” Likely, several members of the Governing Council may well take issue with these comments, since during its lifetime neither the Eurozone nor the ECB has experienced such volatility in inflation.

Banks are currently cutting the rates they are offering their customers, particularly in mortgage products, and Schnabel believes that this is an argument against being “hasty” in cutting official rates.

Wages continue to rise at an average of 5% across the entire Eurozone, and efforts must be made to align them with inflation. The issue with this is that there is a lag between the implementation of wage settlements and the effect of changes in monetary policy.

Schnabel’s comments gave the market no incentive to change its base view that rate cuts will begin in May or June, as hopes are fading of an earlier cut. The data seen so far for this year is not going to encourage the ECB to act precipitously.

The overall view of the market is that there is little incentive to sell the Euro currently as there are continued references to rates remaining “higher for longer”, while calls for cuts are becoming ever more plaintive.

Yesterday, the euro traded “sideways”, although it did manage to make marginal gains. It rose to a high of 1.0784 and closed at 1.0772.

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.