6 July 2022: Johnson hit by resignations

GBP – Javid and Sunak desert the sinking ship

Two senior members of Boris Johnson’s cabinet resigned yesterday as pressure grew on the Prime Minister to resign.

Chancellor of the Exchequer, Rishi Sunak, and Health Secretary Sajid Javid both used words like integrity, truth and honesty in their resignation letters.

The latest scandal swirling around Johnson is based on the familiar premise that he is unable to tell the truth about any issue where he is put on the spot.

The latest such case is the resignation of the Deputy Chief Whip over allegations of impropriety. Johnson and his staff had been asked about other allegations levelled against Chris Pincher.

Other senior members of the Cabinet such as Deputy Prime Minister Dominic Raab, Home secretary Priti Patel and Foreign Secretary Liz Truss, all potential candidates in a leadership election have so far remained loyal to Johnson.

At the moment, the odds are heavily stacked against the Prime Minister, having already survived one vote of no confidence, lasting the week.

Johnson and his Chancellor were working on a major joint presentation that was due to be released in a couple of weeks, in which the Government was due to level with the public over the depth of the economic crisis that the country is facing.

It is rumoured that there were disagreements over how the situation was going to be portrayed. Sunak wanted to be honest and truthful, laying out how critical the next few months are likely to be, while Johnson apparently wanted to sugar coat the bitter pill.

The word truth featured heavily in Sunak’s resignation letter, and it is thought that this was centred around coming clean about the cost-of-living crisis.

In its latest Financial Stability Report, the Bank of England acknowledged that the global economy situation has deteriorated significantly over the past few months.

The report agreed that the war in Ukraine is now key to the global outlook and will have a major knock-on effect on the UK.

There is likely to be a flight to quality as riskier assets become subject to more price volatility.

This was seen yesterday as risk aversion saw the dollar appreciate against the pound, which has now conclusively broken below the 1.20 level.

It reached a low of 1.1898 and closed at 1.1944.

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USD – Biden should be shouldering more of the blame

Jerome Powell is receiving some unfair criticism over the continued rise in inflation. This is a bit like calling a plumber to fix a leaking pipe, then blaming him for the leak.

Powell may have been a little slow in acknowledging rising prices and the inability of supply to keep up with demand, but the blame for rising inflation should be levelled far more at the Administration and President Biden in particular.

Biden authorised payments during the Pandemic to those who were furloughed or lost their jobs completely, which are now being seen as excessively generous.

While they led to the economy coming out of a brief recession very quickly, they have led, exacerbated by other global issues, to the situation that the economy now finds itself in.

This may have been the crisis that many predicted, over several years, that would lead to the end of the low interest rate era, but the shock wave it has released will take some time to ease.

President Biden, in an effort to ease supply issues, has turned to China for help. He plans to ease some tariffs set in place by his predecessor.

This may ease some shortages but will take some time to feed through and in the meantime, the FOMC will continue to try to dampen demand by hiking interest rates.

The latest data for factory orders surprised to the upside and eased some short-term fears of a recession.

Orders rose by 1.6% following a 0.7% rise in May and a market expectation of a 0.5% increase.

A global shift in risk appetite saw the dollar index rise significantly. It reached a high of 106.79 and closing at 106.52. This saw other G7 currencies pushed to multi-year lows.

Data for services output will be released later today, with the data still expected to show expansion despite a small fall overall. Following last month’s read of 55.9, the June figure is expected to be around 54.5.

The minutes of the latest FOMC meeting will be released later today, and apart from some advance guidance as to the expectations for the next meeting, they are not expected to provide any new information.

EUR – BUBA President identifies three justifications

Germany, which has stayed more in the background under Scholz and Nagel than would have been expected under Merkel and Weidmann has finally broken cover. The Bundesbank President has expressed concerns about the use of the new tools agreed at an emergency meeting of the Bank’s Governing Council last month.

Joachim Nagel set in place three conditions that will need to be met before the Bank can trigger the measures.

He admitted to concerns about the crisis that remains in the Government Bond market, centred mostly around Italy, which is now paying a wider spread than it did in the midst of the 2012 crisis.

The German Retail consortium reported yesterday in its quarterly report that it blames high inflation and the rising cost of energy for the fact that the economy is falling into recession. It acknowledges that although this is not a unique situation relating to Germany only, it feels restricted in what can be done to break free.

Since there is such a negative connotation around the term stagflation, again, particularly in Germany, yet another new term has been invented. Rather than stagflation, the economy is entering an inflationary recession. This may not sound a lot better, but is now what stagflation will be called.

The issue of supply and demand that has led to rising inflation across the Eurozone cannot be better illustrated than by the current situation in the wholesale gas market.

Russia has been gradually reducing the supply of gas through its major pipeline, and this has seen the price rise as demand remains high. Governments have been buyers to reduce the shortfall of stock they will need to regulate the market as autumn theme winter arrives.

The euro fell to a twenty-year low yesterday as extreme volatility returned to the financial markets.

It fell to a low to 1.0235 and closed at 1.0271 as traders saw a possible bargain, banking on the possibility that the single currency won’t break parity on this move lower.