12 September 2022: BoE delays MPC Meeting to 22 September

GBP – UK GDP and CPI due this week

The Monetary Policy Committee meeting that was scheduled to take place this week has been postponed and put back a week as the nation mourns the death of Queen Elizabeth II.

The meeting now due to take place on September 22nd is expected to hike rates possibly by seventy-five basis points as inflation continues to rise. The latest figures for CPI will be released on Wednesday, with headline inflation likely to have reached 10.5%.

It is hoped that the announcement by the government of its plans to provide support for consumers by limiting the rise in the energy price cap to £2,500 for an average family will see inflation top out sooner than has been predicted recently.

The rise next month in the energy cap has been halved which will come as a major relief to the lowest paid, while any proposed increase in 2023 has been shelved. It is unclear if this package has been fully costed by it is expected that the cost will be around £90 billion pounds.

It was a momentous week in the UK with the end of the second Elizabethan era with the passing of the Queen. On Tuesday, she had welcomed her fifteenth Prime Minister and the third female.

Liz Truss has created the most diverse Cabinet ever and will now set about the last of setting the country on a path back to growth. According to Bank of England Governor Andrew Bailey, 2023 is already a write-off, as the economy is expected to enter a recession and continue to contract throughout the whole of next year.

There has been no official comment on that prediction from the new Chancellor, Kwasi Kwarteng, but it is likely that the Treasury is hard at work verifying the numbers and trying to put a positive spin on just how serious the situation is.

Also due for release this week, is the unemployment report for August. It is expected to show that there has been a slight fall in the claimant count, from 10.5k to 9.2k. Average wages, ex-bonus, are expected to have broken 5% in August as the wage/ price spiral continues,

The economy will no doubt be hit by the events of the next two weeks or so, and that will skew the data for economic activity for September.

Last week, Sterling managed to claw its way back from multi-decade lows. It fell to 1.1405 but recovered to close at 1.1591.

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USD – Central Bank to continue to fight inflation aggressively

Federal Reserve Governor, Christopher Waller, commented last week that the monetary policy decision to be taken at the upcoming FOMC meeting will be straightforward.

While there has been very little doubt that the Fed would hike rates at its meeting next week, Waller removed it completely.

The FOMC will raise the target for the Fed Funds rate by seventy-five basis points to 3.00 to 3.25%. This will remove any lingering doubt that interest rates are anything other than restrictive.

It will also bring into sharp focus the comments made by Loretta Mester, the President of the Federal Reserve Bank of Cleveland, that interest rates would reach at least 4%. This now looks certain to happen this year. Although, with the Fed expected to begin to scale back the size of increments, it is likely to happen at the December meeting.

Waller went on to say, in a speech delivered on Friday, that there is no trade-off between the Central Bank’s employment and inflation objectives, so the fight against inflation will continue.

The argument over whether the economy entered anything other than a technical recession in the first half of the year has been put to bed, it didn’t, according to the Fed Governor.

In saying that, Waller confirmed his belief that the Fed hadn’t driven the economy into recession and with only minor signs that unemployment is on the rise, it won’t during this interest rate cycle.

Jerome Powell also confirmed the Fed’s hawkish credentials. Speaking on Thursday, Powell commented that the Central bank has responsibility for price stability and the aim by which that is measured is that inflation is for inflation to target 2% over time.

He believes that the longer the public sees inflation above target, the more likely it is to believe that it is the norm. That affects attitudes towards jobs and wages and adds to the cycle of inflationary pressures.

There is evidence that there will be an uptick in third quarter GDP. While it won’t be significant and won’t allay the fears of those who see a deep and significant recession in 2023, the Fed will be undeterred in its fight against rising prices.

The dollar index began a correction away from its recent highs, reaching a low of 108.36. That low is the same as the previous week and can expect to provide some medium-term support. The index closed the week at 108.97 and has begun this week on the front foot.

EUR – Some level of agreement to support economy

While the ECB grabbed the headlines with its largest ever interest rate hike, there was an equally significant matter agreed that could have far-reaching consequences for the financial health and strength of the Eurozone.

There has been headline agreement for some form of fiscal unity between the members of the Eurozone. While we are a long way, possibly years, from any form of fiscal union, every great journey starts with a first step.

It has long been argued that monetary union was doomed to failure due to its one size fits all nature, and it may very well be that the frugal five are merely paying lip-service to the need for there to be a more concerted attitude towards taxation and public spending, but any form of movement towards a closer link between the countries of the Union must be viewed positively.

The opposite view will be that the formation of a committee to study fiscal union is the kiss of death. Committees are the surest way of, if not killing an idea, then certainly delaying it indefinitely while giving the appearance of moving it forward.

The first and, no doubt positive step along the path to fiscal unity was agreed last week by Finance Ministers. They have agreed to coordinate support packages that they have agreed individually to support their own population when dealing with the growing energy crisis.

Their agreement is that support should be given to both individuals and industry but with two provisos. First that it should be considered as emergency help, which may be withdrawn as the situation improves, and second that it should be targeted.

Of course, how it will be targeted hasn’t been agreed, and that will almost certainly involve further a meeting(s). The most obvious question is, will targeting consider national borders? If it doesn’t, that will be a giant leap forward for fiscal unity. If it does, then we are still a long wait from any meaningful fiscal union.

The market is bracing itself for more bad news from both Germany and the wider Eurozone tomorrow. ZEW will publish its economic bulletin for both Germany and the wider Eurozone. In Germany, economic sentiment is expected to fall from -55.2 to -60, while in the Eurozone it is expected to be unchanged at -55.9.

Last week, the single currency performed relatively strongly, although this may be more to do with a weaker dollar. It rose to a high of 1.0113 and closed at 1.0043. It may have a little upside potential as the dollar’s correction deepens but will remain a correction rather than a trend.