13 December 2022: Economy rebounds in October

The monthly GDP data that was published yesterday showed that the economy bounced back to grow at 0.5% following a 0.6% contraction in September.

Despite the positive data, the economy is still facing a recession that will probably start in the current quarter.

The country faces a significant weakening of its economy this month due to the freezing weather that is engulfing the country, as well as strikes by workers from numerous sectors. Nurses, firemen, ambulance crews, and train drivers are among those who will walk off the job during this month and early next. The Government has drafted in the army to drive ambulances during the strike, while fleets of taxis will ferry people to and from hospital,

Rishi Sunak and his ministers are standing firm as the pressure mounts on them to cave in and accede to the demands of the unions.

The Chancellor of the Exchequer, Jeremy Hunt has said that the size of the claims are unaffordable and if the Government were to agree pay deals in excess of the rate that inflation is rising currently, it would simply add fuel to the fire and start and wages/prices spiral that would be extremely difficult to break.

Yesterday’s publication of output data for manufacturing and industrial production was also misleading, showing that minority sectors of the economy fell by less than had been expected and also showed an improvement on last month.

Today sees the release of the November employment report. There is likely to be something of a lull before the storm effect, as the headline number of new claimants falls by around 10K. Average earnings will have risen by more than 5% but real wages, when taking into account the level of inflation, are still falling.

The Bank of England is expected to hike short-term interest rates by 50 basis points when the monetary policy committee meets on Thursday. This will be a fairly neutral result for the currency, with the results of the ECB and FOMC meetings expected to have a far greater effect on the market.

Yesterday, the pound traded in a narrow range, reaching a high of 1.2299 and closing at 1.2271.

The latest meeting of the Federal Open Market Committee, the rate setting group, made up of several Fed officials and the Presidents of Regional Federal Reserve’s get under way with the minutes of the last meeting and the recent comments of the Fed Chairman, Jerome Powell, lowering the market’s expectations for another jumbo rate hike.

The minutes saw the committee leaning towards a tapering of the size of the increment, while Powell spoke of his belief that smaller rate increases are likely ahead and could start in December. However, Powell left the markets in no doubt that should inflation begin to rise again, the FOMC stands both prepared and willing to step back into a continuation of larger rate hikes.

More recently, Powell has hinted that the target for short term interest rates has been raised to 5% and there is little chance that rates will be cut from that level in 2023.

The Fed’s base case for the economy is that in the first two quarters of 2023, it will be sluggish with growth hard to come by, but as the year progresses, there will be a pickup and GDP will average between 1.5% and 2%.

The headline employment data remains strong, although there is a degree of underlying weakness. The jobless rate, currently at 3.7% and unchanged in November compared to October, is expected to rise to 4.6% early in the New Year.

The dollar index will be driven by the FOMC’s decision. A fifty point hike is likely to be fairly neutral since the Central bank has hike rates to a level which is now restrictive, while others, in particular the ECB, still have some wary to go.

The index was marooned yesterday as traders awaited the result of this week’s three Central Bank meetings. It traded between 105.25 and 104.65, closing at 105.00

There appears to be a degree of agreement building among members of the ECB’s Governing Council ahead of this week’s interest rate decision.

While the hawks and the doves disagree about the size of hike that is necessary to keep inflation falling, the doves are close to conceding that a further hike is necessary.

The more indebted nations see their interest burden continuing to rise, which reduces their ability to support their economies, while the hawks, now led by Austria which has taken on the leadership of the frugal five since the departure from the Bundesbank of the outspoken Jens Weidmann, believe that the higher the rate of inflation the more damage is done to the underlying economy of the Eurozone.

Although the rate of inflation has topped out and begun to fall, there is very little confidence that it won’t begin to rise again as the war in Ukraine continues well into 2023.

It has already decimated production of foodstuff which has led to very little surplus in the region and should it be the same next year there will no doubt be shortages which will drive prices higher.

The can on the price of Russian oil has so far been a failure, as Vladimir Putin has said that his country will reduce production rather than sell at a price dictated by Brussels.

The overall drop in the price of fuel has been a significant factor in the fall in inflation, but should OPEC join Russia in curing production, the price could rise again rapidly.

Germany will publish its inflation report for November today. It is expected that the headline will remain unchanged at 11.3%. Such a slowdown in the rate of increase will not satisfy the German Economy Ministry, which is dedicated to bringing the rate down close to the ECB’s target.

The euro was also in the doldrums yesterday. It traded between 1.0580 and 1.0506, closing at 1.0535.

Have a great day!