23 March 2023: Inflation remains in double figures

The Prime Minister, Rishi Sunak, received a massive vote of confidence in his Brexit agreement, the so-called Windsor Framework, yesterday. Despite threats of wholesale rebellion from Brexiteers from his own Party and the Ulster Unionists voting against, in the end only 27 MPs declined to support the Bill.

Three former Prime Ministers, Liz Truss, Iain Duncan-Smith and Boris Johnson voted against, but Johnson saw his credibility take the first of two significant hits as he appeared before a Select Committee later in the afternoon, which was convened to decide whether he had deliberately lied to Parliament over the Partygate scandal.

Clearly under severe pressure, he argued openly with members of the committee about his role in attending a number of get-togethers held in Downing Street when the rest of the country was in lockdown.

Proving intent will be a difficult task for the Privileges Committee, but should they find against the Former Prime Minister, he could find himself in the political wilderness with all hope of a summer comeback in tatters.

The day was far brighter for the current Prime Minister as his work with the European Commission to find a definitive agreement to finally put Brexit to bed was validated.

Inflation date for February was published, and it showed that the headline rose last month from 10.1% in January to 10.4%. This will place additional pressure on the Bank of England’s Monetary Policy Committee, which meets later this morning to decide and is expected to hike interest rates by a further twenty-five basis points, as the drip feed of rate increases that has taken place since December 2021 continues.

The meeting will take place against a background of continued turmoil in the financial markets following the failure of two banks in the U.S. and the high-profile case of a Swiss financial giant having to be rescued by a combination of the Swiss National Bank and its main competitor, Union Bank of Switzerland.

It is likely that in his press conference following the MPC meeting, the Bank’s Governor will reference the current turmoil, but while he is expected to voice the Central Bank’s preparedness to pump liquidity into the market at the first sign of contagion, he will want to continue what is becoming a long-drawn-out fight to bring inflation down.

The pound rallied strongly yesterday, making a high of 1.2335 against the dollar. It was hard to decide whether dovish comments from the FOMC Chairman following its own twenty-five point hike, or the anticipation of a further hike from the MPC was the reason for its rise. In any event, Sterling drifted down from its high and closed the day at 1.2265.

In his press conference following the FOMC meeting which concluded yesterday, Jerome Powell managed to combine three slightly opposing statements regarding the interest rate hike.

First, he announced that short-term interest rates would rise by twenty-five basis points, he then commented that the end of the programme of hikes may be coming to an end, and he concluded by confirming the Central Bank’s determination to win the battle to bring inflation down.

The market will have to wait for the publication of the minutes of the meeting in three weeks time to ascertain the true inference of his statement.

By the time the minutes are published, it is hoped that the current turmoil brought about by fears of banks having liquidity issues over the further withdrawals of deposits by concerned customers will be at an end.

While Powell made every effort to calm market fears, his colleague at the Treasury, Janet Yellen, stoked concerns somewhat with seemingly conflicting remarks.

Yellen commented that the Administration is not considering insuring all uninsured deposits, a move that analysts believe would go a long way to relieving the current crisis.

Of course. The Treasury Secretary’s comments could also be construed as her attempt to calm market fears over the severity of the crisis since it has to be believed that she has her finger on the pulse, and she doesn’t expect any major liquidity issues at regional banks.

The market took its cue from both the dovish hike in rates and Yellen’s comments. The dollar continued its recent retreat, while stocks in financial institutions took another hit, falling by close to seven and a half percent.

In his press conference following the February FOMC meeting, Powell commented that a fifty point hike had been considered, while he illustrated how much the situation has changed by saying that the committee had considered a pause yesterday. This led to the rise in rates being labelled a dovish hike.

With the Fed and ECB having hiked rates already and the BoE expected to follow suit today, it is likely that unless there is an escalation in the liquidity issues facing banks in the U.S. Eurozone and the UK, rate rise will continue well into the second quarter of the year.

As intimated above, the dollar index fell to a low of 102.05 in the wake of Powell’s comments, threatening minor support at 102.05. It ultimately recovered to close at 102.56, although it has opened close to its lows again in Asian trade.

Christine Lagarde, abandoned any doubts that may have been in the mind of the financial community by explaining her views on inflation in the simplest terms possible.

She simply informed the market that inflation is too high. While this won’t have come as news to any analyst or commentator listening, it underlined the fact that despite the turmoil that is happening in the market currently, the European Central bank will remain on the front foot in its efforts to reduce prices.

Lagarde believes that inflation has passed its peak now, but having risen marginally in February on the back of higher prices for basic foodstuffs, there is clearly more work to be done.

Bundesbank President Joachim Nagel backed up Lagarde’s view, commenting that rates in the Eurozone are still accommodative, and the Governing Council has no reason to pause yet as all its good work over the past nine months will have been pointless.

Nagel made no mention of the turmoil in financial markets, clearly believing that German Banks, and those in the wider region, are able to withstand any short term liquidity issues with the ECB standing ready to pump funds into the market.

He cited the agreement that is already in place for the Fed to supply dollar liquidity if that is deemed necessary.

With the Fed making a dovish hike yesterday and discussing the possibility of a pause in its programme of rate hikes while the ECB remains the most hawkish of all G7 Central Banks, the foundations are in place for the euro to make a fresh challenge on the 1.10 level versus the dollar.

The comments from Central Bankers and Government officials over the past week have been highly supportive for the single currency, which may now be driven higher in its own right.

Yesterday, the euro rose to its highest level in a month against the dollar, reaching 1.0912. It saw a bout of profit taking on short term positions, but still managed to close at 1.0855.

Have a great day!