16 June 2023: Post-pandemic hospitality recovery delivers a huge boost to services output

The enquiry into the Partygate scandal delivered its findings yesterday, and it spelt the end of Boris Johnson’s career in politics.

He was found guilty of misleading Parliament on multiple occasions while all the time pleading his innocence. The enquiry recommended that if Johnson remains an MP, he should be suspended for 90 days, but if he continues with his resignation, he should not be afforded the privilege, afforded to ex-MPs of unfettered access.

MPs will now debate the report since its findings are only recommendations, but already there are plans to pass an even stricter punishment.

Johnson and his supporters still maintain that the inquiry is little more than a witch-hunt, while veiled threats have been made against those from his own Party who support a total ban.

The fall from grace of the former Prime Minister who was seen by many as solely responsible for the eighty-plus seat majority the Conservatives gained in the 2019 General Election has been spectacular, even by the standards of Westminster.

Although he has vowed to return, the chances of his ever being trusted again with high office are slim to non-existent.

The Conservative Party will do well not to implode into an all-out civil war, while Cabinet Ministers are calling for unity as the Party tries to put the entire fiasco behind it.

The hospitality sector which came close to being decimated during the Covid lockdowns has bounced back with a startling degree of resilience.

The Sector is one of the major contributors to services output which now make up 80% of the country’s economic output. It is estimated that by 2027, the sector could contribute twenty-nine billion pounds to the economy and have created a further half-a-million new jobs.

The Bank of England will be the final Central Bank to hold a rate-setting meeting following the four that have already been held this week and last.

While the ECB and Bank of Canada hiked rates, and FOMC and Bank of Japan remained on hold, the advance guidance from the Bank’s Governor is that a further twenty-five basis point hike will be agreed, this move would meet with the approval of the Chancellor of the Exchequer who commented earlier this week, that the level of inflation is such that a further hike is rendered inevitable.

The prospect of another rate hike which will add to the divergence of rates between the UK and U.S. saw the pound add to the gains it made on Wednesday. It rose to a high of 1.2785 yesterday and closed at 1.2783.

Whether it was intentional or not, Fed Chairman, Jerome Powell, has managed to wrong-foot the markets while providing advance guidance that can only be considered accurate.

When the May employment report was published, which showed the addition of 339k new jobs, the highest number recorded since the stunning January report, the market considered it to be unlikely that the Central Bank would carry out its plan to pause its cycle of rate hikes.

When two senior members of the FOMC were “sent out” to back up Powell’s comments that a pause was still being seriously considered it is now clear that Powell and his colleagues had advance warning that headline inflation had fallen considerably last month.

So it proved, allowing the FOMC to carry out its wish to pause the cycle of rate hikes in order to give the economy a chance to “catch up” with one of the longest runs of rate hikes in history.

Where Powell has slightly confused the market in his view of what is going to take place at the July meeting.

He has “hinted” in the strongest terms he is able, that rate hikes will resume, but if the results of the June jobs and inflation reports are the same, or at least similar, where will be the justification?

There are those who believe that the signs of the economy beginning to run out of steam are more than enough justification for an end to the cycle of hikes entirely, but that is unlikely to happen.

The Fed would be heavily criticized if it hiked in July only to pause again in September, which given the expected period between meetings due to the vacation season, is eminently possible.

For now, there will be several speeches made by FOMC members in the coming days; indeed, James Bullard, the President of the St. Louis Fed will be the “first cab off the rank” today.

A survey of corporate CFOs conducted by accountancy firm Deloitte this week showed that there is a greater concentration taking place in cutting costs currently than in investment in the business.

The dollar index has lost significant ground since the FOMC announcement on Wednesday evening. The fall may now be considered a change of trend with its medium-term target at the 100 level.

Yesterday the index fell to a low of 102.09, and it closed at 102.14.

The ECB, or at least its President, stayed true to its word, which means there is little reason to doubt that a further hike will take place next month.

In her press conference yesterday following the announcement of a further twenty-five basis point hike in short-term interest rates, Christine Lagarde commented that a further hike next month is “extremely likely.”

While that level of advanced guidance is welcome, Lagarde is in danger of “painting herself into a corner.”

It is probable that the comments from Italian and Spanish Central Bankers, among others, that the “end is in sight” may become a little more strident in the run-up to the July meeting, calling for an end to hikes at that meeting.

Given her constant calls for further hikes and the lack of any consideration of a pause or halt during her speech yesterday, the market clearly considers that there is a better than even chance that there will be a hike announced at the meeting that is due to be held on September 14th.

There is “plenty of water to flow under the bridge” between now and then, and a strikingly more dovish speech following the July meeting cannot yet be ruled out, although it would draw criticism from market practitioners.

Since a July hike is now “baked in” the newly formed divergence in interest rates between the U.S. and Eurozone is set to continue.

Yesterday, the euro climbed to a high of 1.0952 and closed at 1.0942. A further attempt at the rarefied atmosphere that is to be found above the 1.10 level is now looking certain.

The view of several analytics firms like ZEW and IFO is that the current recession is more than technical. Economic activity and output continue to contract with little hope of an improvement, particularly if monetary is to continue to be tightened.

With consumer confidence and services output data due for release next week, there is nothing expected that can be used by the ECB to change its mind.

There is no doubt that the hawks remain in charge of monetary policy, and they are still determined to fight the threat of continued inflation until it returns to the ECB’s target.

Have a great day!