28 March 2024: Risks from Global Markets are growing

Following Catherine Mann’s comments this week in which she threw cold water on the idea that a cut in interest rates is imminent and questioned how many cuts in interest rates the MPC will make this year, several members of the financial media have questioned the role played by independent members of the Committee.

There is already pressure for the makeup of the committee to be changed to allow the independent members’ vote to be more meaningful and avoid the “group speak” which means that effectively Andrew Bailey and his colleagues and the Bank of England control the Monetary Policy and are only required to pay “lip-service” to the opinions of the “independents”.

The Committee comprises four permanent members and four independent members, with Bailey holding the casting vote. Since the financial crisis of 2012, every committee member has voted identically, which renders the external members’ votes effectively pointless.

While Mann, Megan Greene, Swati Dhingra, and Jonathan Haskell make several valid arguments for policy changes, they are doing little more than any other interested party.

It has been suggested that a member of the Treasury team be elected to the MPC to express the Government’s view. While that may unbalance the current voting structure, the Bank’s independence would be preserved.

The Bank’s Financial Policy Committee, which is made up of a far wider range of members, commented yesterday on its fears that risks to financial stability have increased substantially since December.

These risks have mostly manifested themselves as pressures on the cost of living, although consumers have remained resilient.

There may be an increase in volatility today in advance of the Easter Holiday weekend, which coincides with the month’s end. The final cut of the Q4 GDP data will be published later this morning.

Although there is little chance of the 0.2% fall in growth that has already been released being changed, there is an outside possibility that since the variance is less than the margin for error, the government may receive the good news that the economy did not dip into recession late last year.

Sterling is still in reactive mode. Currently well below its weighted moving average, which should provide resistance to any rally. Yesterday it climbed to a high of 1.2641 and closed at that level.

The Fed appears to have adopted a laissez-faire attitude to monetary policy, which may provide some comfort to the market as it suggests a feeling of “crisis, what crisis”, but there are those who view this as the FOMC “burying its collective head in the sand”.

The attitude of Jerome Powell and his colleagues is that the fall in inflation, while not maybe as fast as they would like, shows that it is “moving in the right direction”, while job creation is beginning to slow. Their view is that beginning to cut rates now may well create a pause in the fall in inflation since it would increase demand.

This week’s major accident in the port of Baltimore may have a similar, and possibly just as devastating, effect on supply chains as the Pandemic, although it is unlikely to be as widely felt.

Import and distribution channels on the eastern seaboard will be severely affected, and it remains to be seen its effect on the wider economy.

The FOMC will rightly be cautious about any change in monetary policy until the problem fully plays out. It is a major tragedy in human terms, but there will be uncertainty until its full effect is known and alternative solutions to the issue become known.

A more positive “spin” in the events of the past few days was provided by the chief economist of Moody’s Analytics, Mark Zandi, who commented that the bridge collapse will not meaningfully impact the U.S. economy, nor will it push Baltimore into a recession, he added, though he said the incident could still cause significant economic ramifications.

The financial market is likely to remain cautious until the full extent of the problem is known, and the upcoming holiday will be seen as a benefit. Overall, traders are unlikely to consider any possible cut until the damage to supply chains can be better estimated. This should provide a degree of support for the dollar.

Yesterday, the dollar index traded in a narrow range, with traders closing short-term positions as the market began to lose liquidity.

It traded between 104.45 and 104.21 and closed at 104.28.

The Executive Board of the ECB is beginning to resemble its Governing Council as it added more members. The latest addition, Piero Cipollone, an Italian who until recently was the Deputy Governor of the Banca d’Italia, may add a more balanced outlook that has, until now, been decidedly hawkish.

Cipollone spoke yesterday of his view that Eurozone wage growth seemed to have peaked and if it kept slowing in line with its forecasts, “we should be ready to swiftly dial back our restrictive monetary policy stance”.

His view, which is “decidedly Italian” comes as the ECB is said to be considering its first rate cut following the end of its cycle of rate hikes which ended last September.

It is unclear what influence the Executive Board has in practice, since its deliberations appear to duplicate those of the Governing Council, just with different personnel. It may well be simply another example of the European Union’s financial profligacy.

It does appear that the fall in output, demand, and activity is slowing. The level of interest rates has now fed through to the entire economy, and while the chances of a wholesale collapse appear to have lessened, the need for a rate cut is just as urgent, perhaps even more so.

Data released yesterday saw the unemployment rate remain at 5.9% which is close to its historical low, while the Italian economy continues to improve. Rome reported that business and consumer confidence rose by more than expected, while producer prices predicted a continued fall in the headline rate of inflation.

The ECB has pinned all its hopes on a fall in the rate of wage growth to allow it to begin to cut rates. The data for the first quarter is expected to be available in time for the May meeting of the Governing Council, while advance forecasts predict that wage increases will remain above the rate of inflation. That means that the decision will not be as “cut and dried” as has been mooted.

The Euro is hovering just above its medium-term level of support at 1.0800. It is unlikely that the market will have sufficient momentum to see that level broken today, but when it does break, the single currency may see an extended period of weakness.

Yesterday, it continued its run of lower closes. It fell to a low of 1.0810 and closed at 1.0827.

Have a great day!