10 November 2022: BoE will turn more dovish next year

GBP – Q3 GDP likely to be a prelude to recession

The Bank of England is expected to turn more dovish in its attempts to bring inflation under control in the New Year.

Various think tanks have reviewed the Central Bank’s Monetary Policy Committee member’s voting performance at meetings held since rates began to be raised last December. The conclusion is that they are reluctant to hike rates and will either vote for smaller hikes or abandon the policy entirely.

Bailey’s comments at news conferences following meetings have been almost apologetic. Technocrats working for the Bank of England have been tasked with finding when inflation will begin to fall naturally if interest rate hikes are tapered or ended altogether.

Many feel the rise in inflation is due to circumstances beyond the Bank of England’s control, and a tightening of fiscal policy will have a far greater effect.

A lot will depend on next week’s budget delivered by Chancellor Jeremy Hunt as it is generally accepted that the country will start a long and painful recession this quarter.

Hunt’s primary task will be to bring forward plans to repair the £60 billion hole in the country’s finances.

It is likely that he will introduce spending cuts and tax increases, a long way from Kwarteng’s earlier budget, which proposed that cuts in taxation would be used to drive trickle-down economics.

It may not be pretty over the next few months, but the Government appears to be working hard to repair the damage done to market confidence over the past few months.

The Pound fell yesterday as it did not find the momentum to test resistance at 1.1615. It reached a low of 1.1333 and closed at 1.1348.

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USD – Following the economy, not Powell, pays dividends

In the end, the country’s verdict on the first half of Joe Biden’s first term in office was not nearly as bad as had been predicted.

It was feared that the Democrat-controlled House of Representatives would be swept away by a red wave as voters cast their ballots.

While there is still a mountain of work to be done, and the Democrats are likely to face a Republican Senate, which makes it difficult, but not impossible, to pass its legislative programme, things could have been far worse. The outcome of the vote for the Lower House is still in the balance. The number of seats gained by each party is tied at 48 each.

Donald Trump is expected to announce his intention to run in the 2024 Presidential Election. He appeared apoplectic following the result where his sponsored candidates failed to be elected. In fact, the biggest win for the Republican Party was the re-election of Florida Governor Ron DeSantis, who is believed to be about to launch a bid for the Republican nomination for the Presidency.

On hearing news of DeSantis’ victory, Trump commented that he was concerned about his running for President and the potential damage it could bring to the party. He followed that up with veiled threats to release damaging information he had about the Florida Governor.

The President of the Richmond Fed, Thomas Barkin spoke of his concerns over the FOMC’s continued interest rate increases and their effect on an economy that is already experiencing tight labour markets and ongoing supply shortages.

He believes that the worst of the surge in inflation may have passed, and the Fed may have to consider tapering its policy of rate hikes.

Data for wholesale inventories was released yesterday and showed a continuing fall from 0.8% to 0.6%. The relatively low reading points to continued economic growth, which flies in the face of predictions of a slowdown.

The Dollar Index rallied away from the support at 109.60 as traders were buoyed by the election results. It rose to a high of 110.64 and closed at 110.43.

EUR – Ecofin has little idea how to support the ECB

The latest meeting of the Ecofin group of Eurozone Finance Ministers has been unable to find new ways to support the ECB in its efforts to fight off rising inflation as the economy comes ever closer to a severe and lasting recession.

Finance Ministers find themselves unable to break away from the domestic issues that plague them. It is inevitable that once the economy is on a more comfortable path, it must undertake structural reform.

Monetary union was rushed when it took place, with practicality prioritising functionality. Many believed that the member nation’s commitment to the project would ensure its success.

Over time, several weaker economies have been allowed to join. Their presence has seen them adopt a degree of financial discipline but has failed to cure the issues that remain in their attitude to fiscal propriety.

Germany believes that every nation should follow its financial lead, but Governments have been elected based on promises of good times to come without any reference to the work that needs to be done.

The ECB will likely continue its hawkish attitude to monetary policy until at least the end of the first half of next year. While it may lower the size of its rate hikes, there will also be a continuation of the reduction in the size of the Central Bank’s balance sheet.

As its balance sheet shrinks, liquidity will be withdrawn from the market, affecting banks’ ability to lend.

Eurozone’s banks are already adding to reserves in preparation for the expected slowdown, which will inevitably increase bad loans.

The banks’ balance sheets have not been sufficiently shored up following the earlier crises, despite Brussels allowing them to extend the period over which debts can be written off. That time has been squandered as it was spent trying to explore new markets.

In the end, banks have had to withdraw behind their borders to protect their core businesses.

The Euro remained in the doldrums yesterday, as it is still unable to challenge the 1.01 level versus the Dollar. It fell to a low of 0.9992 but rallied to close at 1.0010.