14 October 2024: Lower rates have spurred a recovery in retail sales

The Government’s Investment Summit which begins today has been saved at the eleventh hour following a threatened boycott by Dubai following the Transport Secretary’s comments about DP World subsidiary P&O Ferries.

There has been some frantic behind-the-scenes diplomacy from Sir Keir Starmer who both apologized to the Emiratis and publicly admonished Louise Haigh who had earlier described P&O as a “rogue operator” in an interview with ITV on Wednesday, after it sacked nearly 800 seafarers in 2022 and replaced them with cheaper workers.

Asked if she used the ferry service, Haigh responded, “I have been boycotting P&O for two and a half years and I recommend that the British public do the same.

Starmer distanced himself from Haigh’s comments, telling reporters that this was not the view of the Government.

The threat that DP would not only boycott the Summit but place its planned one-billion-pound investment in a complete overhaul of the London Gateway Container Terminal.

Now that threat has been averted, The Government can use the Summit to showcase Britain as a place that is “open for business”, bringing together hundreds of global investors.

This is also an important week for economic data with the September employment report due for publication tomorrow and the figures for inflation released on Wednesday.

Headline inflation is predicted to fall below 2% for the first time in three years.

Official figures are predicted to show a decline in consumer price inflation (CPI) from 2.2% in August to between 1.8% and 1.9% in September, marking the first time inflation has dipped below the Bank of England’s 2% target since 2021.

The expected drop in inflation results from falling global energy prices, the resolution of supply chain issues following the pandemic, and the impact of aggressive interest rate hikes. Annual inflation has steadily declined since peaking at 11.1% in October 2022.

Preparations for the Budget are still creating a stir in both Westminster and the City. Rachel Reeves will have seen the numbers for those who enjoy non-dom tax status and who are leaving, or plan to leave, the UK before the end of the year.

A newly formed group, Foreign Investors for Britain, is set to meet with government officials this week to urge a reconsideration of Reeves’s proposed overhaul of the non-dom tax regime, which could include levying inheritance tax on foreign assets.

The pound has shown some resilience in the face of returning dollar strength. Last week, it fell to a low of 1.3022 but rallied to end the week at 1.3067.

The market is still unsure what will happen at the next meeting of the MPC, with members seemingly unable to agree on a rate cut in November or put rates on hold for another month. The inflation data is expected to encourage the doves, with their most dovish member Swati Dhingra scheduled to make a speech later this morning.

It is a possibility that the Fed Chair, Jerome Powell, will declare victory over inflation this week despite slightly disappointing data for consumer prices published last week.

With the latest employment report showing strong job growth, he may feel that the time is right to declare a soft landing for the economy.

Chicago Federal Reserve Bank Austan Goolsbee on Thursday said he sees a series of interest-rate cuts over the next year to year and a half, noting that inflation is now near the Fed’s 2% goal and the economy is about at full employment, and the Fed’s goal is to freeze those conditions in place.

“Over a 12–18-month period, I think we are going to gradually, whatever word you want to use, move to a steady state” on the policy rate, Goolsbee said in a CNBC interview.

He noted that there was broad agreement among policymakers that rates need to drop a “fair amount” over that period. Near-term, he said, there are likely to be more meetings where policy decisions will be close calls, as last month was, as central bankers sift through sometimes conflicting data.

The FOMC rarely has dissenting opinions when it comes to rate cuts, but Fed Governor Michelle Bowman broke a precedent at the most recent FOMC meeting by voting against the “jumbo” fifty basis point rate cut.

She explained her motives in a speech last week.

“The persistently high core inflation largely reflects pressures on housing prices, perhaps due in part to low inventories of affordable housing. The progress in lowering inflation since April is a welcome development, but core inflation is still uncomfortably above the committee’s 2 per cent goal,”

“I was concerned that reducing the target range for the federal funds rate by a half percentage point could be interpreted as a signal that the committee sees some fragility or greater downside risks to the economy,” Bowman said.

But with no obvious signs of weakening or fragility, Bowman believes that starting the rate-cutting cycle with a quarter percentage point move would have better reinforced the strength in economic conditions.

There are several FOMC members due to speak this week including Waller, Kashkari and Kugler.

Industrial Production and retail sales figures are due to be published on Thursday, with building permits and housing starts due on Friday.

The publication of the minutes of the latest FMC meeting added further weight to the belief that in times when the Fed is planning to adjust its monetary policy, minutes that are three weeks old have often been usurped by more recent comments by its members.

The Dollar index continued its recent rally last week. Since reaching a low of 100.16 on September 27th, the index has closed higher on nine of eleven sessions.

There is some congestion on charts around 103.20 which may provoke a mild correction, although the trend for the dollar is certainly higher.

Last week it rallied to a high of 103.18 and closed at 102.92.

ECB President Christine Lagarde confirmed what the market has been feeling for the past couple of weeks on Friday when she spoke of her belief that the Governing Council is now showing greater confidence over inflation.

Several of the more hawkish members of the rate-setting committee, including Martins Kazaks and Isabel Schnabel have changed their view of the risks in the Eurozone economy from fighting inflation to promoting growth.

Fighting inflation problems will remain an issue for the ECB, but this time it will be falling inflation it will need to try to control.

Central banks typically use interest rate cuts to stimulate the economy during periods of low inflation or deflation. However, if interest rates are already low, which they will be if the ECB continues its programme of rate cuts, there may be limited room for further cuts, reducing the effectiveness of monetary policy.

A prolonged period of falling inflation can lead to economic stagnation, where growth slows down significantly. This can create a vicious cycle of reduced spending, lower production, and rising unemployment.

The meeting of the ECB’s Governing Council which takes place this week wasn’t expected to continue the cycle of rate cuts, but now such action is considered likely.

Inflation has fallen far faster than ECB economists, including its Chief Economist, Philip Lane had expected, even though market commentators and observers had said that the official expectation for inflation to not be sustainably below its 2% target until the third or fourth quarter of next year were unnecessarily pessimistic.

Now with inflation at a three-year low, the ECB is performing a significant pivot and looking at ways to boost the economy.

Any action that is adopted by the ECB will be welcomed in a few places more than Germany.

No industry is more important to the German economy than cars. And no carmaker is more important than Volkswagen.

Now, as the 87-year-old carmaker is floating the prospect of job cuts and factory closures as it seeks to return to profitability, Volkswagen’s struggles are being reflected in the overall troubles facing the country, which is grappling with a shrinking industrial sector and an economy that is forecast to contract for a second consecutive year.

“The fact that Volkswagen, Germany’s largest car manufacturer, largest industrial employer and the world’s No. 2 behind Japanese carmaker Toyota, is no longer ruling out plant closures and compulsory redundancies shows how deep the German industry is now in crisis, according to economists at several think tanks in Germany and other European capitals.

The Euro has begun a slide back towards the level it was at a year ago, as rate cuts are now considered to be more vital to the Eurozone economy than they are in the U.S.

The common currency fell to a low of 1.0900 last week and closed at 1.0937.

Have a great day!