15 January 2025: Tories insist the crisis was “made in Downing Street”

Rachel Reeves was defiant in the House of Commons as the opposition laid the blame for the current turmoil in financial markets squarely at her door.

Reeves blamed global volatility for the rise in the UK’s long-term borrowing rate as she fended off calls for her resignation.

Reeves is facing one of the most difficult periods in her six months in office, with investors dumping UK bonds and the pound amid concerns about low growth in Britain and abroad. On Tuesday, the government sold £1bn worth of new bonds on the most expensive terms since 2004.

Reeves told the Commons that the recent moves in UK bond markets tracked those in other countries. Addressing demands from her Conservative counterpart, Mel Stride, to step down, Reeves replied: “The Shadow Chancellor is simply not serious.”

Senior politicians are always on shaky ground when their bosses publicly declare their “full confidence” in them. Chancellor Reeves is currently in such a position.

On Monday, Sir Keir Starmer initially refused to say that Ms Reeves would stay in the post for this parliament after the cost of UK borrowing hit a near 30-year high and the pound slumped to a 14-month low against the dollar.

Instead, the Prime Minister simply insisted she was doing a “fantastic job” and that he had “full confidence” in her. A few hours later, the PM’s official spokesperson confirmed she would be Chancellor until 2029.

Should Starmer decide that Reeve’s role has become untenable, he will likely turn to Pat McFadden as a solid, reliable pair of hands. MacFadden earned the Prime Minister’s trust when he masterminded the Party’s triumphant General Election campaign, although, in truth, the victory was handed to him on a silver platter.

The December inflation date is due for release later this morning. Headline prices are expected to have risen from 2.6% to 2.7%, while the core rate with volatile items like food and energy stripped out fell to 3.4% from 3.5%.

Both politicians and the Bank of England were congratulating themselves late last year on the fall in inflation, but the rate of deflation has ground to a halt, although Andrew Bailey has often struck a cautious tone when discussing further rate cuts.

There is less pressure on G7 Central Banks as the drive for lower rates has abated. In the U.S., there are concerns about the effect of incoming President Donald Trump’s economic agenda, while in the Eurozone, despite calls for rate cuts to boost economic activity, the ECB is taking a more conservative attitude to looser monetary policy.

The UK has continued to have one of the highest inflation rates in the G7, mainly driven by rising energy prices and ongoing supply chain issues that continue to be attributed to Brexit. Increases to the National Living Wage and employer national insurance contributions will, we expect, push inflation higher over 2025. Higher energy prices won’t help either, nor will higher food prices, which are starting to appear.

The pound steadied yesterday as the dollar paused for breath ahead of next week’s Presidential inauguration.

It rallied to a high of 1.2250 and closed at 1.2205. Versus the Euro closed right on its medium-term level of support at 1.1847.

Since the turn of the year, there have been notably few comments on monetary policy from members of the FOMC. January brings the “ringing of the changes”, with the make-up of the Committee changing.

The market is keen to find out if the changes will bring a more hawkish tone to discussions, although it is likely that new or returning members will use the adage that the data will drive them.

If that turns out to be true, the market can expect fewer rate cuts in the first half of 2025 as the effect of the ascension of Donald Trump to the White House leads the Fed to act cautiously. Trump has nominated several Cabinet members with little experience of holding high office but with fierce loyalty. Witness the furore surrounding Trump’s Defence Secretary nomination yesterday.

Pete Hegseth was until recently a presenter on Fox News. His confirmation hearing yesterday was a fiery affair, with Hegseth clashing with the Senate Committee as protesters attempted to disrupt proceedings.

Hegseth repeatedly deflected the various misconduct allegations and focused on his military experience in the Army National Guard as senators decide whether the combat veteran and former TV news show host is fit to lead the U.S. military.

Despite the criticisms levelled at him over his personal life which included, racism, sexism, and financial impropriety, it is now likely that he will be confirmed to assume his role next week.

Data for producer prices was published yesterday ahead of the consumer price numbers which are due later today.

“Factory gate” prices grew by 3.3% in December, up from 3% in November.

The headline rate of consumer inflation is expected to have risen to 2.9% from 2.7% previously. This will likely keep the dollar supported, as the Fed is seen as unlikely to cut rates in an environment where inflation is on the rise.

It is too early to gauge the economic effect of the tragic wildfires that have been raging for more than a week in California yet. They are likely to put modest pressure on the U.S. national economy in the near term, but are unlikely to derail strong forward momentum, economists say.

Forecasters reckon the fires’ destruction of property and job market disruptions could put upward pressure on inflation as they also slow growth and put a modest brake on hiring, although not at a large enough level to change the outlook fundamentally.

The rebuilding programme that has already been announced will drive the California economy forward, but its effect on the overall U.S. economy will be marginal at best.

The dollar index ran into some light selling pressure as traders took advantage of a lull in buying pressures to take profit on long-established positions.

The Greenback fell to a low of 109.18 and closed at that level.

The European Union sanctions on Russia as a consequence of its invasion of Ukraine have driven the cost of gas imports higher in the region, driving inflation higher. Sanctions put in place by the outgoing Biden administration have driven the oil price to higher levels, too.

Natural gas prices have doubled since October 2024 from under $2 per MMBtu to just under $4 per MMBtu as of Tuesday in the Asian session. According to the US Energy Information Administration, natural gas futures for delivery in the Netherlands increased to a weekly average of $14.55 per MMBtu by the week ending 8 January, 27% higher than the same period last year.

The elevated energy prices pose significant risks to the eurozone’s economy, particularly affecting manufacturing activities as the European nations grapple with political uncertainties, one week ahead of Donald Trump’s inauguration.

Surging energy prices could complicate the inflation outlook in the Euro area, echoing the crisis experienced when Russia launched aggression against Ukraine in 2022. The European Central Bank is likely to face challenges in balancing economic growth with mounting inflationary pressures this year.

The ECB has expanded its social media presence by joining Bluesky, a rival to Elon Musk’s X.

A spokesperson stated that the move is part of a broader strategy to diversify communication channels following the adoption of other platforms last year. The ECB launched its Bluesky account by sharing an interview with chief economist Philip Lane while confirming it will continue using X.

Musk, who has used X to promote political figures, recently endorsed Germany’s far-right Alternative for Germany party and has also backed Italy’s Prime Minister Giorgia Meloni. His influence has raised concerns among EU regulators, particularly over misinformation and political bias. Critics have also highlighted his opposition to diversity and climate policies, which contrasts with the ECB’s commitment to gender equality and environmental sustainability under President Christine Lagarde.

The newfound resilience of the “Club Med” nations is allowing them to show the more “staid” nations of the north how to survive economic adversity.

Businesses in Greece, Spain, Italy, and Portugal are witnessing levels of productivity and growth that are the envy of Germany and France.

Ireland, which is constantly considered a “European outlier” with no land border to the mainland, has staged a remarkable recovery.

In a significant reversal of fortune, the “periphery” is now driving any growth that is seen in the region.

Meanwhile, Germany’s economy has seen virtually no growth to speak of in the last four years as it has dealt with political disharmony and an economy which is falling further and further behind the times.

It wasn’t long ago that the peripheral nations were being threatened with expulsion, given their seemingly incurable appetite for budget deficits and high levels of debt. Now, Greece in particular has got its house in order and is looking forward with a high degree of confidence.

The euro took a breather yesterday as the dollar trod water. It climbed to a high of 1.0308 and closed at 1.0301 as it broke a run of five consecutive lower closes.

Have a great day!