15 November 2023: Claimant count fell in October

Sacked former Home Secretary, Suella Braverman, launched a ferocious attack on the Prime Minister yesterday.

In a letter to Rishi Sunak which she published on social media, Braverman accused Sunak of failing on key policies and breaking pledges over immigration. She denounced Sunak for lacking the courage to make tough decisions and relying on “wishful thinking”.

The reshuffle announced by Sunak on Monday has the feel of a “last throw of the dice” from a Prime Minister whose tenure in office has been dogged by crisis upon crisis.

Wages continue to rise at a faster rate than prices according to the latest employment report which was published yesterday.

Average earnings rose by 7.7% in the three months to September and appear to be slowing more gradually than the Bank of England has predicted, having risen by 7.8% previously.

The claimant count unexpectedly fell to 17.8k from 20.4k in September, a fall which shows that interest rates are perhaps not yet at a level at which they are restricting demand sufficiently.

The Bank of England is unlikely to react to a single months’ data by tightening monetary policy based on a single result from a notoriously volatile data stream.

Today will see the release of the October inflation report, with a significant fall in the headline rate expected given the Bank of England Governor’s bullish comments about an encouraging fall in price rises.

The headline rate is predicted to fall below the 5% level, supplying some much-needed encouragement to the Prime Minister, who pledged to halve the rate this year and looks to have achieved that goal.

The combination of the employment report and the predicted fall in inflation should allow the Bank of England a little respite from the clamour following the Bank’s Chief Economist’s agreement that rates will be cut roughly in accordance with the market’s expectations.

In comments reported yesterday following the release of the employment data, Huw Pill backtracked a little, saying that inflation may remain above the Bank’s 2% target for some time to some as wage growth is falling “too slowly”.

The pound reacted to the data, as well as the fall in inflation in the U.S., by climbing to a high of 1.2506 and closing at 1.2501 as a flurry of short positions saw their stop losses triggered.

The market is still infatuated by monetary policy rather than concentrating on comparative growth rates as the major G7 Central Bank’s all believe that they have ended their cycle of rate hikes.

If today’s inflation data indicates that the Bank of England may be able to cut rates sooner rather than later, the pound could easily see its gains reversed.

Several FOMC members have been cautious in their comments recently about the rate of fall in the rate of inflation, warning that the Central Bank may not be finished with its programme of rate hikes. The Fed Chairman Jerome Powell has been at the forefront of those warnings, commenting that the current fed funds rate may not be sufficient to take price increases.

Yesterday’s publication of inflation data was inconclusive, showing that the headline rate fell to 3.2% from 3.7% in September, while the core rate with volatile items stripped out fell only marginally to 4% from 4.1% previously.

They may have finally “put to bed” the notion that rates may need to increase any further, but it saw bets of when the first cuts will take place trimmed back.

Despite the data, there were two more Central Bankers who, while acknowledging the data, were content to “pour cold water” on the idea of rate cuts.

Former St. Louis Fed President, James Bullard, still sees a risk that prices will pick up again. This echoes the view of his successor, Kathleen O’Neill Paese. The market’s view that rates have now peaked was challenged by Bullard, who suggested that the Fed’s work is far from over.

The sentiment was echoed by Richmond Fed President Thomas Barkin and Atlanta Fed President Raphael Bostic, who also feel that inflation will need more time to return to the 2% target.

Bostic believes that rates will remain on hold at the next FOMC meeting, but any thought of rate cuts should be placed firmly at the back of member’s minds.

Chinese Premier Xi Jinping arrived in the U.S. yesterday to attend the APEC summit in San Francisco. His visit contrasts markedly with the last time he visited the U.S. when he was “wined and dined” by former President Trump as his country’s economy was in the ascendancy.

Later today, he will meet President Biden, with his negotiating position in a far weaker state than it was on his last visit. Biden wants far greater cooperation between the world’s two largest economies, while also pressing for greater commitment from China to achieve new zero carbon emissions by 2050.

The dollar fell precipitously yesterday, as despite Fed warnings, the market appeared to get the message that rate hikes have ended.

The index fell to a low of 103.98, crashing through earlier support at 104.85, and closed at 104.07.

The robustness of the economy should see the dollar consolidate at lower levels, similarly to its reaction to the October employment report.

The Eurozone economy contracted in the three months to September on a quarter over quarter basis but managed to climb to 0.1% rise year-on-year, which will provide cold comfort to the ECB who still don’t see rate cuts happening until the second half of next year.

If the fourth quarter is equally weak, then the region will have fallen into a recession. There is little or no confidence that the economy is likely to pick up, with output from both the manufacturing and service sectors still falling.

One bright spot was data that showed that despite the ECB believing that rates are sufficiently restrictive on demand, unemployment fell again in October.

However, there is an issue, acknowledged by Eurostat which compiles the numbers, that the method of collecting and collating the jobs numbers is flawed.

With the ECB adamant that rate hikes are at an end and rate cuts are still some way off, the market should be confident that rate will remain unchanged for the time being, at least, but there are still nagging doubts that rates could be forced to rise should inflation begin to pick up or be cut should the recession deepen.

Despite this uncertainty, the ECB President is adamant that monetary policy will be unchanged.

The statistics say that unemployment fell by 0.3% in the third quarter, contributing to a 1.4% fall year-on-year.

Growth seen in France, Spain and Belgium did not offset a contraction of 0.1% in Germany, while most other states’ economies flatlined.

ECB Vice-President Luis de Guindos maintains that the Bank will continue to follow a data dependent approach. This throws up two questions; first is the ECB sufficiently nimble to react should inflation begin to pick up again or if the coming recession is deeper than expected, and second, how reliable is the data.

Such a statement is also dependent upon the Governing Council being both willing and able to go back on its determination to leave rates unchanged.

The euro had its most productive day for more than three months yesterday, rising to a high of 1.0887 and closing at 1.0882. Although the 1.10 level may appear to be within striking distance, there would need to be a sea change in market sentiment for any challenge to be tried, let alone be successful.

Have a great day!