17 December 2024: The MPC is expected to remain on hold as Inflation rises

Reed Employment CEO, James Reed, spoke on TV on Sunday about his concerns for the economy given the current trend in the job’s data which is due to be officially released later this morning. He believes that Rachel Reeves’ budget “spooked” business could lead to a recession, given the current lack of economic investment.

He said job vacancies, which will make up part of this morning’s report, fell by 13% month-on-month in November. He added that when he had seen similar figures in the past, they had been an indicator that recession was “around the corner”.

Last month, Reeves was accused by business chiefs of making it hard to invest in Britain, prompting her to insist there was no alternative.

The boss of the CBI warned that her measures would deter companies from expanding. Squaring up to her detractors, she told the CBI conference: “I have heard a lot of feedback about my Budget, but no alternative suggestions.”

Reed offered several alternatives, telling Laura Kuenssberg that increased taxes on fuel and gambling, for example, could be suitable alternatives.

The NIESR has said that its models predict that when the data is released in the coming days, inflation will have risen from October’s 2.3% to 2.6% in November. They also predict that it will remain unchanged in December and January.

Inflation data will be published tomorrow.

That would be unusual since inflation generally falls in January due to the effect of the sales, which retailers begin soon after Christmas.

The Bank of England’s Monetary Policy Committee meets tomorrow and Thursday and is expected to vote 8-1 in favour of leaving rates unchanged. The one dissenting voice will be that of independent member, Swati Dhingra who has been canvassing for lower interest rates since the start of the year.

Suppose there are any further votes for a cut. In that case, they may signal a dovish shift among the Committee’s members, which would open the possibility of an acceleration of rate cuts if the current level of GDP continues.

The economy has contracted by 0.1% in each of the past two months.

Retail sales data is due for publication on Friday. They are expected to have picked up last month rising by 0.4% month-on-month, although the year-on-year number is expected to be significantly below October’s figure of 2.4%, rising by just 0.1%.

Beijing has responded angrily to news that one of its nationals has been banned from visiting the UK. It is believed that Yang Teng Bo “courted” Prince Andrew to gain influence. China has denied this and called the allegations “groundless speculation.

The Prime Minister will be concerned about any retaliation since China is a powerful trading partner of the UK.

Yesterday, the pound recovered from its recent low against the dollar. It rallied to a high of 1.2699 and closed at 1.2783, as the divergence between UK and U.S. monetary policy is likely to grow this week.

The FOMC is now almost certain to cut the Fed Funds Rate at its final meeting of the year, which begins later today and concludes tomorrow. It will also be the final meeting of the “Biden Era”, a period in which inflation has risen close to double figures before falling as the Fed regained a measure of control by increasing borrowing rates.

U.S. manufacturing activity contracted further in December, with a measure of factory output dropping to the lowest level in more than 4½ years, amid worries that higher tariffs would raise prices of imported raw materials next year.

S&P Global said on Monday that its flash manufacturing PMI dropped to 48.3 this month from 49.7 in November. Economists had forecast a flash reading of 49.8. A PMI reading below 50 indicates contraction in manufacturing, which accounts for 10.3 per cent of the economy.

The gauge of production at factories declined to 46, the lowest level since May 2020, from 47.9 in November.

Euphoria over the outcome of the Presidential election boosted the services sector flash PMI to a 38-month high of 58.5 from 56.1 in November. That lifted the composite PMI Output Index, which tracks the manufacturing and services sectors, to 56.6 this month, the highest level since March 2022, from 54.9 in November.

The unexpected fall in manufacturing output and the reason for its decline will probably be the final factor in the FOMC’s decision to cut rates.

The expected cut will be the third in the current cycle that has seen rates cut by seventy-five basis points this year but may be the last until the start of the second quarter of 2025.

Data for Personal Consumption Expenditure is due for release later this week, and it is well known that Fed Chair, Jerome Powell, favours this measure of inflation since it has a broader scope than CPI and includes housing costs.

The Federal Reserve is ending 2024 in a predicament like the one they were in when the year began: Inflation’s slowdown is looking bumpy, and officials might have to rethink just how much they’re able to cut interest rates in the year ahead.

There are concerns that inflation might be resisting the Fed’s attempts to return it to its 2% target could prompt Fed Chair Jerome Powell to say officials are going to be patient and cautious about future cuts.

The dollar index had an eventful day yesterday, as it spent most of the day in negative territory. It was buoyed by the market shrugging off the manufacturing data and choosing to celebrate the higher services output.

It eventually closed at 106.85, marginally lower than its opening level.

Chancellor Olaf Scholz lost a confidence vote in the German parliament on Monday, putting the European Union’s most populous member and biggest economy on course to hold an early election in February.

Scholz won the support of 207 lawmakers in the 733-seat lower house, or Bundestag, while 394 voted against him and 116 abstained. That left him far short of the majority of 367 needed to win.

Scholz leads a minority government after his unpopular and notoriously rancorous three-party coalition collapsed on Nov. 6 when he fired his finance minister in a dispute over how to revitalize Germany’s stagnant economy. Leaders of several major parties then agreed that a parliamentary election should be held on Feb. 23, seven months earlier than originally planned.

The eurozone has, by and large, seen relatively stable governments in its largest economies over the past decade, as proportional representation has overtaken “first past the post” as a fairer means of gauging voters’ preferences. However, as the region has been destabilized, due mostly to the large influx of immigrants, primarily refugees, the left and right have become fragmented between hardliners and moderates.

This has led to Far-right governments in Italy and Hungary and the collapse of both German and French coalitions.

The European Central Bank will cut interest rates further if inflation continues to ease towards its 2% target as restricting economic growth is no longer necessary, ECB President Christine Lagarde said on Monday.

“If the incoming data continue to confirm our baseline, the direction of travel is clear, and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.

She added that keeping rates at a “sufficiently restrictive” level was no longer warranted given weak growth and moderating price pressures, a hint suggesting that the next aim is the so-called neutral level that neither restricts nor stimulates the economy.

There is opposition to allowing the base rate of interest rates to fall to a level at which it stimulates the economy. ECB Board member, Isabel Schnabel and Latvian Central Bank Governor, Martins Kazaks have both spoken recently of their opposition to significant rate cuts since they believe the current level of economic activity does not warrant such action.

According to the latest S&P study, the eurozone’s private sector is ending the year in decline, including the fastest rate of job reductions in four years. Companies are cutting their workforce due to a drop in orders and economic activity.

The eurozone PMI, published on Monday by S&P, rose to 49.5 points in December from 48.3 points in November. However, it remains below the 50-point mark that distinguishes growth from decline. The service sector saw a slight rebound, while industrial production experienced its steepest decline in a year.

The euro halted its drift lower yesterday, rising against the USD for the third consecutive session as the market comes to terms with a likely cut in the Fed Funds rate tomorrow.

Yesterday, it reached a high of 1.0524 and closed at 1.0508.

Have a great day!