17 October 2022: Hunt becomes PM via the back door

GBP – Truss has lowest all credibility

Along with the total loss of credibility, Liz Truss has also ceded authority to the new Chancellor of the Exchequer, Jeremy Hunt.

Hunt, who was defeated early in the Conservative Party Leadership campaign, chose to back Rishi Sunak in the contest rather than Truss.

Having thrown her first choice for Chancellor under the bus, the Prime Minister named the most experienced member of the Cabinet as the fourth Chancellor this year.

As he faced the press on Friday for the first time, Hunt admitted that mistakes had been made and distanced both himself and the Government from the recent mini budget.

Truss appears to have almost completely handed over the reins of Government while she tries to regroup.

Most of the weekend’s newspapers and political programmes on TV are openly questioning whether she would be able to fight off any challenge made to her authority in the coming days.

The Bank of England’s support for the country’s government bond markets expired on Friday, but it is difficult to gauge if it has been successful given the political maelstrom that has been stirred up by the prime minister.

President Biden weighed into the discussion over the weekend, commenting that he isn’t the only one who doesn’t believe in trickle-down economics, but at the end of the day, it is up to the British people to decide.

Such open criticism is rare from the President, but the reaction of the markets to the upheaval in the UK seemingly warranted such comment.

Jeremy Hunt now must deal with a sudden sixty-five-billion-pound sinkhole in the country’s balance sheet. He has already deferred the 1p cut in the lower bands of income tax and says that the situation means that some taxes may have to rise.

With Truss ruling out spending cuts and Hunt saying there will be no return to austerity, it will be interesting what rabbits we can expect to be pulled for the hat in the coming weeks.

Last week, the Pound rallied quite robustly, reaching a high of 1.1380. It was unable to maintain its relative strength and fell back to close at 1.1324.

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USD – Most economists now expect job losses by January

Last week’s publication of the minutes of the latest FOMC committee, which voted to raise short-term interest rates by seventy-five basis points, drew extraordinarily little reaction from traders.

It could be that the Fed is losing its ability to shock the markets with the scale of its actions.

It may also be true that the markets both agree with the Central Bank’s actions but see them abating in the coming months.

Several Wall Street Banks believe that the economy is about to see a significant downturn, with new job creation about to turn negative.

Bank of America published a note to investors last week in which it predicted that around 500k jobs could disappear in the first quarter alone.

Such a downturn in activity would certainly have an effect of the FOMC, but with headline inflation only falling from 8.3% to 8.2% the effect of interest rates turning restrictive needs to become a significant factor in the next couple of months,

Many commentators predict that the FOMC will hike by a further seventy-five basis points in early November, then finish the current round of hikes by hiking by fifty points in December.

That will mean that the fed funds rate will be 4.5% which should be sufficient to slow the economy considerably.

The FOMC appears to be split about how long rates will need to remain relatively high.

There is a general agreement that between 4% and 4.5% will be the top, but some, like Cleveland Fed President and CEO Loretta Mester, believe that they should remain above 4% for at least a quarter, while more dovish members like Chicago’s Charles Evans are in the same camp as previous Fed Chairmen, Ben Bernanke and Janet Yellen, who both favoured lower rates.

Last week, the Dollar Index managed to regain its losses from the previous week. It rose to a high of 113.42, closing at 113.30.

EUR – Lagarde insists that the eurozone is not in recession

Philip Lane, the ECB’s Chief Economist, commented last week that the Central Bank is being deliberately vague about its target for interest rates.

It is odd for the ECB to be vague about its target, then admit to it. It somewhat defeats the purpose and makes any efforts to persuade the market in a certain direction fairly pointless.

Lane considers the most recent comments, that rates will need to be raised, as sufficient. As it turns out, the markets agreed with him and didn’t ask for any clarification.

The German Central Bank was certainly in an unambiguous mood last week when it called for substantial rate hikes to be made by the Central Bank well into 2023.

Germany feels that, as the country with one of the highest savings rates, it has been suffering for long enough while rates have remained at historical lows to support highly indebted nations who do not practice financial discipline.

Christine Lagarde appears to have allowed events to overtake her as she still insists that the economy is not in recession, and refuses to accept that it will contract in 2023, even though average growth is expected to be only 0.5%

Soaring energy prices and a weak Euro led to a record trade deficit for the region in August. As supplies slow and prices continue to rise, it is likely that the trade deficit will worsen further.

Olli Rehn, the Head of the Bank of Finland, is both a realist and an interest rates hawk. He was quoted last week saying the Eurozone economy is weakening considerably, but he still believes that the Central Bank should continue to hike rates, as he sees inflation as a major threat to the economy.

In the current environment, the Euro is remaining relatively well-supported, On Friday, it reached a high of 0.9808 but fell back to close at 0.9722