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Morning mid-market rates – The majors
18th November: Highlights
- Hunt announces £25 billion in tax rises
- Dollar rises as market sees hawkish Fed
- ECB concerned about potential for fiscal instability
GBP – Opposition criticized budget, but cannot suggest alternatives
Twenty-five billion pounds worth of tax increases were delivered by way of the freezing of any increase in the thresholds for income tax until 2028. This means that as wages rise over the next five years, six million people will enter higher tax brackets.
The highest rate of income tax was cut from one hundred and fifty thousand pounds to a little over one hundred and twenty-five thousand. Hunt announced that the triple lock on state pensions and means tested benefits will be maintained meaning that both will rise by September’s rate of inflation next April.
While this announcement was cheered by Conservative MPs, it was little more than a confirmation of a manifesto pledge that was agreed by Boris Johnson last Spring.
The minimum wage was also increased by close to 10%
Help with energy bills will continue after next April, but the average family’s cost of energy will rise from £2,500 to £3,000 going forward.
Hunt agreed that the country faces challenges as household incomes are predicted to fall by 7% over the next eighteen months, while inflation will fall, due to the measures being taken, by next summer.
There will be increases in the budgets for schools, social care, and the NHS, but overall, the Government has increased the period by which time it will have balanced the books, from three years to five.
When Kwasi Kwarteng delivered his mini budget a few months ago, a review by the Office of Budget Responsibility was missing, but one was delivered to accompany Hunt’s measures, and it made painful reading.
Five hundred thousand jobs are expected to be lost over the next eighteen months, with the employment rate increasing from 3.6% to close to 5% as the country grapples with a severe recession. The OBR predicts that the economy will shrink by 1.3% in 2023 before beginning to recover in 2024.
However, the return to growth will be slow and uncertain.
Sterling fell following the statement, but that was more to do with a dollar recovery rather than the market’s verdict on the measures, which were deemed as being proportionate and measured. Sterling fell to a low of 1.1762 and closed at 1.1862.
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USD – Is employment still red hot? Is a recession a certainty?
It is the nature of many economists’ outlook that they confuse their own ideas with facts to provide additional insight.
Over the past couple of months, headline inflation appears to have begun to top out, although the FOMC remains hawkish in its outlook. It remains data driven, and that policy is compounded by the employment data which shows that the market is still red hot.
However, a number of well-regarded banks are issuing warnings that growth in new jobs will slowly deteriorate over the next one and a half quarters and be negative by the end of next March.
That is a hard pill for the markets to swallow, as it is something that it is difficult for some to extrapolate from official figures currently.
CFOs who are making budgeting arrangements for the next year see inflation remaining high, but their interest rate burden is continuing to rise, while a recession is predicted by something between fifty and seventy-five percent of analysts.
It is hard not to become ultra-conservative when managing a company’s expected income and expenses when your bankers are reluctant to agree to additional lending based upon spurious information.
The FOMC is expected to remain hawkish in its outlook until it sees a significant fall in inflation.
A few members of the rate setting committee have begun to forecast a fall in inflation, but they also believe that the fall is cyclical, since the fed funds rate has only just become restrictive.
That same CFO may see rates as more restrictive than his counterparts, depending on how he manages his cash flow and expense base.
Over the next few days, a series of monthly data will be published that provides details of the U.S. Housing market. In the latest CPI figures the cost of shelter, which is translated as rental expenses, began the fall, this means that core inflation is being dragged lower as the housing market reacts to higher interest rates.
The dollar staged something of a recovery following its recent falls yesterday. It reached a high of 107.64 and closed at 106.68.
EUR – Let’s all blame Putin!
The surge in costs in several members of the Eurozone and the continued instability caused by the war in Ukraine is placing financial stability at risk. As the period of fiscal imbalance continues with only a very few members having inflation close to the Union’s average, the interest rates determined by ECN risk becoming less and less important.
How can Estonia, with inflation close to twenty-five percent, hold out any hope of control in its economy when official interest rates have just risen to 2%.
The rise in inflation across the entire eurozone requires additional measures, agreed in Brussels, to bring it under control. A cap on energy costs needs to be agreed’ although the cost of basic foodstuffs has now overtaken energy as the most pressing matter.
The marginal growth of just 0.2% quarter on quarter for the eurozone as while, seen in the third quarter, places the data within the margin for error and renders it unreliable. It is likely that that is why the ECB accepts the possibly that a recession has already arrived, particularly as a contraction is all but certain for Q4.
The Banque de France, which presides over one of the lowest rates of inflation in the Eurozone, announced that it sees further interest rate increases in the coming months, with the use of jumbo increases not yet at an end. That is not the most popular current expectation with several analysts predicting that the ECB will be less hawkish at its next meeting at hike by only fifty basis points.
It is easy for Central Bank Presidents and Governors within the Eurozone to be hawkish; the only issue is how hawkish they really need to be. Currently, the Central Bank is using the equivalent of a garden hose to tackle a major blaze as far as inflation is concerned.
A substantial reduction in the rate of inflation will only be seen when Vladimir Putin withdraws his troops from Ukraine.
The Euro slipped a little yesterday as the dollar recovered some ground.
The 1.05 level now looks even further away. The single currency fell to a low of 1.0305 and closed at 1.0368.
Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.
