19 January 2024: The market expresses surprise at the rise in inflation

The Chancellor of the Exchequer, visiting the World Economic Forum in Davos, spoke of his belief that the UK is in the perfect position to become a “magnet for investment” in the tech sector. He outlined his optimism for the country’s growth and productivity and spoke of the Government’s belief that there should be a light touch in the regulation of AI.

Jeremy Hunt made “all the right noises” that would be expected from a finance minister in a Government that is facing a General Election later this year.

Later, in an interview with financial journalists, Hunt strongly hinted that there would be further tax cuts, both in his Spring Budget that will be presented to Parliament in early March, and post-election, should his Party be returned to Government.

Hunt wants the country to be able to compete with countries that currently have greater potential for growth than is seen here. In both the U.S. and Asia, personal taxation is lower than in the UK, and that is one reason for their greater productivity.

The Pandemic has sped up the natural development of the tech sector and following Brexit, the UK is now perfectly positioned to be at the forefront of ground-breaking developments.

The CEO of Barclays Bank, C.S. Venkatakrishnan, also visiting Davos, spoke of his optimism for the UK economy. His bank hasn’t seen the level of bankruptcies and liquidations that he would normally associate with an economy that is on the brink of a recession. In contrast, both business and personal lending levels continue to grow.

UK banks have faced criticism about the level of security they expect to receive when lending to small and medium enterprises, and that is said to be restricting the appetite of entrepreneurs to take calculated risks.

Venkatakrishnan went on to say that an internal survey found that nine out of ten small businesses feel positive about the prospects for the economy in 2024 with close to sixty per cent reporting elevated levels of optimism.

This week’s employment and inflation reports have been something of a double-edged sword for the economy, as the claimant count fell, and inflation rose marginally. This gave the market a dose of reality over the prospects for an early cut in interest rates and traders are waiting to see if there is any clue provided by Andrew Bailey following the upcoming MPC meeting.

The pound has staged a recovery following losses seen earlier in the week. Yesterday it rallied to a high of 1.2704 versus the dollar and closed at 1.2699.

The consumer is responsible for close to 70% of U.S. GDP. While the actual figure fell slightly in 2023 compared to 2022, this was due in the main to the emergence of the economy from the Pandemic.

Retail sales and consumer confidence are therefore extremely important to a nation that has “exported” a great deal of its manufacturing capability over the past twenty-five years and relies on personal consumption to grow,

Figures for retail sales in December were published earlier this week and showed a welcome return to substantial growth. Sales, including autos, rose by 0.6% following a rise of just 0.3% in November and a market expectation of a rise of 0.4%.

This reflects a continuation of the growth in consumer hopes of cuts in interest rates in 2024.

Treasury Secretary Janet Yellen continues to be the “Cheerleader in Chief” for the Biden Administration’s economic policies.

This week, she has been quoted as saying that Republican Party criticism of Biden’s “oversized” pandemic relief package is misplaced, and the current state of the economy proves that.

She went on to say that the U.S. can certainly continue to supply support to both Ukraine and Israel, although the conversation relies more on the will of the people than affordability.

Next week will see the publication of data for economic output. It is expected to show that services output remained marginally above the watershed level between expansion and contraction while manufacturing was still in contraction, although the composite figure is expected to show growth.

The speculation about the next FOMC meeting will also begin next week. The meeting will take place on January 31st and while there seems to be no chance of a cut in rates yet, traders and investors will be primed for a further dovish pivot from Jerome Powell.

However, Atlanta Fed President, Raphael Bostic, poured more cold water on the prospect of an early cut in rates when he spoke last evening of his view that it may be the third quarter before the Fed feels comfortable to cut rates.

He is still looking for evidence of inflation being anchored at 2% while he would like to see how the geopolitical situation unfolds before committing to rate cuts.

The dollar index trod water yesterday as the market is still in a comparative state as it tries to decide which of the G7 Central Banks will be the first to cut interest rates.

The index closed at 103.38, just one point higher than the previous session.

Despite several hawkish comments that have been made this week, there is still a degree of optimism from several Eurozone Central Banks that the ECB will be able to agree a cut in rates before the start of the second quarter.

While that seems more fanciful with every day that passes and conditions like the outcome for first quarter wage growth are seen as barriers, the fear that economies, particularly in Southern Europe, may slip into recession while rates remain at record highs is driving some optimism.

There is a growing school of thought that the “one country, one vote” method that is used by the Governing Council to make decisions is not representative.

For example, Robert Holzmann, the Governor of the Austrian National Bank represents a population of close to nine million people, while Italian Central Bank Governor, Fabio Panetta stands for close to sixty million. Holzmann appears to have far more “sway” than Panetta despite this.

To many, this will be seen as mere semantics, but the Executive Board will certainly need to investigate what can be done to make the Governing Council more effective and representative of the views of the majority.

Questions have also been asked recently about why the lives of close to three hundred and fifty million people are significantly driven by an unelected body.

Christine Lagarde jealously guards the independence of the ECB and has spoken recently of the oversight that is performed by the European Parliament, which is an elected body.

Elections will take place in June, and it will be interesting to note just how much of a swing to the right takes place given the tough choices that need to be made about immigration, both legal and illegal, and asylum.

The European Parliament and the European Commission have very little input about the Eurozone economy, possibly because there are MEPs from countries that still operate independent monetary policies and have their own currency.

Output figures will also be published next week for both Germany and the wider Eurozone. Germany is expected to show a very slight improvement, but remain in a deep trough, while the Eurozone will be virtually unchanged.

The Euro is clinging to its short-term support level but is unable to attract any new buying interest. Yesterday, it managed to rally to 1.0906, but it seems that there are now sellers around the 1.0910/20 level which is limiting its advance.

It closed at 1.0869 and looks likely to lose more ground before the Central Bank rate-setting meetings begin.

Have a great day!