20 September 2024: The markets need more than a rate cut to boost the economy

The most wide-ranging measure of consumer confidence fell significantly in September, as concerns grew that the government had spooked people with its warning that next month’s budget would see taxes rise and public spending cut.

The Gfk Consumer Confidence index had seen a strong recovery in the first half of the year following the turmoil brought about by Brexit, the Pandemic and political upheaval.

The index fell by seven points to -20, which a spokesperson for Gfk called less than “encouraging news” for the new Government.

The electorate had been promised a government that it could trust, but within the first two months accusations of sleaze have been levelled at the Prime Minister and his wife, as well as unpopular decisions on asylum seekers and the pensioners’ wonder fuel allowance.

Rachel Reeves is facing calls to temper her actions next month since she has apparently “found” an extra ten billion pounds but is so far not planning to reverse the decision to cut public services.

The Bank of England’s Monetary Policy Committee voted by a majority of 8-1 to leave its base rate of interest unchanged at 5%.

The only dissenting voice was that of arch-dove Swati Dhingra. In the end, it was made clear that the rise in inflation over the past two months had given rise to concerns amongst MPC members that a further cut may fuel price increases, which could see it having to “push the brakes hard.

Recent economic data has provided the worst possible news, with inflation rising and the economy flatlining. The strength of core inflation is still a concern, and services inflation is still too elevated to justify acting again so soon after August’s reduction.

A further cut in November is being considered by the market, but the Bank may face accusations of being politically motivated since its November meeting, which takes place on November 7th will follow closely on the heels of the Budget.

MPC member Catherine Mann will be speaking later this morning. She is likely to present a hawkish view on the Bank’s decision.

The pound rallied to a high of 1.3314 against the dollar following the announcement of the rate decision. It also climbed to a high of 1.1918 versus the Euro.

Against the dollar, Sterling is now at its highest level since March 2022, but with the economy on the brink of contraction, the rally may be short-lived.

In typical fashion, the market took no time to digest the fifty basis point cut in interest rates agreed by the FOMC on Wednesday and is already speculating about whether it can expect another jumbo cut, possibly as soon as November, or if it will come as two twenty-five point cuts in November and December.

Asset markets have appreciated the Fed’s action, although some have called it better later than never. However, more rational commentators have observed that the timing and size of the cut have set the perfect tone for the market as it enters the fourth quarter, irrespective of the result of the Presidential Election, which is now less than fifty days away.

President Biden confessed Thursday that there’s “a hell of a lot more work to do” to tame inflation and boost the economy — as he delivered an error-ridden speech, including a false claim that he hadn’t met Federal Reserve chairman Jerome Powell.

Speaking at Washington’s Economic Club, Biden said, “No one should confuse why I’m here. I’m not here to take a victory lap. I’m not here to say a job well done. I’m not here to say we don’t have a hell of a lot more work to do.”

“I’ve never once spoken to the chairman of the Fed since I became president,” the retiring president then added.

However, Biden and Powell met in May 2022 in the Oval Office — and the opening remarks of that meeting were covered by the White House press pool.

There were several errors and inconsistencies in the speech, in which he got several names and titles wrong.

Ironically, Biden’s seeming path to infirmity may have boosted Kamala Harris’ chances of winning in November.

One sidebar to the FOMC meeting was the vote against the fifty-point cut by Fed Governor Michelle Bowman, who became the first Governor to vote against an interest rate decision in almost twenty years.

Of the Fed’s 19 policymakers who take part in each two-day rate-setting meeting, only 12 cast a vote on the decision.

Those include eight permanent voters, including all seven members of the Fed Board and the president of the New York Fed, with the remaining 11 Fed presidents trading off one-year turns at the ballot box in groups of four.

The dollar index lost ground yesterday as it continues to test medium-term support close to the 100 level. It reached a low of 100.52 and closed at 100.64.

While no one expected September to hold all the answers to G7 Central Banks’ monetary policy decisions, observers had hoped that there would be a little clarity by now.

That has not been the case, with The Fed, ECB, Bank of England and even the Bank of Canada leaving it to the market to speculate about when, and by how much the next cut in rates will be.

ECB President Christine Lagarde is apparently open to a further cut in October, but her opinion has become less relevant since early summer, while Isabel Schnabel the Hawkish German Economist who is responsible for the Bank’s bond portfolio appears less confident.

She spoke yesterday of the ongoing challenge of “sticky” services inflation, which continues to keep headline inflation elevated.

She highlighted that price pressures within the services sector are “broad-based and global,” and that the momentum remains high, well above levels that would be consistent with price stability. This persistent inflation in services is a key concern for the ECB’s outlook.

Her apparent partner as the market’s “go-to” person in monetary policy matters, Chief Economist Philip Lane, offered a more balanced view, as he is wont to do.

He outlined the ECB’s flexible approach to monetary policy and said that if disinflation accelerates, “a faster pace of rate adjustment may be warranted,” suggesting that further cuts could be considered at the October meeting based on incoming data.

He favours a meeting-to-meeting approach which is data-driven. As a concept, that seems a great idea, but it depends on how data-dependent the rest of the Governing Council is prepared to be. If this were taken at face value, rates could rise and fall at every meeting!

The Governor of the Portuguese Central Bank, Mario Centeno, appeared to favour the approach of his Italian counterpart yesterday in calling for the ECB to cut rates in October, possibly by fifty basis points.

He said, “Given the position in which we are today in the monetary policy cycle, we really have to minimize the risk of undershooting because that’s the main risk.”

The euro is still reaping the benefit of the comparative narrowing of the gap between interest rates in the Eurozone and the U.S.

It rose to a high of 1.1178 yesterday and closed at 1.1161.

Have a great day!