22 June 2022: Mann’s words underpin Sterling

GBP – Pound gains relief from BoE support

Yesterday saw the largest strike take place in the UK since the 1970s. Boris Johnson, who is a great admirer of Margaret Thatcher and her policies, will get the chance over the next few weeks or possibly months to emulate her as the country looks like it could easily erupt into a class war of industrial action.

Rail workers have agreed to return to talks today as the first of three days of official action took place. The strike brought the country to a virtual standstill and the public face further disruption when the second and third days of action take place tomorrow and Saturday.

Strikes by rail workers may be the thin end of the wedge for industrial action, with rumblings coming from teachers, while the health unions are also considering a vote on strike action.

When the current Government was elected two and a half years ago, it seemed to have policies that could unite the country, as it promised to level up the geographical and social landscape to make the country a fairer place to live.

In contrast to its promises, the UK is now more divided than it has been since the miners strikes of the early 1980s. From the disregard for the rules illustrated by the partygate scandal, the Thatcherite policy of allowing the sale of council houses, and the deportation of illegal immigrants to Rwanda, the Government is in danger of becoming totally detached and wasting the opportunity it was given by achieving an eighty-plus majority.

Members of the Bank of England’s Monetary Policy Committee, are making speeches this week, mostly aimed at informing both the markets and the man in the street, about its policy intentions and its plans for calming inflation.

So far, Catherine Mann and Hugh Pill have spoken of the how and why of rising prices, with Jon Cunliffe and the Governor still to come. Pill’s admission that the Bank got it wrong in its estimates for inflation, assuming, as happened in the U.S., that the fracture between supply and demand created by the end of the Pandemic would simply fade as the country returned to normal.

Mann’s comment that supporting Sterling is a major part of the Bank’s policy provided some support for the pound yesterday. With the economy slowing rapidly and the relationship between the Government and the workforce at its lowest ebb for forty years, doubts are growing that Johnson and his Cabinet will be able to turn things around before they have to return to the polls.

There will be a significant test of the public’s opinion tomorrow when the Tiverton and Honiton by-election takes place. The result of a poll conducted by the Liberal Democrat Party was leaked yesterday, and it shows that they expect to win a landslide victory, which will add further pressure to calls for the Prime Minister to resign.

Yesterday, under the influence of Catherine Mann’s comments the day before, Sterling rallied to a high of 1.2324, closing at 1.2272. It remains to be seen how convinced the markets are by the support of the Bank of England, given the headwinds the economy now faces.

Data for inflation will be released this morning, with the headline expected to have increased to 9.1% while the core possibly fell to 6% or possibly below.

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USD – Powell is determined to put right his inflation misstep

Democrat Members of Congress are set to increase their criticism of the actions of the Federal Reserve, which they believe are dragging the country towards a recession that could be avoided.

Their criticisms are laid squarely at the feet of the Fed’s Chairman Jerome Powell, who has readily admitted to missteps over the treatment of rising inflation which began a year ago.

Powell, who is unfairly blamed for the fact that he was appointed by a Republican President and freely admits to supporting the GOP, has overseen a complete change of policy in recent months as he has become an inflation hawk.

The series of interest rate hikes that have been seen recently have begun to increase in speed although, as certain members of the FOMC have been forced to admit, so far, they have had no discernible effect on rising prices.

It is clear that there are outside influences that are seeing prices continue to rise, but it would be very difficult for the Fed to sit on its collective hands and watch as inflation rips through people’s investments and savings, hoping that the situation in Ukraine will ease, and energy prices return to a more supportive level.

There is an argument raging in financial markets about whether there is to be a recession in the U.S. or even if it has already started.

Several commentators appear keen to do away with the traditional measure of a recession, which needs to see two consecutive quarters of contraction, or what is euphemistically called negative growth, for a recession to be confirmed.

Such a measure is considered old-fashioned by today’s market’s which aren’t prepared to wait six months for confirmation of something they already believe to be happening.

One piece of advance warning of a slowing economy is the housing market. Data released yesterday showed that sales of existing homes fell by 3.4% after a 2.6% fall in May.

Existing home sales are affected by rising interest rates on home loans and homeowners’ view of the prospects for the economy. This data will be backed up by new home sales data due for release on Friday. This is also likely to have fallen.

Jerome Powell will testify before Congress today, and his pre-prepared remarks will be eagerly awaited by the markets. He is expected to continue his tough stance on inflation, commenting that another hike of seventy-five basis points is all but confirmed.

The dollar index is experiencing something of a lull while it trades in a wider range of 103.50 to 105.50. Yesterday it fell to a low of 103.93, closing at 104.41.

EUR – Threat of sell-off in financial assets and housing growing

Concern is growing in financial markets that increased risk of yet another crisis which could bring down the entire Union.

The ability of indebted nations to borrow their way back to growth is in question, since the price they would have to pay could become prohibitive. The gap in spreads between certain nations and others is continuing to grow, while the ECB remains close to the limit of how much support it can give to individual members.

The grand plans of the ECB to withdraw its emergency funding through its PEPP fund and start to normalize interest rates by a series of hikes look highly risky now and could be leading the region into a recession that could be deep and long.

The ECB President believes that the current policies will now end in recession, and commented recently that such a scenario is not the Central Bank’s baseline view.

However, with Russia apparently targeting the Eurozone economy by slowing the supply of gas through its pipeline into Germany as punishment for the application of sanctions, energy is going to become an even scarcer commodity.

The German Federation of Industries (BDI) slashed its estimates for growth in 2022 yesterday. The Eurozone’s industrial and economic powerhouse is expected to grow by just 1.5% this year, versus an expectation of 30.5% prior to the Ukraine conflict breaking out.

Since the initial shock of the Russian invasion, the markets have tended towards, not quite ignoring the war, but looking more at its possible effect. The fact is, it is real and happening on the doorstep of the Eurozone and supplies of both energy and foodstuffs are going to be severely affected for some time to come.

The German Finance Minister spoke yesterday of his concern at how high inflation is eroding the foundations of the economy that have been built over many decades. Germany will always be hawkish over inflation given its past, and will support any measures that are brought in, almost disregarding its membership of the EU.

Another member of the Frugal Five, Finland’s Central Bank Head, Olli Rehn, welcomed the opportunity that has been given to the ECB to normalize interest rates.

Such comments drive a wedge between members of the EU and cannot be helpful in promoting the unity that is necessary for it to survive what is going to be an extremely tough remainder of 2022.

The single currency remains driven by the prospective size of a rate hike in the Eurozone.

At some point, traders will begin to rank the likelihood of recession in G7 nations, and that will have a negative effect on the currency markets. Yesterday, the euro rallied to a high of 1.0582, but slipped back to close at 1.0528.