23 January 2023: Has the country turned a corner?

The Government is close to agreeing a funding package for the UK steel industry in order to avoid its complete collapse. While it is dwarfed by the number of workers employed by Germany, British Steel remains a cornerstone of the UK industrial output.

The package, expected to be valued at around £300 million, is a bridge with the Chinese Jingye Group, the new owners, promising an investment of £1.2 billion over the next ten years.

While China has built up its internal capacity in the heavy industry sector, it has created difficulties for several nations who are unable to compete on output or price but employs a significant number of workers not just directly but across the entire supply chain.

Last week, Andrew Bailey, the Governor of the Bank of England, spoke of his expectations for the economy. The last speech he made on the subject, was following the resignation of Liz Truss and was extremely downbeat and referenced the lack of confidence in the UK created by the growth strategy of Rishi Sunak’s predecessor as Prime Minister.

While the situation is far from ideal, he was a little more upbeat in his comments. He believes that the UK will enter a recession in this quarter, but he feels that it will be shallow compared to previous downturns, but it will last for longer than before.

Having battled against rising inflation for more than a year, while trying to ensure that its decisions don’t tip the country into recession, the MPC now believes that price rises have topped out and core inflation is beginning to fall.

Bailey is still concerned that the economy is subject to price shocks related to global events like the energy prices and the war in Ukraine, but overall the economic situation is beginning to stabilize after a year of unmatched turbulence.

The international community has had its confidence mostly restored by the Sunak and Chancellor, Jeremy Hunt, but it takes a lot longer to gain confidence than to lose it.

Last week was an important one for tier one data. The December figures for employment and inflation.

The jobs figures depicted a degree of resilience that is surprising given the economy is about to fall into recession, suggesting that the recession won’t be characterized by mass unemployment.

The data showed that the country is still flirting with all-time lows in unemployment.

Inflation is falling, but not slowly enough for several members of the MPC, while the price of several basic foodstuffs has risen alarmingly.

Sterling remains mired in the level of expectation the market has for continued rate hikes.

Last week it challenged medium-term resistance around 1.2440, but is lacking sufficient confidence to drive higher. It closed at 1.2394 having risen to 1.2438.

Lael Brainard, the Vice Chair of the FOMC and, depending on the result of the next Presidential election, several people’s choice to replace Jerome Powell when his term as Chairman comes to an end, spoke of her belief that short-term interest rates will continue to rise even though significant progress has been made in bringing down inflation.

Brainard is a Fed Governor. She holds a more bureaucratic role than several of her FOMC colleagues, who are Presidents of Regional Federal Reserves whose position as voting members rotates on an annual basis.

Eleven regional presidents rotate each year, with four seats available. The President of the New York Fed has a permanent seat, with the balance of the twelve members made up of Governors who each oversee a different component.

Brainard is mostly involved in regulation, and this role brought her into conflict several times with the previous President. While the Federal Reserve is committed to free markets with a degree of self-regulation, she retains a significant level of oversight.

As a voting member of the rate setting committee, her views will often confirm those of Jerome Powell and her comments last week show that she is on the same page as the Chairman being cautiously optimistic that the economy can avoid a recession, despite the possibly that the economy may experience two quarters of minimal contraction, while being firmly committed to bringing inflation down close to the Central Bank’s target.

The earnings season continues this week with results for Tesla due for release. It is predicted that the electric car giant will benefit from the growing market view that there will be a soft landing, although the tech sector has been shedding thousands of jobs since the turn of the year.

Alphabet, the owner of Google, was the latest group to announce job losses as the entire sector goes through a period of rationalization.

Last week’s data releases remained unpredictable and that has led the dollar index into a period of consolidation. It has benefitted from just two up-weeks since the middle of November. It fell to a low of 101.51 and closed at 101.99 last week.

Christine Lagarde, the President of the European Central Bank, has undergone something of a metamorphosis over the past six months, shape-shifting from a supportive ally of the weaker but highly indebted members of the Eurozone to an inflation hawk, determined to bring prices under control.

In the first few months of rising inflation, Lagarde was reasonably sanguine about the causes of higher prices, in a manner similar to her colleague at the Federal Reserve.

However, as inflation has moved past the shocks created by the war in Ukraine and the wholesale price of gas, she finds herself siding more with the hawkish views of the Frugal Five.

There was another obvious change of mid last week, although it was born more out of acceptance of the direction of the wind blowing through Frankfurt, rather than a deeply felt commitment to higher rates.

Mario Centeno, the Governor of the Bank of Portugal, spoke a few weeks ago of his belief that the ECB was coming to the end of its current cycle of interest rate hikes, only to change his mind last week and agree that there were more rises in the pipeline.

The victory of expectation over hope has not so far spread to the Central Banks of the other deeply indebted nations, but were it to manifest, it would make Ms, Lagarde’s job a lot easier.

Next week’s ECB meeting is certain to vote for another hike in short term interest rates. The only issue is how large the hike will be.

The odds heavily favour a fifty basis point hike, bringing the variable rate minimum bid rate to 3%, while hikes of either twenty-five points or seventy-five basis points are considered either overly hawkish or little more than a token.

While inflation appears to be falling it is not falling at a fast enough rate to satisfy the hawks, although it is doubtful that Lagarde is among them, while it is doubtful that twenty-five points will even bring the rate to a neutral position.

The short-term fate of the euro rests with the decisions to be made next week in New York and Frankfurt. The press conference held by Jerome Powell is likely to be slightly more dovish than the words of Christine Lagarde.

Having broken the 1,09 level this morning, a shift in rate expectations across the Atlantic may see the single currency test the 1.10 area.

Last week, it reached a high of 1.0887 and closed at 1.0856.

Have a great day!