25 April 2022: Sales, output and confidence fall

The Bank of England could halt hikes in May

Data released on Friday illustrated the full potential of the slowdown in the UK economy. Retail sales fell by 1.9% month-on-month, following on from a 0.5% fall in February. This contributed to a year-on-year rise of just 0.9% versus market expectations of a rise of 3%.

Data for services output, the sector which makes up 80% of UK growth, was also released. This had been showing significant strength over the past few months, but in March, output fell back to 58.3 following an exceptionally strong read of 62.6 in February.

In most cases, analysts would have written off a single month’s poor data as a blip or an anomaly, but these figures fuelled concerns that the economy has seen the best of its recovery from the pandemic and the growing cost of living crisis is beginning to affect consumer confidence.

The fall in retail sales was particularly poignant, with fears growing that the raising of the energy cap is forcing people to choose more carefully how household budgets are spent.

The opposition have called for a Parliamentary debate on the crisis, which should include a supplementary budget.

It is being rumoured that the report on the Partygate scandal is going to be so damning that Boris Johnson will have little option but to resign. Johnson received support from his Party Chairman yesterday.

The best reason Oliver Dowden could find for Johnson to stay was that current events both at home and abroad are causing such disruption already that a leadership contest would set the country back even further.

While the UK involvement in the conflict in Ukraine remains at arm’s length, the cost of sanctions being implemented against Russia and Vladimir Putin’s supporters is being estimated at nine billion pounds a year for at least the next ten years.

As the conflict enters its third month, the UK continues to be fully committed to supplying arms and financial support to Kyiv.

Friday’s poor data saw the pound fall to its lowest level in two years versus the dollar. It reached a low of 1.2822 and closed at 1.2838.

This week has no significant data releases, so traders will be able to begin to position themselves for next week’s Bank of England meeting. Andrew bailey and his colleagues face a tough time deciding whether to continue to hike rates in the face of a dramatically slowing economy, despite inflation possibly reaching a high of 10%

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Fifty Basis Points now the likely outcome of May meeting

The Federal Reserve Chairman, speaking at last week’s IMF conference, virtually confirmed that the Central Bank will hike interest rates by fifty basis points at its meeting which takes place next week.

Jerome Powell sees the merits of two fifty-point hikes taking place at the May and June meetings in order to try to slow the continuing rise in inflation.

The June meeting will also see the release of the Fed’s economic projections.

Powell described the U.S. labour market as overheating and repeated that a large proportion of those switching jobs are doing so for higher wages. This is introducing inflation into wage negotiations and has the potential to add further upwards pressure on prices.

Another action that will be considered next week is the reduction in the size of the Fed’s balance sheet. In simple terms, that will see the Central Bank reduce its holdings of Government bonds and Mortgage-Backed Securities by ninety billion dollar a month, with the entire reduction possibility reaching a trillion dollars.

Fed officials have commented that the reduction will amount to the equivalent of two further rate hikes.

The overwhelming concern of analysts and investors is how such a radical rise in monetary policy will affect the economy.

While most banks don’t yet see a recession as their core prediction, many are raising their expectations close to 50/50. Their concern is around the ability of the Central bank to be sufficiently proactive to react should data begin to show a significant slowdown in economic activity.

Having championed support for the economy during the pandemic in a blinkered fashion, ignoring rising inflation, the Fed will face expectations that it takes notice of the entire economy and makes necessary adjustments going forward.

Last week, the dollar index was unable to break higher, having reached its highest level since May 2020. It reached a high of 101.33 and closed at 101.12. This week sees the release of durable goods orders and consumer confidence tomorrow, trade data on Wednesday and preliminary Q1 GDP on Wednesday, along with personal consumption expenditures.

While this data will have some effect on the dollar, traders will await next week’s FOMC meeting along with the employment report before deciding on the medium-term path for the Greenback.

Extreme policy divergence could see euro fall accelerate

Over the next four years, France is expected to move significantly closer to Brussels as a result of Emmanuel Macron’s convincing victory in the French Presidential Election.

Macron is the first President to be re-elected since Jacques Chirac, who was President from 1995 to 2007. However, Macron’s re-election has more to do with the right-wing tendencies of his opponent, Marine Le Pen, than it did with his own popularity.

This election was described as being fought against a backdrop of which candidate was disliked the least. There will be relief in both Brussels, where there were grave concerns that Le Pen would introduce a Eurosceptic set of policies, and also in the financial markets, where a Le Pen victory was seen as a long-term threat to the viability of the single currency.

The single benefit that is being celebrated by the majority of the French population will be the fact that Macron can be expected to do more about the promises he made to the electorate when he was first elected in 2017.

France is now expected to move closer to Brussels, although Macron failed to make any ground with his attempts to appease Vladimir Putin, for which he was roundly criticized.

ECB President Christine Lagarde has called for a greater degree of unity from her colleagues on the Bank’s Governing Council. It has long been an issue that since the board is made up of Chairmen, Governors and Presidents from the Union’s members, that they wear two hats, representing the best interests of their own nations before the common good.

Lagarde warned against criticism of the board’s decisions, as well as leaks of both members’ own opinions and their voting intentions. She actually demanded that members refrain from making comments about the content of the meeting until at least the Monday following the previous Thursday’s meeting.

It is doubtful she will have been successful, and the market will be interested to see how the board’s members react following the next meeting, which takes place on June 9th.

Last week, the euro continued to suffer at the hands of the dollar. It fell to a low of 1.0761 and closed at 1.0781. There will have been some relief from the French Election, but the trend for the euro remains lower.

Business and consumer confidence data will be released on Thursday, and both are expected to see a continuation of the recent downturn.