26 October 2022: “Some mistakes were made”

GBP – Sunak promises correct ‘mistakes’ made by Truss

Rishi Sunak made his first speech as Prime Minister yesterday. He admitted that ‘mistakes had been made’ by Truss’s administration, even if they were driven by good intentions.

Nevertheless, Sunak faces a challenge which makes the support he delivered during the first weeks of the lockdown look like child’s play.

Interestingly, he has left Jeremy Hunt as Chancellor of the Exchequer, but Sunak will certainly have far more to say in the decision-making process than his predecessor.

According to the Bank of England, the economy will fall into recession either late this year or early next, while inflation continues to be a significant issue.

Yesterday’s data shows that the price of several household staples have risen by more than fifty percent over the past year – a direct result of the conflict in Ukraine which has seen crops wiped out and shipping routes disrupted.

The Pound rallied to its highest level since before the mini-budget yesterday as traders showed a degree of support for the new Prime Minister.

Many hope that Sunak can restore further confidence. However, the Bank of England will likely hike short term interest rates at its next meeting regardless.

The damage inflicted on the UK by Truss and in the final months of Boris Johnson’s term will take years to put right. It is becoming increasingly important that the country re-examines its decision to leave the European Union, as the population has now had time to consider the practical effects of Brexit.

It is hard to make a case for any economic advantage that has been gained from Brexit. The PM already has the economy, NHS and immigration to worry about, but would do well to consider renegotiating the terms of our departure.

The Pound reached a high of 1.1499, closing at 1.1465. There is strong resistance at 1.1500, which has now been tested three times, and may need to see a reaction at the 1.1180 level if it is to see a medium-term bottom created.

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USD – Powell hints at a pause in rate hikes

Fed Governor Christopher Waller has said that participants of next week’s FOMC meeting will have a full and frank discussion about the path of short-term interest rates based on current expectations and future growth.

FOMC members will receive the CFNAL next Monday – a report which notes how the economy is performing compared to trends. The last report showed that the economy was performing as expected with marginal deviations.

Next week’s FOMC meeting will have access to the three major reports on the employment market, including Jolts job openings data which measures the number of vacancies. Fewer private sector jobs were created in September, and that trend is expected to accelerate.

Non-Farm payroll growth is almost impossible to predict for October. It is likely that the first data of Q4 will show a significant fall in new jobs created as a prelude to the possible decline in the New Year.

The FOMC may slow the pace of rate hikes as the economy shows signs of a significant slowdown.

The possibility that the Fed may pause, or at least be considering a pause, to hikes pushed the Dollar Index lower yesterday. It fell to a low of 110.75, closing at 110.89. The next level of support is at 110.20. If it fails at that level, it could open a fall to 107.80.

EUR – Where Germany leads, the Eurozone follows

The German economy is taking the full brunt of an economic slowdown that seems likely to affect the rest of the Eurozone as we move into winter.

With the rising cost of energy, both consumers and commercial users will hope for a mild winter. So far, the German authorities have been successful in replenishing their stocks of gas, but that could all be for nothing if usage is at the top end of recent years.

The flash release of PMI data, containing about 85% of responders, fell to 47.1 from 48.1 as the economy heads into recession.

The first order of business at tomorrow’s ECB meeting will be to acknowledge that there is a recession.

Once the ECB accepts that, they can begin to counter its worst effects. While hiking rates with the economy on the brink of significant contraction may add fuel to the flames, inflation leaves the Governing Council with little alternative.

The lack of urgency shown by Christine Lagarde and her colleagues earlier in the year has now come back to bite them. It is likely that they will now hike rates and possibly pause in January to gauge the effect of tighter monetary policy.

Hikes of seventy-five basis points at both meetings will bring official rates to the neutral level. If inflation continues to climb at its current rate, a pause will need to be abandoned, as a fourth consecutive rate hike may be needed.

Every piece of data shows the Eurozone economy is contracting, and Lagarde will be hard-pressed to draw any positive conclusions with which to back up her announcement of a rate hike.

The Euro is beginning to gain ground, although a rise above parity is not considered likely unless the FOMC pauses its programme of hikes next week. It rose to a high of 0.9976 yesterday and closed at 0.9964.