27 September 2024: Sterling regains its poise as rate cuts dominate

There is a feeling around Westminster that Rachel Reeves has been chastened by the level of anger directed towards the Government regarding, in particular, the decision to greatly reduce the number of pensioners receiving the Winter Fuel Payment, but also her general desire to show herself as a tough Chancellor, ready and able to make tough decisions.

In opposition, the markets and former colleagues from the Bank of England often feted Reeves. Former Governor Mark Carney, publicly backed her, saying that it is beyond time we put her energy and ideas into action,”

Economic credibility is still Labour’s Achilles heel, and even though Reeves has prominent people lining up to support her, her public perception needs to be worked on.

While it would be far too much of a climbdown now for her to reverse the decision about the Winter Fuel payment, there are signs that her Budget may not be as bleak as first imagined.

One of her other flagship policies, massively reducing the availability of non-dom status to foreign nations who live in the UK but can avoid paying tax on their overseas earnings, is being watered down.

This has always been considered little more than an attempt to unsettle Rishi Sunak since his wife held non-dom status.

Reeves is also pushing for the UK’s tax and spending watchdog to upgrade its national growth forecasts to reflect the economic boost Labour says can be achieved from its blitz of planning reforms. It seems that the Chancellor wants to be given a prize for her policies on investment and planning regulation before it is certain that they have been beneficial.

In much the same way the MPC is independent, as is the Office for Budget Responsibility, and it has already dismissed such interference when in 2011 it dismissed similar plans by David Cameron.

Nonetheless, the OECD is optimistic about the UK economy. The Paris-based Organization has reported that it believes that the UK economy will grow at a faster rate than Germany, Japan and Italy in 2024.

In its latest twice-yearly global economic outlook, the OECD predicted the UK economy will grow by 1.1 per cent during 2024, which is the same as it expects for Canada and France and behind only the United States among G7 members.

As the market continues to digest the monetary policy alternatives for the UK, U.S. and Eurozone, it is still of the opinion that the Bank of England will lag in cutting interest rates. Between the Fed’s proactivity and the ECB’s likely desperation to avoid a damaging recession, the Bank of England will maintain a “steady as she goes” policy since it sees the balance of risks to be roughly equal.

Yesterday, the pound recovered its losses from the previous session, rallying to a high of 1.3434, and closing at 1.3413.

There are signs in the publication of August’s economic data that the U.S. economy is losing traction. Results for durable goods orders were published yesterday, and they showed that they saw zero growth last month, down from a healthy 9.9% in July.

Although durable goods orders are notoriously volatile given the nature of the items being ordered monthly, their trend is undoubtedly weakening.

Although the trend is lower, the data beat economist’s forecasts for a significant fall. Excluding defence, new orders rose by 0.2% after a 10.3% rise in July. The rest of the report showed that the economy is not delivering as it was in the first two quarters of the year.

Second quarter GDP was confirmed at 3%, although the economy is unlikely to see such significant growth over the second half of the year.

Donald Trump gave a speech in New York yesterday afternoon, which observers said reminded them of Joe Biden’s rambling delivery. Whereas the former President prides himself on “shooting from the lip”, his non-preparedness is now becoming something of a liability.

Kamala Harris, by comparison, appears fresh and outlines succinctly answering quotations with a level of confidence that befits her current poll lead.

In repetitive, conspiracy-laden remarks to the press at Trump Tower, the former president looked to blame the Biden administration for the migrant crisis and repeated his claims that illegal migrants were stealing jobs from Black and Hispanic people specifically.

Boston Fed President, Susan Collins, joined with Fed Governor Adriana Kugler yesterday to discuss a shift from inflation to jobs in the Fed’s focus.

Philadelphia Fed President Patrick Harker used similar references to his speech in Jackson Hole in August regarding loosening monetary policy. Harker was an advocate of a cut in August, so it is little surprise that he not only supported the “jumbo” cut made last week but expects further cuts before the end of the year.

Michelle Bowman appears to be using her new-found celebrity as the FOMC’s only dissenter over the size of the rate cut agreed last week. Reporters are eager to know how she will vote going forward, and she is still hawkish over inflation.

She is in favour of a wait-and-see attitude to study the effect of last week’s fifty-point cut on inflation and job creation, although it may take a while for the effect on the latter to be felt.

The dollar index is still unable to make much headway, as the market is still uncertain about the Fed’s attitude to further loosening of monetary policy.

Yesterday, it fell to a low of 100.46 and closed at 100.56. It still has solid support at the 100 level, and any move below that level is likely to be short-lived.

In a speech made yesterday, ECB President Christine Lagarde welcomed the technical advances being made within the Eurozone which she described as “cutting edge, but she is wary of their use in financial systems. She believes that technology offers sizeable opportunities but also poses sizeable risks.

“In this setting, macroprudential policy needs to pull off a unique balancing act. To effectively mitigate the risks posed by innovative technologies, the macro prudential policy must paradoxically embrace and harness the very innovations they create,” she said in a speech delivered at the eighth European Systemic Risk Board conference.

She stressed that her attitude to technology is neither good nor bad, emphasizing that faster is not always better.

There has been a noticeable softening of Isabel Schnabel’s hawkish attitude towards inflation recently.

She spoke recently of how disinflation is “on track”. She supports a view which differs from the market that it will take the whole of next year before inflation is sustainable at the ECB’s two per cent target level.

On the topic of geopolitical risks, Schnabel said that they could bring about “new supply-side shocks,” adding that rising “protectionism and weaponization of critical raw materials” could lead to higher inflation.

She went on to say that she believes that the labour market is still resilient even as wage increases are levelling off, but there are signs of an overall softening of job creation.

She is concerned about productivity growth, which has been disappointing so far this year, although there are signs of a nascent recovery. Germany is continuing to underperform, but private consumption is improving and could be the vehicle upon which a recovery is based.

The relative strength of the Euro is having a positive effect on inflation, but this cannot be considered anything other than a bonus since markets remain fickle.

The single currency climbed to a high of 1.1189 yesterday and closed at 1.1177. It appears, from recent price action, that there is good selling interest between 1.1180 and 1.1220.

This may cap the Euro until the market sees a clear path for G7 monetary policy.

Have a great day!