28 November 2022: Autumn Statement lacks strategy

Jeremy Hunt’s Autumn Statement lacks a singular strategy to promote growth, according to the Office for Budget Responsibility. It is more a package of measures designed to help the public survive the expected downturn in the economy.

When the worst of the downturn has taken place, and it becomes important to nurture economic activity, there is nothing that will help to promote output.

It is predicted that at the height of the recession, around half a million jobs will be lost, which will push the unemployment rate above 5%.

Currently, workers feel quite secure as jobs have become plentiful and this is encouraging them to push for wage increases as inflation continues to rise, despite the Bank of England’s continual tightening of monetary policy.

The next meeting of the Monetary Policy Committee takes place on December 15th, with the first meeting of 2023 scheduled for February 2nd.

It is likely that rates will be hiked next month, although the Bank is expected to be more driven by the data at later meetings.

At the latest meeting when short term interest rates were raised to 3% both Silvana Tenreyro and the newest member of the Committee Swati Dhingra voted for a more moderate increase, and it will be interesting to see, considering the measures that have since been introduced if other members of the group are swayed.

Catherine Mann and Jonathan Haskell have been the most hawkish recently, although both fell into line last month.

This week, there are no tier one date releases due for the UK, although the index of house prices could spring a surprise and feed speculation concerning the pace of the slowdown.

The UK has adopted the tradition of Black Friday from the U.S. This being considered as the start of the Christmas Shopping period and provides that market with a method of comparing consumer activity at a crucial time for retailers. Spending on Friday was buoyant, although the number of sales that took place online rose again.

Sterling had a mixed week following the release of the FOMC minutes that proved to be a little less supportive for the dollar than expected. The pound rose to a high of 1.2153 and closed at 1.2097.

Having turned mildly dovish at their most recent meeting, FOMC members will be anxiously anticipating this week’s publication of the November Employment to see if their belief that conditions that will allow them to temper the next rate hike have become reality.

As the rate at which inflation has been rising has moderated marginally over the past couple of months, they are hoping that they have supplied conditions for the number of new jobs created by the economy to moderate.

The current estimate for the headline non-farm payroll figure due for release this Friday is 200k. While this will be a lower number than has been seen over the past six months, it will not supply the definitive answer that the more moderate FOMC members have been expecting. Average earnings are also likely to have fallen slightly, but not enough to allow interest rates to be left unchanged.

The level of economic activity being seen recently has remained constant, which is leading the economists and leading banks to move away from predicting that there will be anything more than a moderate downturn in activity even if there are two consecutive quarters of contraction signifying a technical recession.

The Preliminary data for Black Friday activity has been encouraging, but retailers remain concerned about the level of activity that will be seen right up until Christmas.

Concerns remain about disruption to supply chains as the prospect of a rail strike remains, and the slowdown created by the issues being seen in China may also have a dampening effect.

The dollar is likely to be under pressure until the outcome of the next FOMC meeting becomes clear. Before the employment report, data for the housing market as well as consumer confidence are due for release, as well as personal consumption expenditures and activity data from ISM.

The dollar is slowly correcting following the FOMC minutes and fell to a low of 105.63 and closed at 105.95.

Christine Lagarde, the ECB President, is facing severe difficulties promoting unity among members of the Eurozone. Last week, the President of the Austrian Central Bank and one the most hawkish members of the Governing Council Members threw his weight solidly behind another seventy-five-basis point increase in short term rates at the next meeting.

While his remarks were tempered by the fact that recent data has pointed to any recession in the region being less damaging than expected, several weaker economies are still likely to experience a recession early next year and will be looking to the ECB to supply a degree of support.

The jury is still out on whether the entire eurozone will fall into recession, although it is hard to imagine the entire region managing to escape. In fact, it may be that some individual countries are already feeling the effects.

Having provided an incredible amount of support during the Pandemic, it will be hard for Lagarde to be seen to abandon countries who are demanding further backing.

The Frugal Five are demanding that inflation be brought under control, or at least that the Central Bank does nothing to fuel the flames. With inflation still at record levels, the ECB is still determined to bring it under control but is desperately trying to avoid being accused of fuelling a recession.

The gradual fall that is being seen in the oil price should see headline inflation fall, but until gas prices regulate and more importantly the war in Ukraine ends, stagflation will remain a major risk.

This week data for consumer confidence and economic and industrial sentiment will be released as well as inflation. It is expected that the headline will moderate from 10.6% to 10.4%. This is unlikely to moderate the ECB’s thinking but may have the effect of driving the euro a little lower.

With the FOMC expected to begin to taper rate hikes, the single currency has begun to benefit. However, if traders begin to believe that Central banks are about to either begin to either moderate rate hikes or stop them altogether, the Euro will suffer more than most.

Last week, the single currency rose to a high of 1.0448 and closed at 1.0409. There is resistance at 1.0420 and a close above that level daily could provide impetus for a further rally, particularly if the U.S. employment report proves to be unsupportive.

Have a great day!