28 September 2022: Lenders withdraw mortgage products

GBP – Concerns over Central Bank actions spook market

The International Monetary Fund has urged the UK to reconsider its plans to cut taxation.

In an unprecedented statement the IMF commented that it was economically risky in the current environment to rely on a relatively high degree of growth in the domestic economy when there are considerable factors to may be outside of the Government’s control that could blow the plan off course, and even if they are successful, the plans are inequitable.

Even as Kwasi Kwarteng was confirming that there will be no turning back on the plan, the IMF was recommending an early re-appraisal.

This statement from the IMF was unprecedented in terms of its criticism of the policies set out in the Chancellors mini-budget last week, as well as calling for the policy to be reversed.

Sir Keir Starmer, the Leader of the Opposition, in a speech to his party’s annual conference, found himself in the awkward position of agreeing with a large part of the tax cuts, although he too would reinstate the higher rate of income tax. He settled for claiming that his Party is now the Party of the Centre, dedicated to fairness for all.

The Bank of England Governor Andrew Bailey spoke yesterday of his determination to regain control over inflation. His comments left the markets in no doubt of further interest rate increases, although they will wait for the November meeting as Bailey is not in favour of what he called ill-considered intra-meeting changes in policy.

Several large mortgage lenders withdrew products from the market yesterday amid uncertainty about how much further interest rates will have to rise. The largest lender, Halifax, was the first to react and was quickly followed by most of its competitors.

Hugh Pill, the Bank of England’s Chief Economist, spoke yesterday of the significant market turmoil the package of measures to promote growth had produced and the Bank’s plans for a significant monetary policy response to rising inflation.

Pill went on to say that the Bank’s ability to control and monitor markets in the UK was dependent on a strong and robust macroeconomic framework.

The pound recovered somewhat yesterday after two turbulent sessions. It rose to a high of 1.0730 but fell back to close at 1.0666.

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USD – Lack of clarity ensures further volatility

The raft of data that has been published recently doesn’t necessarily point to a recession this winter, although neither does it provide comfort that a significant downturn won’t occur.

The fact that the Federal Reserve has what several commentators call a blatant disregard for the economy, given its complete preoccupation with inflation, merely tilts the scales towards a slowdown.

Demand with the economy is not particularly high for this stage of the economic cycle, so dampening it down by tightening monetary policy will not have the usual effect.

Yesterday, data for consumer confidence was released. This was stronger than expected and carried on the recovery that was first seen in the previous month’s numbers.

While it is too early to believe that the recovery in confidence is taking hold, it is certainly an encouraging sign. The conference board reported that consumer confidence rose to 108 from 103.6 in August.

The September employment report that will be released a week from Friday is already generating a fair amount of attention in the market.

Since it will be the first data released since the Fed moved interest rates into restrictive territory, what effect that has had will set the tone for the final quarter of the year.

Early indications are for between 225k and 250k new jobs having been created, which is lower than the average of the past three months.

Don Kohn, an economist who spent more than forty years working at the Federal Reserve, commented yesterday that he believes that the odds against the economy avoiding a recession are less than 50;50.

Kohn, who was a member of the Fed’s board for a large part of his career, believes that it is a combination of factors, including the Pandemic, the shortage of semiconductors and bottlenecks continuing in supply chains among others that will lead to difficulties in market conditions in 2023.

The dollar index has paused for breath as turmoil continues in equity markets. It closed within three points of the previous day at 114.15

EUR – ECB wont prop up injudicious Central Banks

The ECB won’t give any support to Eurozone member states that make what Christine Lagarde considers to be policy errors, the Central Bank’s President confirmed in a speech yesterday.

Testifying before the European Parliament in Brussels, she was referring to the plight of Italy, which is needing support to enable it to borrow on international capital markets.

She believes that the new tools which are still in development and should be ready for introduction by the end of the year cannot be used by nations that invite problems then are surprised when the market penalizes them by demanding high rates to lend them money.

Lagarde went on to say that the conflict in Ukraine has cast a large shadow over the economic performance of the Eurozone, but even despite this, she expects any recession to be shallow and the economy of the region to recover fully in the second half of 2023.

On the matter of interest rate policy, she refused to be drawn on the magnitude of any rate hikes, but agreed that policy will need to be tightened at the next several meetings.

While the Bank of England is hell-bent on reducing taxes to stimulate growth, the ECB is considering recommending that the eurozone heads in the opposite direction.

Philip Lane, that Central bank’s Chief Economist, believes that a higher rate of tax for the top earners should be introduced to subsidise the cost of energy,

Lane sees a clear trade-off in choosing how to pay for the inflated cost of energy that has been triggered by Russian hegemony. Raising taxes has far less effect on inflation than increasing deficits by governments borrowing more.

Lane prefers to increase taxes on the wealthy, as this wouldn’t undermine the ECB efforts to reduce soaring prices.

This is a departure for the Central bank, whose officials do not usually refer to fiscal matters since there is no policy of centralized union on taxation.

The euro continues to make fresh lows with no real sign of a bottom forming. It fell yesterday to a low of 0.9569 and closed at 0.9595