Truss channels her inner Thatcher
Morning mid-market rates – The majors
30th September: Highlights
- Truss stands by her tax plans
- Jobless claims hit five-month low
- Contraction likely to have started in third quarter
GBP – PM faces questions from all sides of the House
In comments to local radio stations ahead of the Conservative Party Conference that begins this weekend, Truss told reporters that she has no intention of making any form of U-turn.
Former Bank of England Governor, Mark Carney, was the latest senior official to question why she chose to ignore an offer from the Office for Budget Responsibility to provide an independent assessment of the plans laid out in the mini budget.
Carney welcomed the budget and its aim of promoting growth but was critical of the fact that there was no independent scrutiny of the plans which led to questions about what detail had been left out. He went on to say that there is a possibility that the Treasury is working at cross purposes with the Bank of England.
The overriding message for the financial markets is that unfunded tax cuts and unfunded spending undermine the stability of the entire system.
The rise in the cost of mortgages will more than eat away at the reduction in fuel costs, leaving consumers in no better position than they were before Truss and Kwarteng came to power.
Carney disagreed with assertions that the crisis was caused by global events that the UK has no power over, commenting that the global situation has been developing for over a year and the policies that have been put in place recently are an overreaction.
The fact that the financial statement is not going to be published until November has also attracted widespread criticism, and Truss has been forced into a meeting with the OBR to try to calm the markets,
The Conservative Party is reeling from a poll released overnight in which it is trailing the Labour Party by 33 points, which would translate into a majority of more than a hundred seats if repeated in an election.
Having considered Boris Johnson to be unelectable, which led to his removal from the Leadership of the Party, the new Prime Minister may prove to be even less able to win the next election than Johnson was.
The pound recovered yesterday following a turbulent week. It rose to a high of 1.1121, closing at 1.1118.
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USD – Market now concentrating on September NFP
Considering this data, most analysts have revised upwards their expectations for the headline number of new jobs created in September which will be revealed on October 7th.
That in turn increases the likelihood that the Federal Reserve will hike interest rates by seventy-five basis points at its next meeting, which will be held during the first week of November.
St. Louis Federal Reserve President commented that whichever way you slice it, the U.S. has a very tight labour market, and the jobless claims numbers are super low.
The current number of job vacancies mean that it is hard to imagine the unemployment rate rising in the short term.
Bullard’s colleague of the FOMC, Mary Daly, added the effect of higher rates is already being seen, but it will be a while before the full impact of the Fed’s policies unfold.
Despite optimism that the core rate of inflation was beginning to top out, data released yesterday for Personal Consumption Expenditures rose from 7.1% to 7.3% in the latest period. This data tends to lag CPI a little.
The Cleveland Fed President, Loretta Mester does not envisage a recession but believes that growth will be sluggish for several quarters.
She believes that the Fed got the size and persistence of the inflation shock wrong. Rates must be in positive or restrictive mode for at least a year to finally ensure that inflation is under control.
President Biden spoke yesterday of America’s commitment to the people of Ukraine and said that the U.S. will never acknowledge the sovereignty of Russia over land that it has gained during the current conflict.
The dollar index began a correction yesterday, falling to 111.96 and closing at that level. Given the potential for a strong headline NFP, the correction may be quite shallow.
EUR – Consequence of higher prices could be catastrophic
Data for inflation in Germany was released yesterday and showed that last month prices rose by 10% up from 7.9% in August. The figures for the entire Eurozone will be released later this morning. This was a major shock to the markets, which had been braced for an increase, but inflation was not expected to reach double figures.
This makes it highly likely that a severity-five basis point increase in rates will be approved at the ECB meeting which is being held on 27tyh October.
A further drop in the Eurozone Economic Confidence indicator was also reported for August. This leads the market to believe that the economy may be contracting as a prelude to a recession being declared in this quarter.
The data makes something of a mockery of Christine Lagarde’s assertion that there won’t be a recession in the region, and there will be growth in 2023. The economy is slowing rapidly as suggested by the most recent data released. Business activating and consumer demand are slowing, and businesses order books are seeing little if any growth.
Activity in the services sector is shrinking at an alarming rate. Output fell from 8.9 to 4.1 according to the business activity report. This appears to be a prelude to an even gloomier few months ahead.
The euro gained a little yesterday as the dollar corrected. It rose to a high of 0.9816 closing just one pip lower.
The labour market is not seeing the kind of growth that the U.S. is experiencing. The unemployment rate is expected to remain at 6.6% what data for August is released today.
Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.
