Families being forced to choose between heat and food

The Office for National Statistics in a report published yesterday expressed its concerns that the unprecedented upheaval that the country has faced over the past five or six years will bring the return of a level of poverty that was believed to have been eradicated permanently.

Brexit followed by the Pandemic then the ongoing conflict in Ukraine means that the country, the Chancellor and the Central Bank are continually firefighting without being able to set in motion the policies and actions that formed the Government’s manifesto following its election victory.

Indeed, it is now more than likely that the current Parliament will not have been able to do anything it set out to do and the standard of living for ordinary people will have dropped considerably.

Bank of England Vice-Governor Ben Broadbent concurred with the findings of the report, adding his belief that it is doubtful that UK households had ever faced such a hit to national income, and it is highly likely that inflation will continue to rise while the economy suffers below average growth.

In separate comments, Broadbent went on to encourage his colleagues on the Monetary Policy Committee to consider their words carefully when making comments about voting intentions or their views on the economy to ensure that they didn’t add to public concerns or spook the market.

At its last meeting, the MPC voted unanimously to hike interest rates, but there are still concerns that there are one or two doves, among the independent members, who believe that hiking rates won’t solve the inflation issue and will exacerbate the weakening of the economy.

Market expectations are for three more hikes at consecutive meetings. That will bring official rates to 1.50%.

Broadbent went on to emphasize that it is not pertinent for the Bank to keep the market guessing, since clear and straightforward policies will serve a far more effective process.

The Bank has increased its forecast for the peak in inflation, which is expected to arrive next month, from 7.25% to 8%. However, Broadband didn’t appear convincing, commenting that in his view that will be the highest that will be seen.

The line between advance guidance and opinion is easy to cross, and Broadbent’s words should serve as a cautionary message to those MPC members who look at the economy on a meeting-by-meeting basis.

Sterling continues to be driven by fluctuations in risk appetite. Yesterday, it managed to recoup some of its losses from earlier in the week. It rose to a high of 1.3182, but was unable to gain any traction and fell back to close at 1.3133.

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But, concerns over possible recession growing

Several market commentators rejoiced yesterday at the release of Q4 2021 GDP. Growth was even stronger than had previously been announced between October and December last year.

However, the world is a very different place now, with the continued rise in wholesale gas prices that had been continuing for the entire year now exacerbated by the conflict in Ukraine.

In reality, there is very little to be celebrated in the fact that the United States’ emergence from the Pandemic was even stronger than had been originally realized.

This means that the economy has further to fall if the recession that is being predicted in some quarters is to be seen.

One historic indicator of a slowing economy and a potential recession is the inversion of the yield curve. This simply means that it is more expensive to borrow, as an example, for three months than it does for three years.

In normal times, the yield curve slopes up but when pessimism sets in it tends to invert.

This is an indicator that investors have become more pessimistic about the future. This phenomenon has been played down by the White House. The yield on two-year Treasury Bills surpassed the ten years. This was the first time this has happened since 2019. While it is by no means certain that a recession is now any more likely, it does mean that the economy is facing an even tougher year than it saw in 2020 or 2021.

The White House put a brave face on things by commenting that all indications are that the economy will continue to improve, while other indicators of a slowdown are not at all elevated.

President Biden’s spokesperson went on to echo the recent words of Fed Chairman Jerome Powell before the FOMC gave up on stimulation and switched to fighting inflation.

The data for private sector hirings was released yesterday and showed that the significant recent improvements could be coming to an end.

The Fed will want to see a continued improving picture, although the size of numbers that have been put up recently are unsustainable. 455k new private sector jobs were created this month, down from an upwardly revised 486k in February.

The latest prediction for the headline NFP remains around 480k.

The dollar index remains in the thrall of the glimmer of hope that has emerged in Ukraine.

Yesterday, it fell again to a low of 97.68, closing at 97.83.

Lagarde admits to fears over growth

The Eurozone economy continues to show signs of stagflation, appearing despite several comments to the contrary.

As in the U.S. there is a fascination with economic events that took place months ago and a growing reticence to face facts.

The refreshing honesty of ECB Chief Economist Philip Lane has not followed through despite data released yesterday that showed that inflation is still surging.

Inflation in Germany has now reached 7.6%, and while the new Bundesbank President Joachim Nagel is more considered than his predecessor, Jens Weidmann, he is sure to have made his feelings clear to the ECB President following the release of the data.

There is no argument that the conflict in Ukraine is going to have a potentially devastating effect on the economy, and there are already conversations taking place about how quickly the Eurozone will be able to recover.

ECB president Christine Lagarde will be determined to ensure that the region receives all the support it needs, but with several of the more stable nations also facing a fall in living standards, ensuring that there is ample liquidity won’t have the effect that will be needed.

The ECB is still facing the question of the reduction of its balance sheet, swollen by the purchases of Government Paper it has made to prop up bond prices and ensure that borrowing costs do not get out of hand. There is one certainty, and that is that several nations in the eurozone should be paying far higher interest rates in order to reflect the risk buyers are taking.

At the last count, the ECB owns a staggering 95.5% of all Eurozone paper issued last year. It has made an informal promise that it will hold onto those assets as long as necessary.

The euro has benefitted over the past couple of days from the positive comments that have been made at the latest round of face-to-face talks.

Yesterday, it rallied to a high of 1.1184, closing at 1.1158. The pivotal point at 1.1250 is now in view and a break of that level could bring about a short sharp rise to around 1.14, although the underlying sentiment remains negative.