31 October 2023: Will the MPC confirm that rates have peaked?

This week’s meeting of the Monetary Policy Committee is unlikely to confirm that the almost two-year cycle of interest rate hikes is at an end, but if there is another pause announced on Thursday lunchtime, Andrew Bailey and his colleagues may not have the “wiggle room” to hike again for fear of damaging the fragile balance that has been achieved between demand and inflation.

HSBC announced yesterday that it has upgraded its forecast for the UK economy next year. It is now forecasting growth of 0.4% following an earlier prediction that the economy would shrink by 0.6% in 2024.

It based its forecast on renewed resilience to inflation and the fact that rates are close to their peak. HSBC followed Lloyds Bank in showing a higher degree of confidence in the economy.

One area of the economy that still concerns HSBC is the housing market, which it forecasts to see an overall loss of 11% from its highs. It also believes that inflation will remain high averaging 4% next year and believes that the Government’s inflation target will be adjusted upwards no matter who wins the General Election.

Mortgage approvals fell to 43.3k in September, their lowest level since January, while the remortgage market which was previously very buoyant despite rising short-term interest rates has seen its lowest activity since 1999.

Fears remain that the opinion of MPC member Swati Dhingra that rising interest rates take a year to be fully absorbed into the economy is correct and rates are closer to being restrictive than the market believes.

This may be one reason Andrew Bailey is confident that inflation will fall “markedly” when the data for October is published.

One thing that the financial markets don’t appreciate is a lack of clarity and with this week’s MPC meeting unlikely to provide an answer whether the pause is continuing, or if rates have indeed peaked will only increase the market’s concerns.

If there is no hike announced it will be assumed that the advance data on inflation that the Bank’s analysts have produced confirms Bailey’s views.

The pound is ending the month close to its lows. Yesterday, it rallied to a high of 1.2174 in relatively quiet trading and closed at 1.2167. Versus the Euro, Sterling again tested its five-month low reaching 1.1439, but it rallied to close at 1.1464.

There couldn’t be a greater contrast between not just the market’s perception of the growth differential between the U.S. and the Eurozone but also the data in actuality.

Confidence in the U.S. economy is continuing to climb, and Jerome Powell is expected to provide an upbeat review in his press conference following tomorrow’s FOMC meeting.

With most G7 Central Banks close to announcing the end, or at least a lengthy pause in interest rates hikes, the FOMC can be the most relaxed about the resilience of its economy.

While the dollar is still in reactive mode given the turmoil that has been created by the war between Israel and Hamas, it is set fair to see further gains and, likely, end the year at, or close to, its highs.

With the economy posting third quarter GDP numbers that were significantly stronger than the market had expected, and data released so far for this month appearing to show similar levels of growth, it is likely that Banks and their economists will begin to upgrade full year growth expectations before long.

There are still some naysayers regarding the economy who are defying the data that is being put in front of them. Morgan Stanley’s Chief Economist spoke yesterday of sales that he admits are still growing but at a slower pace than has been seen previously.

Profit margins are being squeezed as firms try to increase turnover, but as Jerome Powell is fond of saying, admittedly about inflation, progress cannot be linear given the number of moving parts that make up the economy.

House price data will be published today, with the S&P/Case Shiller index of house prices expected to improve by 1.6% against a 0.1% rise previously.

Elon Musk the CEO of SpaceX and Tesla is still one of the most concerned about the progress of the economy. He says that Tesla have had to reduce their prices to contend with higher interest rates being charged for cat finance to keep market share.

The dollar index is still unable to hang on to gains in a market that remains nervous with traders having no real confidence to establish long-term positions. Yesterday, it fell to a low of 106.06 and closed at 106.14. October has seen a fall in volatility as traders try to consolidate the profits that have been hard-earned in a difficult year so far.

The President of the ECB has been saying for some time that when the Central Bank ends its cycle of interest rate hikes that it would not be an interlude, but it would confirm the view that rates are sufficiently restrictive upon growth to see inflation continue to fall.

In her press conference last week, Christine Lagarde reinforced her view that inflation would eventually reach the ECB’s target of 2% and that there is no reason to revisit the target despite the end of the “low interest rates era”.

The Governor of the Croatian Central Bank Boris Vujcic said yesterday that the ECB has ended its cycle of interest rates, although he added the caveat “for the time being”.

Germany published preliminary GDP data for the third quarter yesterday. It showed that the economy contracted by 0.3% year-on-year, worsening from 0.2% previously.

One piece of good news was the fall in inflation in the Eurozone’s largest economy from 4.5% to 3.8%. It is hoped that today’s release of Eurozone-wide inflation numbers follows the same pattern.

Yesterday’s data confirmed that Germany has entered a recession, and it may drag the rest of the region into the same condition.

The World Bank warned yesterday that any escalation of the war between Israel and Hamas could see the oil price rise close to $150 per barrel. If that were to happen, clearly the global economy would suffer a major shock as inflation was reignited and growth numbers collapsed.

So far there has been no significant sign of another oil price shock, although Brent Crude has been testing the $90 level recently.

Data for consumer confidence in the Eurozone was released yesterday and although it was still extremely weak at -17.9, it has remained constant for the past three months, and can now be considered to have bottomed out.

Preliminary inflation data for the entire region will be published today and that is expected to have fallen to 4.2% from 4.5% previously. The halt to rate increases is still difficult to justify based on these numbers alone and betrays the concerns of the Central bank over the growing number of issues that the region’s economy faces, whether they are self-inflicted like Italy’s growing debt crisis, or the situation in Israel and Ukraine.

The Euro again rallied away from a test of its recent lows as traders saw no real interest in challenging long-term support. It reached a high of 1.0625 and closed at 1.0615.

Have a great day!