3 October 2022: Truss will not change course

GBP – The PM believes the country can grow its way out of crisis

The Conservative Party conference got under way in Birmingham yesterday. It was supposed to be little more than a lap of honour for now leader Liz Truss, but so far that has not been the case.

During her first month as Prime Minister, Truss has unapologetically trodden her own path, first introducing a programme of tax cuts that created mayhem in financial markets, then when she had the chance to pare things back a little, refused to do so.

Her choice for Chancellor of the Exchequer, Kwasi Kwarteng, has made an equally erratic start. His performance has been likened to that of an A-level economics student.

Now, as the Conference begins, former Ministers are sharpening their knives.

Grant Schapps, a former Chairman of the Party, and Michael Gove who held several senior Cabinet positions under both Theresa May and Boris Johnson, have both been scathing in their criticism of the Prime Minister in the past 24 hours.

Schapps called her “tin-eared,” an old expression which refers to someone who is tone-deaf – reflective of her total lack of understanding of the mood in the Party. He went on to say that several of his colleagues will vote against the bill to abolish the higher rate of income tax.

One such rebel will be Gove, who labelled the tax plans to make tax cuts possible by borrowing from the market as not Conservative, and said that it would be difficult to support such plans in Parliament when it came to a vote

Both Schapps and Gove insisted that they are not in contact with their former colleagues, it looks increasingly likely there will be a back bench rebellion against abolition of the 45p tax rate and the limits on banker’s bonuses which was also revealed last week.

Truss herself appeared on TV yesterday and, when asked about her unpopular package of measures, blamed the unrest they have caused on miscommunication. This appeared like passing the blame on to Kwarteng, although it seems his recent announcements had been both perfectly clear and well-rehearsed.

Following Schapps and Gove’s criticisms, a number of Truss supporters criticized the former Ministers for being disloyal. It is likely that this story still has legs, and it may lead to the Prime Minister having to defend her policies even further.

The pound recovered from a roller coaster week by closing higher, it reached a high of 1.1234, and closed at 1.1166, at the end of what was by far its most volatile week of the year so far.

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USD – PCE raise still points to 75 BP

As the pace and rate of inflation has begun to slow, while concern over the slowing economy continues to exercise the minds of several eminent economists, rumours have begun to circulate about splits forming in the FOMC over the size of rate hike that will be appropriate at the committee’s upcoming meeting on November 1st and 2nd.

Having hiked rates by seventy-five basis points at each of the past three meetings, and taken rates well into restrictive territory, some less hawkish members of the committee believe that it may be pertinent to reduce the size of the hike to fifty basis points to support growth.

Jerome Powell, the Chairman of the Federal Reserve, a man who suffers from having been appointed by Donald Trump, which affects his credibility, has always said that the FOMC will be data driven and while the employment market remains red-hot the Fed will continue to aggressively tighten monetary policy.

With the September employment report due this Friday, and the latest figures for jobless claims showing that they have fallen below 200k and have been falling for several weeks, October is shaping up to be a pivotal month.

Other leading indicators, such as Producer Prices and Durable Goods orders, have been holding up well, but it is the continued rise in the number of new jobs that the Fed wants to see lower before they begin to taper rate hike.

The latest estimate for the headline, new jobs created line in the September report is still for 250k. While this is a little lower than has been seen recently, it is still strong for this stage of the economic cycle.

Other data that will be released this week includes ISM Manufacturing PMI later today, ADP private sector employment on Wednesday, and the regular jobless claims on Wednesday.

In addition, FOMC members Ester George, John Williams and Loretta Mester will make speeches that will be checked for any nuance as to their voting intentions.

As the Fed has moved rates into restrictive territory, concerns have been building regarding the effect that higher rates will have on emerging economies.

The Fed has been accused of driving emerging economies into a recession that will spear rapidly as costs in those markets have risen quickly, leaving no time for necessary adjustments.

The Dollar Index climbed to a high of 114.78 last week but ran into strong selling pressure and closed the week lower at 112.17.

EUR – No let-up in sight until energy prices moderate

Data for average inflation for the entire Eurozone was released on Friday and despite the ECB’s rhetoric becoming ever more hawkish, it has now reached 10%.

Given that this is the average, there are nations who have far higher inflation than others and a few who are performing better.

The date takes no notice of the size of the nineteen economies, so is not a particularly accurate indicator. Most analysts take notice of a few significant economies like Germany, France, Spain, and Italy.

In Italy CPI rose close to 10% while in France, which is doing better than its neighbours, it fell to 6.2% from 6.6%.

Germany is suffering badly, with its inflation rate also rising to 10% in September, primarily due to the rise in energy costs. Despite the best efforts of the ECB, which is expected to hike rates again on 27th October and 1st December, inflation will not start to fall until the energy price begins to moderate.

There have now been four unexplained sites of damage to the pipeline which supplies gas to Germany from Russia.

European gas industry experts blame sabotage of the pipeline, a charge that has been strenuously denied by Moscow.

The double-digit rise in inflation that the ECB is fighting a lone battle to bring under control is driven by the high price of energy which jumbled by more than 40% last month.

With winter beginning to take hold in the northern nations, demand will begin to outstrip supply, given the restricted flow that has been coming from Russia due to maintenance issues.

This week, data for producer prices will be released. Factory gate prices are expected to have risen by over 40%. This feeds directly into consumer inflation, which indicates there will be no let-up in the coming months,

The Euro rose versus the dollar last week, although it is still well below parity. It reached a high of 0.9853 but closed at 0.9801.