3 September 2024: Who will be the “closet hawk”?

Of the five members of the Monetary Policy Committee who voted for a rate cut last month, one will need to reconsider if the market’s prediction that rates will remain unchanged this month is to be fulfilled.

Sarah Breedon, the Bank’s Deputy Governor for Financial Stability, speaks later this morning at a Conference on financial cooperation between G7 Central Banks.

Although it is unlikely that she will voluntarily provide any clues about how the slight pickup in inflation has affected her voting intentions, journalists are likely to ask her during a question-and-answer session.

Breedon is not noted for being at all “radical” when considering her voting record. She has voted in accord with the Bank’s Governor, Andrew Bailey, at each of the seven meetings she has attended since being appointed in November 2023.

If not her, then who? Clearly, not Swati Dhingra who is considered the most dovish member of the MPC. IT would be surprising if the Governor had a change of heart, given his commitment to gradually loosening monetary policy, which he was only prepared to begin when he considered inflation to have been defeated. It would be tantamount to admitting he was wrong if he voted to reverse August’s rate cut.

That leaves Lombardelli and Ramsden.

Little is known about the new Deputy Governor for Monetary Policy’s views since she only joined the Committee on July 1st and has kept a low profile since.

Having broken down the five “doves” from the last meeting, it becomes more likely that another cut will be agreed upon since the two “imponderables” are permanent members of the Committee.

The Prime Minister has carried something of a hangdog expression lately, which the press is beginning to consider to be unnecessary, possibly even put on.

He is supporting the plans that his Chancellor, Rachel Reeves, is preparing for taxation to rise and public spending to be cut when she delivers her budget next month, but since his Party came to power, the economy has performed far more than even the most optimistic expectation.

He has been at his most apologetic since taking office, blaming the “toughness” of the Budget on the mess that Labour inherited, a “fact” that is disputed by the Opposition, for which he has been he has been careful not to take credit and has deliberately ignored.

The Election of a new Leader of the Conservative Party is hotting up, with the two front-runners, Kemi Badenoch and James Cleverly, both making pitches yesterday as Parliament returned from its summer recess.

Badenoch, the favoured candidate of the right of the Party, spoke of the need for the Tories to “stop acting like Labour” while Cleverly agreed that the Party needs to “think and act like Conservatives again”, with a smaller role for the state and a focus on doing “fewer things very well, not everything badly”.

The pound had a quietly positive start to the new month, it rose to a high of 1.3155, breaking a run of three daily losses, and closed at 1.3147.

Elon Musk warned yesterday that the U.S. economy is “in the fast lane to recession or possibly even bankruptcy” due to the level of Government spending which Joe Biden has overseen, and Kamala Harris is unlikely to reverse.

He cited a forecast from the U.S. government budget for fiscal year 2025.

According to the report, the budget deficit could rise to $16.3 trillion by 2035, raising concerns about the nation’s financial future.

It is difficult to predict storms when the “economic sky is cloudless”. The economy is growing at a decent if not spectacular rate, Inflation is coming down while job creation is still positive.

It is almost certain that the Federal Reserve will loosen monetary policy later this month, which will provide a further boost to the economy.

Even if there is a downturn early in the New Year, which could happen irrespective of the result of the Presidential Election, the Fed has more than enough weapons at its disposal to ward off any significant issues.

The US Dollar’s bounce gained some impetus after the release of July’s US Personal Consumption Expenditures (PCE) Price Index on Friday.

The PCE is the Federal Reserve’s preferred inflation gauge. The data showed that US inflation remained unchanged compared to the previous month and helped reassure investors that the US economy was probably not decelerating as quickly as some had feared.

In a “soft-landing” scenario, the dollar is likely to continue to gain even as monetary policy is loosened.

Jamie Dimon’s recent comment that the Fed may cut by fifty basis points, while having little to commend it, is nonetheless gaining some traction, and has sharpened the market’s interest in this week’s publication of the August employment report.

It would take a significant fall in job creation, even possibly into negative territory, for the FOMC to take such a precipitous step. The market acknowledges that there were a considerable number of votes for a cut at the last FOMC meeting, but there is no sign that members intend to double down and vote for a fifty-point cut.

The dollar is beginning to gain traction after a month in which its correction came close to becoming a trend. The market is beginning to “pivot in much the same way as the Fed, concentrating on growth, rather than inflation.

The index paused for breath yesterday as the Labor Day holiday took place. It lost a small amount of ground, falling to a low of 101.57 and closing at 101.67 just four pips lower than the opening.

The regional elections that were held in the east of Germany over the weekend continued a worrying trend in European Politics, as the right-wing AfD party gained significant success.

The heavy defeat of Germany’s coalition parties in regional elections in Thuringia and Saxony was expected. But the sharp rise of the far-right Alternative for Germany (AfD) will weaken Chancellor Olaf Scholz’s government a year before the next scheduled national poll.

It will make it harder for Berlin to loosen its fiscal policy and could lead to curbs on immigration. Both would spell unwelcome news for a stagnating economy.

Unlike local elections in the UK, 60% of voters used their votes to “comment” on national rather than regional issues. Although the Bundesbank is content to allow the economy to be driven into recession by continuing high interest rates, the German People are growing weary of being labelled the “sick man of Europe”.

Scholz described the results in the two regional votes as “bitter” and warned his coalition partners to tighten their partnership to ward off right-wing “extremists”.

Italy has had a right-wing government for two years during which the sky has not yet fallen, while there has been a significant rise for the right in the Netherlands and France together with far-right demonstrations in the UK, the time may have come for the region to re-examine its policies on immigration.

In the past, Europe has welcomed immigrants as a source of relatively cheap labour, but as the European Union becomes more integrated with the free movement of people, those in the East, who would normally “fill the gaps” created by a lack of workers in industrial regions, find opportunities limited.

Germany is also an ageing country that depends on foreign workers, with 36% of companies reporting a shortage of skilled labour. The AfD rhetoric is mostly aimed at mass immigration, but any further restrictions will weigh on German businesses.

Before trying to mollify AfD voters, Scholz may want to consider the economic price of doing so.

Isabel Schnabel, a member of the European Central Bank’s (ECB) executive board, has urged caution against implementing aggressive interest rate cuts, citing ongoing risks that inflation might not meet the ECB’s 2 per cent target.

She cited high service price inflation as a significant obstacle to reaching the target, which she considers to be “set in stone”.

Her warnings reflect concerns from some members of the ECB’s Governing Council, who believe that the battle against inflation is not yet resolved.

Joachim Nagel, the governor of the German Central Bank, recently cautioned against premature fiscal easing, noting that while the inflation targets are approaching, they have not yet been fully met. Nagel, however, is under political pressure domestically now.

ECB Chief Economist Philip Lane reaffirmed that a return to the 2 per cent inflation target remains uncertain.

The Euro is still pressured despite a quiet holiday-driven day yesterday. It made back most of its losses from Friday, rising to a high of 1.1077 and closing at 1.1071.

Have a great day!