Central continues hawkish tone

The Bank of England raised short-term interest rates by twenty-five-basis points. This is the first time it has seen fit to hike at consecutive meetings since 2004.

The MPC also warned that inflation is set to climb above 7% Hiking by 0.25% having raised by 0.10% in December, the bank hopes that it has sent a signal to the markets that it is serious about fighting inflation.

At a number of meetings last year, the sentiment of Governor Andrew Bailey’s comments centred around the expectation that the Central bank wanted to remain in control of its own destiny. In that it wanted to be able to withdraw support for the economy at its own pace.

The basic fact remains that as soon as Central banks start intimating that the time to hike is approaching, in all probability they are already too late.

Bailey’s agreement with Fed Chairman Jerome Powell that inflation was simply transitory and would be limited to the supply side of the economy has now returned to bite him. How he must wish he had been firmer in expressing his wishes for the cycle of higher rates to have started last November.

Although a first ten basis point hike last November would have been unimportant in the grand scheme, it would have signalled the Bank’s intentions that much earlier.

Yesterday was an inflection point in the fate of the economy over 2022. The Chancellor of the Exchequer announced that the Government’s cap on energy prices would be increased, meaning that the average family will be paying close to £700 per year more.

Rishi Sunak attempted to inject a little realism into the debate by offering an explanation that energy prices have skyrocketed due to global factors, but what started out as an explanation ended up feeling like an excuse.

Sunak did however attempt to sugar coat the bitter pill by announcing that millions of poorer families will receive help with council tax bills that are also set to rise in the year beginning in April.

Sunak’s speech began with a thinly veiled attack on the way the Government has conducted itself recently, just as four senior advisers announced their resignations over Boris Johnson’s attempts to cover up events held at 10 Downing Street, then lied about his involvement.

Sunak clearly means to cap his meteoric rise, having only been elected an MP in 2015, by throwing his hat in the ring in any forthcoming leadership contest.

The pound rallied further against the dollar following the Bank of England’s announcement. It is likely that it will be playing tag with the dollar for the next month or so as the Fed plays catch up.

Yesterday, the pound reached a high of 1.3627, but fell back to close at 1.3592.

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NFP bets remain at 150k

It has always been difficult to predict the monthly data for new jobs created, but that task has become significantly harder over recent months as many additional factors have been added.

The pace of the recovery has been patchy and unpredictable, while Central Bank involvement has risen to a level never seen by an entire generation of traders.

The predictions for today’s headline NFP data have steadily fallen over the past two weeks as negative factors have built up, topped off by the economy having shed jobs in the private sector, according to the ADP report that was published on Wednesday.

In pre-Covid days, the Employment Report was becoming easier to predict since there was little or no Central Bank involvement in the economy. Interest rates were low and had remained so for several meetings.

Then, suddenly, jobs were being lost, support schemes were introduced and eventually inflation began to rise as the supply side of the economy reeled as it was hit by shortages of raw materials and spare parts, energy prices doubled then tripled, and job vacancies began to rise.

It is hard to put together fears over a lower headline non-farm payroll with a continued rise in vacancies. These combinations are alien to traders and investors

Today, as the first jobs report of the year is about to be released, against a backdrop of rising interest rates, it has become even more difficult to make an educated guess on a factor that is likely to affect markets, in conjunction with inflation data until the FOMC convenes again.

Output data for manufacturing and service activity has been inconsistent, while wage negotiations are beginning to add to inflation fears.

The Treasury has appealed for negotiators to be mindful when considering wage demands, but those hopes are likely to be ignored.

There is little point in predicting today’s number other than to say that a fall to below 100k new jobs created is possible, but then, so is a figure more than 300k.

Yesterday, the dollar index fell to a low of 95.23 and closed at 95.32

Lagarde refuses to rule out a hike this year.

The ECB continued its overall dovish actions yesterday, despite President Christine Lagarde becoming more hawkish in her comments following the meeting.

Having recently expressed little expectation that there would be a hike in rates this year and possibly next, she refused to rule out a hike this year.

This was a momentous change and has been seen by markets as a ground-breaking change in attitude.

It is fitting that the Central Bank’s President should come to her senses, just as inflation reaches a record high of 5.1%

In the short term, the ECB is sitting tight on its continued provision of support to markets, but its motive is beginning to change.

The traditionally weaker economies of the Eurozone are showing significant signs of growth. For example, Greece announced this week that it will pay off the final tranche of support it received in the financial crisis early.

Lagarde is concerned that the withdrawal of support at too fast a pace would create disruption in bond markets and create an overshoot in prices that would see heavily indebted nations pay significantly higher interest.

The ECB has almost reached its limit on the amount of debt it has purchased issued by a number of Eurozone States,

A withdrawal from the market could see rates increase as a premium would be demanded by investors unsure of how stable certain economies would be in the wake of the markets becoming unfettered.

It is a truism within the markets that prices move more dramatically when there is a promise of a change, rather than when the change itself takes place.

That is why the euro saw gains yesterday against both the dollar and Sterling.

While the pound was boundaried by the twenty-five-basis point increase delivered by the Bank of England, for now it is unclear when and by how much interest rates in the Eurozone will increase.

Yesterday, the euro rose to a high of 1.1451, closing at 1.1430.