4 October 2022: 45p rate of taxation reintroduced

GBP – Truss in embarrassing climb down after support evaporates

The Conservative Party finds itself in total disarray this morning, with senior MPs having forced their new leader to perform a U-turn over the abolishing of the higher rate of income tax.

There is an even larger scale rebellion being threatened over cuts to the benefits paid to the lowest paid. To quell unrest, Kwasi Kwarteng the Chancellor of the Exchequer has brought forward the spending review that was planned to take place next month.

Priti Patel, Home Secretary in the previous Cabinet, will make a speech at the Conference today in which she will lay bare the concerns of senior Conservatives as the latest opinion polls put Labour a massive twenty-eight points ahead.

Liz Truss, who was supposed to be a trustworthy and forward-thinking leader, has proven herself to be anything but, after just a month in the job.

Kwarteng has been accused of a policy of spending today with no thought of tomorrow and trying to slip through unfunded tax cuts unnoticed. Announcing the decision to reverse the abolishing the 45p rate of tax, he said that it had become a distraction, focussing attention away from a strong economic plan.

He is at odds with the Prime Minister by saying that the Party will forge ahead with plans to galvanize the economy and that the U-turn was a one-off, while she hinted at further changes.

While it is unlikely the Truss will be forced out despite her inconclusive victory in the ballot to become leader, Kwarteng may be on dangerous ground if he is forced into further amendments to the economic plan.

Having labelled the mayhem created in financial markets as little more than a little turbulence, even if the remark was made tongue in cheek, there have been calls for him to be replaced by a more experienced politician, with several Party members mentioning Rishi Sunak, while some are actually mentioning an early election.

Data released yesterday showed that UK manufacturing output remains in contraction, although it only fell marginally from 48.5 to 48.34. Later in the week, similar data for services output will be released. This is far more significant given that services make up 80% of total GDP. It is likely that services output will also report a contraction last month.

Sterling had a moderately successful day on exchanges yesterday. It rose to a high of 1.1334 and closed at 1.1323.

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USD – Fed may be forced into a less hawkish monetary policy

The US economy is slowing quite markedly. Data released yesterday show that manufacturing output fell from 52.8 to 50.9 last month. While it is still expanding, it is likely to fall into contraction next month.

The Fed which has been accused of driving the economy into recession to lower inflation is in a difficult position. It still sees the employment market as red-hot, and until new job creation begins to fall, it will continue to tighten monetary policy.

The market is already questioning whether they can warrant another seventy-five-basis point hike, which would be the fourth in a row. Were they to only hike by fifty points, the market may interpret it as a sign that they are moving to a less hawkish posture, concerned that they may have gone too far.

This week’s employment reports will provide a clearer picture with private sector data tomorrow, jobless claims on Thursday and the non-farm payrolls on Friday.

The dollar index is likely to correct quire vigorously if there is any hint from FOMC members that they favour a fifty-point hike.

The fall in manufacturing output was the largest since before the pandemic. One of the most worrying parts of the report was the fall in new orders, which signalled a significant slowdown.

Jerome Powell, the Fed Chairman, kicked off a week when several of his colleagues will speak by announcing that in his opinion that the Fed will need to tighten monetary policy for a while. His ambiguity was clearly intended, given that the size of any hike and the length of time that the Central Bank will continue its current path is a matter for the FOMC.

John Williams and Loretta Mester will give speeches later today. Mester is considered one of the more hawkish FOMC members, and data for factory orders will be published.

The dollar index fell to a low of 111.46 and closed at 111.64. There is support at the 111.25 level, but a break of that could open a fall to 110.20.

EUR – ECB faces difficult decision

Data that has been released recently was confirmed by output data released yesterday as confirming that the Eurozone economy has already entered a recession, the length and breadth of which depends on the burgeoning energy crisis.

Germany has avoided, for now, a decision on whether it will need to ration gas and energy supplies between domestic and commercial users in the early part of the winter.

It seems that although there is no confirmation yet of the sabotage of the 700-mile-long pipeline that joins Russia to Germany, that Russia is determined to disrupt the Eurozone economy, coming ever closer to warlike acts.

The new Italian Prime Minister started work yesterday and already had to cope with the news that the economy is in recession. She received the news that the economy will continue to contract until mid-2023.

With soaring energy costs and inflation continuing to rise, the Italian economy is continuing to weaken, even after a stronger than expected performance in the first half of the year.

Seventy-four thousand jobs were lost in August alone, the second consecutive month when employment fell.

Meloni is still in negotiation with her allies to put together a Cabinet, with the most difficult appointment the Minister of the Economy, which has long been considered a poison chalice. The most experienced candidate for the post Mario Draghi, the former President of the ECB, claims that he is not interested in the role.

In Spain, the Economy Minister is facing her own difficulties with the cost of Energy. He announced yesterday that she is in talks with her German counterpart about a cap on the domestic fuel price, which Germany is opposing given its likelihood of adding to inflation.

While Spain is predicting positive overall growth for 2022, it expects a recession to begin in early 2023 and last the entire year.

The euro rose to a high of 0.9844 yesterday and closed at 98.25. It appears capped for now by resistance at 0.9850, but a bleak of that could see parity tested if it is able to build the necessary momentum.