5 December 2023: Property prices edged up in November

There is a tiny sliver of a silver lining in the clouds that have enveloped the UK economy during this year, as a few leading indicators are beginning to show signs of a stabilization.

This is yet more confirmation of how vital the Bank of England’s role as the “keeper” of monetary policy still is. No matter the Government’s tinkering with fiscal policy, inflation is and will remain an insidious disease that can remain dormant for many years, only to rise and destroy the hope and dreams of a new generation.

Not only is the “fact” of interest rate hikes important, but the confidence that the market takes from its belief that the Central Bank has a plan and is working in tandem with the Treasury makes perception almost as important.

The market has been unimpressed over several instances this year, where it considers that the Bank has “dropped the ball”. Its overall policy of a “slow drip feed” of interest rate hikes while other G7 Central Banks were enacting far more aggressive policies became tortuous and, far from helping the economy avoid recession, was seen as prolonging the agony.

Permanent members of the Monetary Policy Committee, even with the best of intentions, made the situation worse. Huw Pill, the Bank’s Chief Economist, made a speech in which he basically berated the British people for deluding themselves about their expectations and having a false impression of the country’s position in the world. He would be forced to apologize later.

Only last week, in the wake of the Chancellor’s presentation of his Autumn Statement, the Bank’s Governor revealed his opinion that the economy currently has the lowest potential for growth that he has seen in his entire working life.

When asked to elaborate, Andrew Bailey merely explained that he was “keeping it real”.

The independent members have been a vital addition to the balance of the MPC, but with permanent members block voting, theirs has been little more than an academic exercise which allows for some interesting sound bites.

While the Bank of England jealously holds onto its relatively new-found independence, it will need to show more willingness to partner with the Government in what is expected to be a pivotal year for the economy. Not just since there is due to be a General Election, but because of the timing of its first cut in interest rates will be considered vital if the country is to avoid a severe downturn as inflation continues to decline.

Pill confirmed recently that the market’s view that it will be the third quarter before the Bank feels comfortable in lowering rates was “not unreasonable”, but there should always be a caveat to such comments that includes some reference to reacting to a downturn in conditions.

The pound entered the last two weeks of “normal liquidity” on the back foot. It remains in the range that it has been in for the past week but tested the bottom of that range. There will be little interest to drive it considerably lower as traders hang on to the profits they have made and prepare for the New Year.

Sterling fell to a low of 1.2603 and closed at 1.2631.

Jerome Powell re-established his hawkish credentials in a speech made yesterday, in which he commented that he prefers to wait for rate cuts until there is a degree of certainty that inflation has definitely been defeated.

Such is the degree of sway that the Chairman of the Federal Reserve holds over the market that even if he is considered as being a little too conservative, traders and investors fail to take note of his comments at their peril.

Powell was something of a controversial choice for Chairman when he was appointed by Donald Trump when Janet Yellen was unceremoniously removed from the position and was an even more controversial pick when he was nominated for a second term, given his clear support for the Republican cause, by President Biden.

In keeping with President Biden’s “knack” of surrounding himself with “good people” to make up his Cabinet, Powell listens intently to members of the FOMC and has clearly made a conscious decision to allow them to speak about their views on the economy freely, which at times has confused the market but brings a more collegiate feel to proceedings.

The economy is still on course for a soft landing but is more likely to me, more of a perception, since there is no magic number or set of numbers that can be used to prove that it is taking place.

One prominent Wall Street economist spoke yesterday of his view that the economy is entering a “triumphal period” in which interest rates will be able to be cut during the first quarter.

Donald Luskin went on to say that he still is frustrated by Powell’s continual embarrassment over his gaffe, made well over a year ago, in which he said he believed that rising inflation was transitory and a factor of fiscal stimulation that would soon work its way through the economy.

Such has been Powell’s horror over that comment that he has remained a hawk ever since. This has led to him commenting recently that high interest rates are also transitory. Inflation is turning into deflation at a rapid rate, and the Fed will need to act sooner rather than later.

It is likely that the FOMC will achieve a hat trick of pauses at its meeting next week as the employment and inflation data point to a soft landing.

The dollar index rallied close to its short-term resistance point yesterday as the market began to believe that a soft landing is close and that relative growth rates between the U.S. and other G7 nations will widen going forward.

It rose to a high of 103.85 and closed at 103.63.

It is an odd comment for any ECB official to make, but for Christine Lagarde, the President of the ECB, to say that she believes that the global economy is entering a “quiet period”, raised several eyebrows.

It may be that she was referring to the period just before an ECB meeting where members are precluded from commenting on their intentions, but it is more likely that given her “Powell-like” hawkishness over inflation, which, to be fair, she has tempered a little recently, she is looking forward to a few months respite.

That is of course ignoring, as she is wont to do, the fact that the Eurozone economy is teetering on the cusp of a severe downturn, possibly even a wholesale recession, while the growth and stability pact has been totally destroyed.

As a matter of urgency, Ecofin, the committee of European Union Finance Ministers, needs to discuss an issue that is becoming worrying. The rise in the treatment of individual member nation’s economic statistics as separate from the entire group.

This creates a two, or even three tier split in the group where individual nation’s data is becoming more important than the whole and could lead to monetary policy being geared to individual nation’s concerns.

It is easy to make a comparison to the U.S. where inflation or output rates for the larger states like Texas or California appear to have no more significant status than those of Rhode Island or Maine.

Another issue that has become pressing is a discussion of a fiscal union, and what that may look like.

The longer the Eurozone goes on without one, the more peculiar it looks that monetary and fiscal union were not delivered either together or very closely following each other.

To have individual member states able to “counter” changes to monetary policy by introducing changes to fiscal policy appears to be at least counterproductive.

Next year, not only will the global economy face a pivotal period as inflation falls close to G7 Central Bank targets, but individual countries or groups of countries will need to be more prepared for the unexpected.

The Euro continues to retreat away from the 1.10 level as the last of the tentative bulls are “washed out”. The market is now betting that the ECB will be the first G7 Central Bank to cut interest rates, and as such a significant pillar of support has been removed.

The single currency fell to a low of 1.0804 yesterday and closed at 1.0834.

Have a great day!