6 September 2024: MPC members maintain “radio silence”

The market is becoming disillusioned by the lack of guidance that is being provided by members of the Bank of England’s Monetary Policy Committee. Two new members have co-opted onto the rate-setting group over the past three months, yet traders have little or no idea of their attitude towards monetary policy.

If Andrew Bailey deliberately decides to provide a “single voice” to the market, then that voice should hold regular press conferences.

Looking back over the past three months, speculation about the timing of the first rate cut was driving the market, closely followed by considerations of how many cuts there would be and their frequency, the market has been left to speculate, often coming to incorrect views about the effect of economic data on the process.

It is not enough to simply comment that the data drive the Committee since the market should have access to members’ individual own views, particularly, as now the committee is “split down the middle”.

It is well known that Swati Dhingra and Catherine Mann hold opposing views about monetary policy, but what is known about Claire Lombardelli and Alan Taylor’s attitude to regular data releases?

The new Government is having a relatively comfortable ride in its early days in office, as the Conservative Party appears to be taking an age to identify its new leader.

Six candidates were nominated; Jenrick, Badenoch, Patel, Stride, Cleverly Tugendhat and despite the race having been delayed by the timing of the General Election, only one candidate, Dame Priti Patel has been voted off.

The new leader will not be taking over from Rishi Sunak until the week after Rachel Reeves delivers her Autumn Budget, and although the Government’s mandate is unassailable given the size of its majority, the country deserves there to be in place a viable opposition.

Reeves and Starmer are coming under such pressure over their decision to end the pensioner’s winter fuel allowance that Labour began a series of rumours about the size of the increase in the state pension, which is due to be confirmed next week.

It is thought that Reeves is considering the cost of the triple lock on pensions, which are increased by the lowest average wage increases, the inflation rate and 2.5%.

Using that measure, the average wage increases will determine the rise, which is expected to be around 5% or £400 per year in cash terms.

The upcoming monetary policy decisions that G7 Central Banks will deliver this month are the only real drivers of the currency market currently. The pound has rallied over the past two sessions as the market comes to terms with the possibility that the MPC may leave interest rates unchanged at its upcoming meeting.

Yesterday it rose to a high of 1.3185 and closed at 1.3180.

The appetizers have been served, now the main course is due to be delivered at 1.30 pm today, as the August Employment Report is published.

There have been probably the most widely varied predictions for how many jobs were created last month than there have been since the Fed decided more than a year ago to pause its cycle of rate increases.

The non-farm payroll number could be anywhere from zero to 200k, with so-called market experts providing predictions more in hope than expectation.

Irrespective of the number, it will have a significant effect on what happens at the FOMC meeting, which takes place in a little over a week.

There is evidence, mostly anecdotal, that a rate cut will happen on 18th September, but the rumour begun by J.P. Morgan CEO Jamie Dimon that a fifty-point cut could happen as the Fed tries to “get out ahead” of a slowing economy is gaining traction.

The Fed’s closest follower, The Bank of Canada, got its reaction to the Fed first yesterday by cutting its base rate of interest by twenty-five basis points.

It is thought that Tiff Macklem, the Governor of the Bank of Canada and Jerome Powell often speak, and while yesterday’s decision won’t influence Powell, it may well be further confirmation that a cut will happen if such confirmation were needed.

The Presidential election is now less than two months away and the Candidates have been busy crisscrossing the country attending as many rallies as possible to promote their policies on taxation, welfare, defence and a whole range of local issues which may influence voters in swing States.

While Kamala Harris plans to provide “tweaks” to standing economic policy, Ex-President Trump is “shooting from the lip” by promising to cut government spending and personal taxation. It will be a modern-day miracle if he can achieve both.

The data published so far this week, relevant to employment, has been mixed. Job openings fell in August but only marginally, while private sector employment fell from a downwardly revised figure of 111k to 99k job cuts increased significantly and hiring is at a historic low.

The dollar is still mired in the possibility of a fifty-point rate cut and until the Fed’s decision is known it is unlikely to attract much buying interest.

Yesterday, the index fell to a low of 100.96 and closed at 101.06.

In a long-awaited report commissioned by the European Union and written by former ECB President, Mario Draghi, he lambasted officials for policies that do not boost innovation while pointing to skills gaps and other systemic challenges.

Draghi is said to have called for “radical change” and a strong role for the private sector in the land of “dirigisme” and government intervention.

I had to Google “dirigisme”, and to save readers the trouble, it means a system in which the government has a lot of control over a country’s economy. Who knew?

The final report has not yet been published, but according to several sources, it is four hundred pages long and outlines major changes to ten sectors of the economy.

Europe has long struggled under many barriers to efficient capital allocation and high taxes that stifle entrepreneurship and innovation. At the same time, entrenched social programs and affiliated costs make it very difficult to free up the power of markets to drive an innovation-driven economy.

The report probably doesn’t provide any new information that Ursula von der Leyen was unaware of, but she will need the courage to act on several of its proposals.

There is significant competition in several areas of the Eurozone economy between the public and private sectors, which are bound by individual government policies and politics.

According to data published for the third quarter, the Eurozone economy is in danger of stagnating. It cannot contract much further but requires the impetus that will be provided firstly by a series of rate cuts, followed by structural reform, which should include fiscal union and the creation of a single finance ministry.

It is difficult to see how members of the ECB’s Governing Council cannot agree to another rate cut next week, as inflation is now close to its target despite several hawks believing that rates will need to remain as they are for inflation to reach 2%.

The ECB needs to loosen its grip on inflation and promote economic growth and activity.

The Euro has gained this week from the uncertainty surrounding the size of the rate cut that will happen in the U.S. later this month.

It rose to 1.1119 and closed at 1.1110. On a technical level, it has confirmed a short-term bottom at 1.1040 as it has broken a downward pattern boundaried at 1.1080.

Have a great day!