7 October 2022: No plan to review BoE’s mandate

GBP – Independent Central bank is now considered enshrined

Opposition leaders plan to keep up the pressure on new Prime Minister Liz Truss by forcing her to publicly confirm whether she is about to honour a pledge made by her predecessor Boris Johnson, to increase benefit payments in line with inflation or if she intends to save five billion pounds by going for the cheaper alternative of raising them in line with average wages.

There seems to be little alternative for Truss other than to come clean on what she is thinking as until the decision is made public, she will be hounded from all sides. Backbench Conservative Members of Parliament will find it difficult to commit their full support if they still feel that Truss will renege a pledge made only last Spring, while Labour Leader Sir Keir Starmer will keep up the pressure in the House of Commons if he gets even a sniff of a feeling that he has Truss on the run.

Ofgem, the Energy regulator, revealed in a document that was leaked to the press yesterday, that the country faces the possibility of rolling power cuts if it is a particularly harsh winter.

Britain gets ninety per cent of its energy from secure supplies either domestic or from Norway, while the balance is bought on the open market.

In normal times and even in the current climate, that ten percent should be secure, but if Europe runs into supply issues in the peak period of January and February, contingency plans are being looked at to have a series of rolling blackouts lasting three hours at a time in periods of peak daily usage.

The political storm that the country has been dealing with over the past three to four weeks has brought into question the will of investors to fund major projects that are in the pipeline. So far, the new Cabinet has not filled investors with confidence and the Government will need to prove that it has both the experience and knowledge to push through its plans, which will increase the attractiveness of the UK as a suitable recipient of funding.

Output from all sectors of the economy is now contracting, with the composite PMI rising slightly to 49.1 but still below fifty, which marks the level at which the economy is expanding or contracting.

This has been a relatively quiet week for data, while next week sees the release of employment data, as well as manufacturing and industrial production, which may mark the start of the downturn.

The pound has recovered from the turmoil of the previous week. It has reached a high so far of 1.1470, but a lack of confidence has seen it slip back, and it closed last evening at 1.1163. There is likely to be a significant increase in volatility this afternoon following the release of the September employment report in the U.S.

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USD – Restrictive rates make further hikes difficult

The Fed has faced a mountain of criticism this year, first because it delayed the commencement of tightening monetary policy and then when it has increased the size of the hikes to seventy-five basis points.

With hindsight, the goal of the Central Bank was for short-term rates to reach a level where they are restricting growth, but not cutting it off completely.

If that were the case, it is hard to see why, given their hawkish outlook, they didn’t increase the increments even more, possibly even by one hundred basis points to reach their goal faster.

Once the current crisis is over, and we find the answer to whether the economy is in fact in recession, the policy will become clearer.

In general, it has become clear to markets that rates had to become restrictive for them to have any significant effect on inflation, but now that they are believed to have reached that goal, Jerome Powell will need to tread carefully when delivering advance guidance as to the Fed’s intentions.

A lot will depend on today’s data about the size of the hike that will be agreed at the FOMC meeting in early November. The data on employment has been mixed so far this week and supplies little concrete guidance.

A very strong report on job vacancies was followed by a mediocre rise in new private sector jobs being created.

While weekly jobless claims have been gradually falling over the past few weeks, the fall to below 200k reported last week was always believed by the markets to be a tough act to follow.

This opinion was proven to be correct, since new claims rose to 219k in the latest reporting period, although the previous figure was revised slightly lower.

The latest estimate for headline new jobs created in September remains at 250k. This series of data is generally difficult to predict, given that it is usually reported right at the start of the month and therefore, by necessity, contains several estimates that are generally cleared up by revisions the following month.

Since the U.S. Bureau of Statistics has had added time to prepare the report, it is hoped that it will be fairly accurate.

If there is a risk in the data, it is skewed to the downside, since the market has become more used to seeing its estimates being confounded to the upside. A lower-than-expected number may see the Fed consider a smaller rise in interest rates, but only a negative number will see them abandon a hike entirely.

The dollar has risen quite strongly over the past two days, reaching a high of 112.31 yesterday, closing at 112.25.

Next week will see the minutes of the latest FOMC meeting released on Wednesday. Traders will be on the lookout for any less hawkish comments from its members that could point to a softening of attitudes to rate rises.

EUR – The Central Bank’s President remains hawkish…for now.

A lot is written about the speeches of ECB President Christine Lagarde. That is because she is the only voice that is both heard and trusted on the future path of monetary policy in the Eurozone.

Yesterday, she spoke of the need for interest rates to reach a level where they are restricting activity, but not cutting it off completely. This is an attitude that she shares with the Chairman of the Federal Reserve but given that she is having to deal with nineteen individual Ministers of Finance, her role is all the more difficult.

In a speech yesterday, she spoke of the need for interest rates to reach a level where they do away with any idea of stimulus, then continue to rise to lower inflation.

In the current cycle of global inflation, very few nations are having success in reducing prices, quite simply because they do not have the tools at their disposal, or the rise is outside their control.

It is obvious that as the world exited the Pandemic, energy demand would expand rapidly.

China stole a march on other major users by buying up all the surplus energy it could lay its hands on for future delivery. This naturally drove the price up and presented the developed markets with the issues it faces now.

It is unclear whether China took a gamble on Russia doing more than simply mass troops on its border with Ukraine and would not advance further, or if it read Vladimir Putin’s intentions better than the west.

Either way, Europe is facing a critical period until the Spring of next year as not only will domestic consumers of energy be seriously affected as winter arrives, but commercial users will face cuts in supply which will badly affect economic output that will drive several of the nineteen into recession individually and produce an overall recession in the Eurozone.

This week, output slipped further into contraction, while producer prices rose above 40%. This raises even more the spectre of stagflation.

The euro has been volatile but closed last evening only twenty-five points lower than where it closed on Monday.

Next week will see data for inflation released by Germany, it is expected to reach close to 12% year-on-year.