Chief economist questions bank’s past performance

Huw Pill was named the Bank of England’s Chief Economist in September last year. After a significant absence from the bank’s front-line team for a couple of months, for reasons unknown. He returned yesterday to provide a veiled criticism of what had gone before.

In a speech, he commented that he believes that Quantitative Easing may not be the answer to bond market dysfunction.

It is interesting that in his previous life working at global investment bank Goldman Sachs, he never once suggested another policy option to his former colleagues at the bank.

In a clear case of being wise after the event, Pill justified his comments by observing the current level of inflation that his new masters are scrambling to bring down.

Pill, opening a conference of Sovereign Capital Markets Research, Pill didn’t offer any alternative course of action, although he did appear to say that he wouldn’t support any such action were the need to recur.

Pill’s current contract runs until September 2024, so it is unlikely that he will be called upon to offer any; alternative courses of action.

Given the anticipated rate of policy tightening likely to be enacted by the Federal Reserve, it is expected that the pound will suffer further at the hands of the dollar in the coming months.

While the Bank of England is making every effort to bring inflation under control by raising short term interest rates, the fact that the Federal Reserve, according to the minutes of its latest meeting, has abandoned any support for the economy in favour of taming inflation has set the dollar on a solid path higher.

Global accountancy firm PriceWaterhouseCoopers has slashed its expectations for the UK economy for the rest of 2022. In a report issued yesterday, the firm predicted growth to average 3.8% through the rest of the year. This is down from 4.3%, expected earlier in the year.

A 2% fall in the average household income will affect consumer spending as well as confidence.

Rishi Sunak the Chancellor of the Exchequer has suffered a major fall from grace, being accused of not providing any form of cushion to help the lowest paid who are expected to see incomes fall by around £1,250 this year.

Sunak has now been accused of allowing his multi-millionaire wife to receive non-domiciled status that has saved a considerable amount in tax.

While this may be something of a red-herring, it perfectly portrays the way in which Government decisions and the economy go hand in hand despite the independence of the Bank of England.

The pound continues to threaten the 1.30 level versus the dollar, although it traded in a very narrow range yesterday. It fell to a low of 1.3051, closing at 1.3071.

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Powell believes in increasing Fed action after slow start

As already discussed, the Fed appears to have abandoned any form of support for the economy in favour of a battle to drive down inflation.

On the face of jobless claims figures released yesterday, it seems to have made the right decision.

The minutes of the latest FOMC meeting have provided the market with a significant amount of advance guidance when they were published yesterday. It now seems almost certain that the Fed funds rate will be increased by 5fifty basis points, while the Bank’s balance sheet will be reduced by $95 billion.

That figure will be made up of $60 billion of Treasury Bonds and $35 billion of mortgage-backed securities.

The ultimate target for the reduction of the balance sheet has not been divulged, other than to say that it will amount to trillions of dollars.

While he is not currently a voting member of the FOMC, St Louis Fed President James Bullard made one of the most hawkish statements that have been seen from any Regional Fed Presidents yesterday.

He spoke of the need for the Fed to hike interest rates to 3.5% in the second half of the year. He agreed that rates should be hiked by fifty-basis-points early next month, although he continues to consider data releases.

Given that the market is now pricing in the size of the reduction in the balance sheet, there is no reason for that to influence the pace of interest rate increases.

While Bullard may now be considered the most hawkish of Regional Fed Presidents, His colleague at the Federal Reserve Bank of Minneapolis, Neel Kashkari has similar thoughts.

Kashkari also believes in front-loading interest rate hikes in order to allow the FOMC leeway to be driven by data going forward. Kashkari is wary of overdoing the speed of rate hikes. However, he has pencilled-in the equivalent of seven twenty-five basis point hikes this year. He is not averse to rate hikes continuing into 2023 provided the economy needs them.

The weekly jobless claims data was released yesterday. It showed that applications for benefit fell to their lowest level in ten years, reaching 166k. The data for the week ending April 2nd was well below the market’s median average expectation of 200k and followed a rise the previous week. The four-week average is now well below the watershed level of 200k, reaching 170k.

The dollar index continues to move slowly but inexorably towards the 100 level. Yesterday it traded up to a high of 99.82, closing at 99.74.

ECB meeting just seven days away

It is fast becoming a significant market cliché, but next week’s ECB Governing Council meeting could turn out to be the most significant on record.

This partly due to the fact that there is now close to a majority of members in favour of a hike in interest rates to battle inflation which is becoming close to out of control, if it isn’t already, but also for the fact that the champion of continuing to support the economy, ECB President Christine Lagarde may be absent.

Ms. Lagarde appears to have contracted Coronavirus in what could turn out to be one of the biggest ironies of the entire Pandemic.

Not to gloss over a small nugget of good news, retail sales grew by 0.3% in February. This was before the Russian invasion of Ukraine, when the build-up of Russian Troops on the Ukrainian border was still being considered as sabre-rattling by the Russian President.

That could not have been further from the truth and the likelihood that February’s data will be repeated is remote in the extreme.

The accounts (minutes) of the most recent policy meeting of the ECB show that a large number of Governing Council members hold the view that the current high level of inflation warrants immediate steps towards policy normalization.

When compared to the monetary policy steps being taken by the FOMC, it is clear that the ECB is falling even further behind the curve.

It is accepted that inflation will remain above target for the rest of this year, but the more hawkish Governing Council members now believe that it will remain that way throughout 2023.

It could be argued that if it is above target for such an extended period, then the target no longer exists. Looking at inflation in comparison to a target rather than in absolute terms means that the ECB will continue to garner criticism.

Yesterday, the euro continued the market’s current fascination with trends, no matter how slowly they develop. With the pound flirting with 1.30 versus the dollar, and the dollar index eyeing 100, the single currency continues to target 1.08.

Yesterday, it fell to a low of 1.0864 and closed at 1.0884.