8 July 2022: Bye Bye Boris

GBP – Successor will face a major rebuilding task

Prime Minister Boris Johnson finally bowed to the wishes of many of his colleagues in Westminster and announced his resignation from the post.

He said that he intends to stay on until a successor is confirmed, which could take until the Autumn.

This decision has received further criticism from both sides of the House of Commons, with Opposition Leader Sir Keir Starmer threatening to call a vote of no confidence to ensure that Johnson leaves immediately.

In the end, Johnson was forced to admit that his position had become untenable, something that had become obvious to his Cabinet colleagues days ago and was perfectly illustrated by sixty of them feeling obliged to resign their own positions.

Johnson swiftly reshuffled his Cabinet replacing those who have recently departed. Nominations for the role leader have already begun with candidates needing to have the support of eight MPs in order to stand.

There are a few surprise candidates and also some surprises among those who have said they won’t stand, including current Deputy Prime Minister Dominic Raab.

Among those expected to throw their hat into the ring are former Chancellor Rishi Sunak and Sajid Javid, who resigned as Health Secretary earlier in the week.

The fact that Johnson plans to cling on to power until his replacement is named, means that the country will suffer from a form of paralysis during a period that could prove to be vital in the right against inflation and the cost-of-living crisis.

Johnson and Sunak were working on a joint initiative to improve people’s ability to survive rising energy and food bills with one eye on the winter when the situation will undoubtedly worsen as the energy cap is raised again.

Rather ironically, the pound managed to rally back above the 1.20 level yesterday, as it managed to resist the steamroller effect of a rampant dollar.

It reached a high of 1.2033 and closed at 1.2029. It remains under pressure, and yesterday’s rally may prove to be little more than a blip.

Bank of England Chief Economist Huw Pill spoke yesterday at Sheffield University. He reiterated his recent comments about inflation being uncomfortably high and the fact that it is impossible to predict anything other than further increases before the end of the year. He believes that the rate at which the Bank will be forced to raise rates is also going to increase.

Pill’s colleague Catherine Mann also spoke yesterday, and added to her recent comments about the effect of the value of the pound on inflation. He said that she feels that rate hikes should be front-loaded, but it seems she has missed the boat, since the Bank has already hiked several times in this cycle.

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USD – Events have overtaken the President.

President Biden is expected to fare badly at the midterm elections, as the effect of anyone but Trump voters at the most recent Presidential Election realize that their choice was flawed.

While the Treasury and Central bank attempt to repair the damage created by the President’s over generous support for workers at the height of the Pandemic. Biden remains absent from the fight.

One thing that could be said for Biden’s predecessor was that you knew who was in charge, like it or not.

James Bullard, the President of the St. Louis Fed, spoke yesterday of his belief that not only can a recession be avoided, but FOMC actions will contribute to a soft landing for the economy.

Inflation remains a significant issue and is expected to remain so as demand continues to rise, leading the Central bank to consider further hikes in interest rates of at least seventy-five basis points.

Jerome Powell has already commented that he doesn’t feel that anything above seventy-five will be needed, but as the effect of hikes lags their introduction, there remains a degree of uncertainty.

Inflation is now running at more than three times the Bank’s target, although global events will most likely force the target to be reviewed as inflation remains present in the global economy.

This shouldn’t be considered a case of moving the goalposts to improve the optics, this would be a reaction to a new paradigm shift in how economies interact.

Today sees the release of the June Employment report, which appears to have been a long time coming.

While the headline data for new jobs is expected to be lower than in May, it should still show a healthy number of around 275k.

The unemployment rate is likely to fall back to 3.6%, while the participation rate will be unchanged at 62.3%.

The dollar index paused its recent rush to greater strength yesterday as there was a small shift in risk appetite. The index closed almost unchanged on the day at 107.06 having drifted lower to 105.71 earlier in the day.

EUR – The choice between fragmentation and fiscal union is tough.

Those traders who have been predicted that the euro will, and possibility break through, parity have been suffering a tantalizing week as the single currency has clung on despite the obvious strength of the dollar.

The parlous state of the Eurozone economy, where even the strongest nations are facing a recession, has seen traders shy away from the euro even though a hike in interest rates will take place this month.

There is a feeling, backed up by past actions, that the hike will be only twenty-five basis points which will both confirm the growing divergence between U.S. and Eurozone interest rates and do virtually nothing to bring down inflation.

While the change of direction from providing support to fighting inflation will be initially welcomed, questioning the will of the ECB will quickly return.

It is obvious that despite her more hawkish comments, ECB president Christine Lagarde is unwilling or unable to throw herself into the fight against inflation despite renewed calls, particularly from Germany this week, for action to be taken.

The issue of the inflation rate across the Eurozone, where an average of every country’s headline rate is used, means that the effect of any interest rate hike becomes blurred. A hike of twenty-five, or even fifty basis points will be little more than a drop in the ocean to Estonia, where price rises have reached 20%, with the other Baltic States not far behind.

Once this crisis has been weathered and before the next one arrives, a serious discussion about fiscal union will need to take place. It will not be as straightforward as monetary union appeared to be, since a far greater study will need to be had around tax rates and levels of economic support.

This could be the straw that breaks the camel’s back, since there are bound to be losers from any fiscal union, and it is unlikely that they will come from the wealthier members.

As a permanent cure for fragmentation, such a move would be successful, but it would bring with it deeper issues that could lead to the disappearance of the Eurozone and a return to a looser Union based around trade.

The euro has managed to resist the fall to parity for now, but it still seems inevitable.

Yesterday, the single currency fell to a low of 1.0143, but clung on and managed to rise a little to close at 1.0161.