ACM Update 18-10-22
The lady’s not for turning…? Well that definitely wasn’t the case, with almost a full U-turn of all economic policies unveiled by Kwarteng and Truss, just weeks before. The Bailey/Bank of England versus the Government situation seems to have calmed too, for now.
Over in the US, inflation remains high whilst the jobs market shows no sign of slowing yet.
Last week the UK dominated headlines, both politically and economically, as the game of chicken between Truss/Kwarteng and Bailey/Bank of England caused sizeable GBP volatility. The recently appointed Chancellor seemed to be the scapegoat for the unpopular “Trussenomics”, with Kwasi Kwarteng losing his post and being replaced by Jeremy Hunt by the end of the week.
It had been a nervous few days for gilt markets too, with the Bank of England declaring their intervention would end on Friday 14th. That gave just three days for major decisions to be made, and PM Truss therefore almost had her hand forced in making changes to her cabinet, in order to restore stability.
The latest cabinet merry-go-round was far from favourable for sterling at times last week, with GBP-USD dropping back under 1.10 for a short while, before moving back into the mid-1.13s by the end of the week. Liz Truss also continued her trend of sending GBP on a negative trend whenever she makes a speech or announcement. This took GBP back down late on Friday.
Recent moves in GBP-USD can be seen in the chart below:
Away from the politics, fundamental UK economic data was a mixed bag last week. Unemployment hit its lowest levels since 1974, as the figures for the three months to the end of August came in at 3.5%, just beating expectations of 3.6%. GDP however for August came in at -0.3%, not a great sign for an economy looking to avoid recession. The NIESR (National Institute of Economic and Social Research) also estimate the same size contraction in the UK economy over the last three months.
On the US-side of the equation, the week started with a bank holiday last Monday, so naturally trading volumes were a little lower. US inflation continued to rise when the September figures were released, now running at 8.2% on an annualised basis. The month-on-month growth was 0.4% compared to August.
The jobs market there continues to remain buoyant, despite the best efforts of the Federal Reserve. Expect a further sizeable rate hike in the next Fed meeting on 2nd November. In the minutes from their previous meeting (released last week), the Fed remain concerned about higher inflation to come. This means their pivot to cutting rates could well be pushed back. Retail sales have begun to slow though, showing zero growth in the last month.
The Eurozone remains a concern, with the ECB virtually having their hand forced into aggressive rate hikes, to follow suit elsewhere. As rate hikes take place in the US & UK, without their own rate hikes the Eurozone is effectively importing inflation from abroad if they don’t do the same.
Despite inflation rising sharply and the looming threat of a European recession, the ECB has very little choice but to continue hiking. Christine Lagarde maintained in a speech last week the ECB expect to remain raising interest rates in their next two meetings, which seems very much a foregone conclusion. Recent GBP-EUR moves can be seen here.
The Week Ahead:
Monday – Rightmove UK House Prices (0.9% growth month-on-month)
Tuesday – Australian Monetary Policy Minutes (01:30 UK time)
Wednesday – UK Inflation (10.0% expected, 07:00), Eurozone Inflation (10.0% expected), Federal Reserve Beige Book (19:00)
Thursday – Australian Unemployment Rate (3.5% expected, 01:30), US Unemployment Claims (13:30)
Friday – UK Retail Sales (-0.5% expected, 07:00)
So a much lighter week this week in terms of market data, but as we know from recent events these aren’t necessarily the current focus! The political picture in the UK will remain in the spotlight, very much reliant on new Chancellor Jeremy Hunt to rebuild some confidence.
Inflation and retail sales data will be closely watched in the UK, especially to see if the Bank of England’s interest hikes have made a dent in the current inflation trend. The general consensus seems to be they need to do more, so the data will likely dictate actions in the next meeting for Bailey & co. An even bigger hike on the cards?
Sterling does seem to have found a more stable footing since the cabinet changes of late last week, so any clients needing to sell Euros or Dollars should reach out to the team to discuss their requirements. We will remain very much at the mercy of the politicians, as has been the case of late!
Have a great week.