Beyond Currency

The Unemployment rate in the UK fell again in March as 35k new jobs were created. However, that is where the good news ended, as real wages fell as inflation bit into pay packets. With wages rising by 4% year-on-year, real pay fell by 1% when adjusted for inflation.

While the latest data is encouraging, there were warnings that the end of the trend for more jobs being created could be coming to an end.

The Office for National Statistics warned that it was only the significant increase in bonus payments, mostly linked to the Pandemic, that has meant that wage increases remain relatively close to the level of inflation.

Although the Bank of England is expected to continue to hike rates by twenty-five basis points at each of its next three meetings, the fear is that it will prove too little too late and the country is going to be expected to live with a rate of inflation that is well above the Government's target for the rest of this year, the whole of 2023 and well into 2024.

This will be coupled by an economic slowdown over the rest of this year that could become a recession, although, were the economy to contract sufficiently to bring a recession, the Central bank would be expected to act.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

Industrial and manufacturing output in the UK slumped into negative territory as the headwinds facing the economy began to bite.

Industrial activity fell by -0.6% from 0.7% in February, while manufacturing fell to -0.4% from 0.9%. Year-on-year, industrial production halved to 1.6% from 3%, while manufacturing fell from 52.3% to 3.6%.

While these falls were anticipated and these sectors make up just 20% of total GDP, it is indicative of how the economy is slowing as the headwinds that have been forecast take effect. This sets the start of a trend that will accelerate when increases in the cost of energy and tax payment are factored in.

The data intensifies concerns about the cost-of-living squeeze. Overall, GDP rose by just 0.1% in February, versus market expectations of a 0.4% rise.

The NIESR estimate for GDP in the three months to March was 1%. This is in line with market expectations and illustrates how the economy is slowing even before the rise in the energy cap and the cost of fuel is factored in.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The Bank of England may be forced to pause its current rate hike cycle for fear of tipping the country’s economy into recession.

While it seems that inflation is still limited to the supply side, caused mainly by the remaining bottlenecks in supply chains caused by the Pandemic, so far it has not spilled over into the labour force.

The country is gripped by the fears that have been created by several factors created by an unprecedented fall in the standard of living.

A slowdown in activity is being predicted by nearly every economist and market commentator as the continued rise in inflation collides with the effect of the conflict in Ukraine.

February’s growth figures will be announced later today and it is unlikely that the strong GDP seen in January will be repeated.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

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.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

Expectations for the economy to recover following the Pandemic remain low, but this won’t stop the Bank of England hiking rates to levels not seen since December 2008.

Inflation is still the focus of the Bank of England, despite growing concerns about the prospect of a collapse in economic activity. The last three MPC meetings have resulted in interest rate hikes and that is expected to continue until rates are double their current level.

It is possible that following the meeting that will be held on 4th August, the Bank will pause to gain a sense of perspective over developments not just in the UK but globally.

Only Deputy-Governor Jon Cunliffe is bucking the trend of interest rate hikes. He voted to leave rates unchanged at the most recent meeting, while every one of his colleagues voted for a hike.

The economic situation in the UK is not as clear as the MPC voting records make it appear. Cunliffe has several supporters who believe that the combination of supply chain concerns and the conflict in Ukraine are driving inflation higher in what he considers to be an unnatural manner.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The pound failed to find any positivity in the release of a report which showed that services activity surged in March. This is being seen as a useful gauge of the market’s view that the economy will slow considerably once the effect of the withdrawal of Covid related restrictions begins to fade.

Inflation is still rampant, and the likelihood is that the Bank of England will act both judiciously but aggressively to bring it down.

Deputy Bank of England Governor Jon Cunliffe spoke recently of his view that the Bank may be able to moderate its programme of hikes since the rise in inflation hasn’t yet split over into wage demands.

Investors believe that it is only a matter of time before wage demands rise and create a slowdown in the economy.

The current view of Sterling is that the market has been too aggressive in its belief that short-term interest rates will reach 2% this year. The view is that if the economy begins to slow this month, the Bank of England may not be able to go much above 1.50% if at all. This will mean that inflation will remain uncomfortably high well into next year.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

Bank of England Deputy Governor Jon Cunliffe was the only member of the MPC who voted against a hike in interest rates at the latest meeting.

Yesterday he spoke of his doubts that the Bank will have to take sustained action to curb public expectations that high inflation will become ingrained since, so far, those concerns have failed to materialize.

He acknowledged that inflation would need to be tackled, but does not see a comparison with the 1970s, when an energy shock saw inflation rise and stay elevated.

The conflict in Ukraine will lead to a substantial downturn in economic activity. This will be worse than the Central bank predicted in its latest bulletin, released in February, and will last well into the first half of 2023.

Cunliffe warned against the public becoming convinced that high and rising inflation would need to be countered by higher pay awards.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

This week will mark the beginning of a significant downturn in the UK economy that could see the country in recession by the end of the summer.

It is now considered that the second quarter will see a contraction in GDP or as market analysts like to call it, negative growth.

The most significant factor has been the increase in the cap that is placed upon energy companies to ensure that domestic bills remain reasonable.

It is hard to believe that the first of two increases this year (the second will be in October) will see the average domestic electricity bill rise by £750 a year could be considered reasonable.

The Government loves to draw the attention of the electorate to the performance of the economy in comparison to other G7 nations. Yes, of course the UK is performing better now than the Eurozone. This is almost entirely due to the fact that Europe has a war on its doorstep and has been buying energy from Russia for several years and is now expected to find another supplier.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Today sees the price pressures on UK consumers rise significantly as energy prices, National insurance contributions, water costs, Council Tax, postage and broadband charges all set to rise.

The average household energy bill will increase by around £700 a year with another increase in the energy cap, the most that energy suppliers can charge consumers, set to rise again in October. Today’s rise in the energy cap is set at 54%.

In addition, the conflict in Ukraine is adding to the cost of basic food supplies.

The first quarter of 2022 has ended, with the economy having grown as the effects of the Pandemic have waned, but infections are at a high, but less serious level.

The Bank of England’s actions to stave off inflation will see interest rates rise to 1.50% by the summer, with banks charging more for mortgages.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"The Office for National Statistics in a report published yesterday expressed its concerns that the unprecedented upheaval that the country has faced over the past five or six years will bring the return of a level of poverty that was believed to have been eradicated permanently.

Brexit followed by the Pandemic then the ongoing conflict in Ukraine means that the country, the Chancellor and the Central Bank are continually firefighting without being able to set in motion the policies and actions that formed the Government's manifesto following its election victory.

Indeed, it is now more than likely that the current Parliament will not have been able to do anything it set out to do and the standard of living for ordinary people will have dropped considerably.

Bank of England Vice-Governor Ben Broadbent concurred with the findings of the report, adding his belief that it is doubtful that UK households had ever faced such a hit to national income, and it is highly likely that inflation will continue to rise while the economy suffers below average growth.

In separate comments, Broadbent went on to encourage his colleagues on the Monetary Policy Committee to consider their words carefully when making comments about voting intentions or their views on the economy to ensure that they didn’t add to public concerns or spook the market.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.