So much has happened in the news in the last 12 months. But for me, Putin invading the Ukraine on the 24th February 2022 is a sobering anniversary!
Pound Sterling News
The UK narrowly avoided slipping into a recession in the second half of 2022. For the whole year, the UK economy grew by 4%, the fastest growing economy out of the G7 nations.
UK wages rose quicker than expected at the end of 2022. Average earnings excluding bonuses were 6.7% higher in the last quarter of 2022. That\’s its fastest pace since records began in 2001 – excluding the pandemic period. However, despite the UK inflation rate falling to a 6-month low of 10.01%, wages are failing to keep up with the inflationary spike. And, the Bank of England (BoE) are likely to keep raising interest rates to combat the ongoing inflationary pressures.
The UK unemployment rate held steady at 3.7% in December, in line with market expectations.
The number of days lost to strike action totalled 843,000 in December. That takes the total number of strike days from June to December 2022 to 2,471,000, the highest since 1989.
Headline UK retail sales rose by 0.5% month on month in January. Surprising to the upside against market expectations for a 0.3% decline.
UK public finance data for January showed an unexpected surplus of £5.4 bn versus market expectations for a deficit of £7.9 bn. The surplus means that the Chancellor is likely to undershoot the government’s borrowing target for the current fiscal year. And with the fall in gas prices in early 2023, now down to pre-Ukraine war levels, the cost of the energy price subsidy in the 2023/24 budget will likely be less than originally estimated. That in itself is raising calls for a tax cutting budget on the 15th March from Chancellor Jeremy Hunt.
The U.K. tax burden currently sits at a 70-year high.
John O’Connell, chief executive of the Taxpayers’ Alliance said, “Taxpayers are fed up with their record high tax bills, with no end in sight.”
The Confederation of British Industry (CBI) warned Hunt that he must cut the tax burden on companies in his Budget on 15th March or leave Britain diminished on the world stage and struggling to attract investment
Former Cabinet minister Sir John Redwood declared “Ireland collects £4,000 of corporation tax per person. The UK collects just £1,000 per person. That’s because Ireland charges 12.5% tax and the UK 19%. Lower tax rates bring in so much more business to tax.”
Meanwhile, the Bank of England has launched a joint consultation with the Treasury to discuss the digital pound.
The consultation is being launched because both HM Treasury and the Bank want to ensure the public have access to safe money that is convenient to use as our everyday lives become more digital. A digital pound would replicate the role of cash so that £10 of a digital pound would be worth the same as £10 of cash. It would be accessed through digital wallets offered to consumers by the private sector through smartphones or smartcards. It would be used for payments, online, in-store and to friends and family, rather than savings, with no interest paid on holdings. Unlike crypto assets and stablecoins, the digital pound would be issued by the BoE and not the private sector.
Nicola Sturgeon has resigned from her role as first minister of Scotland.
The currency markets are forecasting that the European Central Bank (ECB) will raise interest rates to all-time highs of 3.75% by September 2023. That\’s up from the current rate of 3%. This would match the 2001 peak just after the euro was first launched.
February has largely seen better-than-expected euro zone economic data fuelling optimism that a recession may be averted. Although the area’s largest economy, Germany shrank by more than expected at the end of 2022. That puts it on course to fall into recession in 2023. German output contracted by 0.4%. Economists predicting another negative result for the first quarter of 2023, tipping Europe’s largest economy into a technical recession – two consecutive quarters of negative growth).
Europe spent almost €800 bn to protect households from soaring energy bills since the beginning of the energy crisis. Germany being by far the biggest spender, splashing out nearly €270 bn since September 2021. In contrast, the UK has spent €103 bn.
Natural Gas wholesale prices are down 73% since November.
US Dollar News
The odds on a higher than 0.25% base rate rise when the Federal Reserve next meet on the 22nd of March have shortened so the US Dollar closed last week back up at the high’s seen against both the Pound and the Euro at the start of 2023.
As a result, the New York stock market recorded its biggest weekly fall in more than two months last week. Market confidence was shaken by the latest evidence of high inflation in the world’s largest economy.
The US consumer price index rose at a rate of 6.4% in January compared to a year earlier, a smaller decline than expected.
Meanwhile Disney announced plans to axe 7,000 jobs, about 3% of its entire workforce in a $5.5 bn cost-cutting plan. More than 66,000 workers in US based tech companies have been laid off. So far in 2023 including: PayPal’s 2,000 job cuts; Google\’s parent company Alphabet recently laid off 12,000 workers, equivalent to 12% of its workforce whilst Meta cut an even bigger share of its staff. Even IBM, which has been in business for 111 years, is cutting thousands of jobs. In total, since the start of 2023, 297 tech companies laid off nearly 95,000 workers. If that rate continues, the industry could cut more than 900,000 jobs in 2023. That\’s nearly six times the total for the industry in 2022.
Why is the Pound gaining value against the Ero but falling against the US Dollar?
The Pound enters the final days of the month trading 0.5% up on the Euro since the 1st of January but 1.1% down against the US Dollar in the same period.
March will bring a whole new months’ worth of economic data; the UK budget on the 15th (For those of you who know their history, the Ides of March and the BoE rate setting meeting on the 23rd of March.
The ECB have their rate setting meeting on the 16th of March so expect some market fireworks midmonth between the Pound and the Euro.
The US Fed have their rate setting meeting on the 22nd of March.
The principal reason the Pound is up against the Euro but down against the Dollar so far this year is all to do with interest rates. More specifically, interest rate differentials and expectations.
I expect the main market drivers to remain interest rate differentials. The UK has a current base rate of 4%; the EU has 3% and the USA 4.75%) and interest rate expectations.
More in hope than expectation, an earlier than expected resolution to the Ukrainian war would surely see an improvement in market sentiment.
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This week’s quote is from Malcolm X
“When ‘I’ is replaced with ‘we’, even illness becomes wellness.”