The last week saw a plethora of surveys and data releases from the UK, which on the surface offered some marginally more positive signals, at least in general. However, the overall direction of travel for the UK was still negative, with retail volumes still significantly lower than where the year began (around 4.4%), consumer confidence still at its equal third worst reading on record and a surge in energy prices leaving headline consumer price inflation at a fresh 4 decade high (11.1% year-on-year).

All this though was window dressing to Thursday’s release of HM government’s Fiscal Statement. The Chancellor, Jeremy Hunt, had already indicated that there was a sizeable shortfall that required filling, but the measures implemented perhaps surprised in terms of the severity nonetheless. There were £25bn of tax hikes, and tens of billions of spending cuts, albeit these were delayed. The tax hikes to individuals and the lack of indexation of income tax thresholds meant that real household incomes would fall by over 7% within the next 18 months. Businesses would also suffer significant tax rises over the coming years with a lack of indexation of National Insurance thresholds for the next 5 years. However, according to the Office for Budget Responsibility the UK economy would only contract by 1.4%.

The risks are that, following the Fiscal Statement, the UK’s recession is likely to be worse and longer, with the prospect of additional interest rate hikes looming also. The market reaction was for the interest rate markets to predict a marginally higher peak for official rates, despite the marked fiscal tightening. Whilst the pound, which had briefly surged above $1.20 earlier in the week, ended on a sourer note, albeit it did rise against the EUR over the course of last week.

This week, there are only the October public finances figures, provisional November manufacturing and services PMIs (Purchasing Managers’ Indices), and November CBI (Confederation of British Industry) industrial trends survey for release. Bank of England speakers Cunliffe, Pill, Ramsden and Mann will also be closely watched, for their first reactions to the UK’s outlook post the Fiscal Statement. That Fiscal Statement may also come under pressure, given reports in the UK media of a backbench rebellion over some of the included measures, including a 12p increase in fuel duty due to come into effect in April next year. There is unlikely to be anything domestic to offer the GBP comfort, in my opinion.

Last week saw comments from Bullard, George, Williams, Waller and Daly, all suggesting that the Federal Reserve has some way to go before interest rates reach an appropriate level to restrain inflation. The interest rate markets continue to see US interest rates capping out at around 5.25%, but some of the speakers said that would be the minimum level they’d be prepared to accept, indicating that the risks are asymmetrically skewed higher.

However, there were further signs that levels of business activity, housing demand, and industrial production were taking a dip, with the October figures for industrial production reporting a surprise 0.1% month-on-month drop in output. Also the November NAHB (National Association of Home Builders) housing market index falling to a 2 and a half year low, housing starts and existing home sales down sharply in October and the leading index falling for the eighth straight month.

The USD lost ground last week to the EUR, GBP and JPY after US October producer prices reported another downside turn for inflation reading. The markets though appeared to have lost a little momentum as we ended the week, handing the USD back a little bit of strength as USDJPY closed above ¥140, and GBPUSD and EURUSD dropped below $1.19 and $1.0350 respectively.

For this week, the Thanksgiving holiday severely curtails the data release calendar and is likely to undermine liquidity as well. The momentum behind the USD sell-off might abate further, with some survey releases from Euroland unlikely to be sufficient to prompt any sustainable domestic momentum, in my view.

What did last week tell us in terms of Euroland’s economic performance? On the face of it, the data and surveys offered a marginally more positive picture in terms of economic activity, with the Euroland October industrial production data rising more than expected, and surveys such as the German November ZEW* reporting larger improvements in the current situation and expectations components. That didn’t help the EUR in the second half of the week, which sold off against the GBP and USD.

The poor performance of the EUR is likely due to several factors. There has been additional geopolitical pressure from the Ukraine/Russia war, with the prospect of increased sanctions against Russia expected to worsen the power situation for Europe in the short-term. That came after fears of an escalation in the conflict following the news of a missile strike in Poland that at first was alleged to be Russian, but later was indicated as errant Ukrainian air defence. There are also concerns over liquidity in Euroland banking system after the ECB (European Central Bank) made changes to the TLTRO (targeted long-term refinancing options) programme, which could be exerting some pressure on the EUR. Finally, there have been some parts of the ECB Governing Council that have expressed concern about the interest rate increases, which could mean a widening between European interest rate spreads and that of other major economies.

This week, there could be some temporary EUR relief in the form of the German IFO** survey for November and the provisional November PMI Euroland surveys for manufacturing and services. If these record an improvement, either nominally or relative to what is observed in other major economies, then the outlook for the EUR might improve marginally. However, the pressure going into December appears to be on the ECB  to do less, or as little as possible, based on speeches delivered recently, in my opinion.

*Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

**Information and Forschung / Germany’s Institute for Economic Research

Last week was the turn of the central bank of Philippines and Bank Indonesia to make decisions on monetary policy, but for both the decisions appeared relatively straightforward. Interest rates rose 75 basis points in the Philippines to 5%, the highest rate since the financial crisis, whilst in Indonesia rates climbed 50 basis points to 5.25%, only a three year high. Both central banks warned of higher interest rates to come, with the weakness in the Philippines peso exerting upside pressure to inflation, whilst in Indonesia, a combination of robust growth and a weak currency are prompting inflation pressures that are proving difficult to re-anchor. The pace of additional tightening may slow in 2023, but the terminal rates for both economies may still be some way off (percentage points), in my view.

This week, the attention switches to what the likes of the RBNZ (Reserve Bank of New Zealand), Swedish Riksbank and SARB (South African Reserve Bank) will do on monetary policy. The RBNZ is expected to hike interest rates by 75 basis points. However, after the Reserve Bank of Australia started to slow down the pace of its tightening, hiking only 25 basis points at the last meeting, could the RBNZ hike be slightly less aggressive? The Riksbank may also note the Norges Bank’s recent slowing in the pace of its tightening, as well as signs of a worsening of Swedish labour market and a slowdown in economic activity. Could that be sufficient to prompt them to do less than the 75 basis points priced in? Finally, the SARB is also predicted to hike interest rates 75 basis points. Here also, the most recent batch of economic data and surveys has been somewhat negative, but there is perhaps less reason for it to pull back on the monetary tightening agenda than the other central banks, other than the improvement in the rand, which is only replicating the USD sell off against most currencies. In my view, these central banks might be rapidly approaching the limits for monetary policy, and the statements accompanying these decisions will be as interesting as the decisions themselves.