Last week saw the debate over UK interest rates take another twist. A number of UK Bank of England Monetary Policy Committee members gave speeches on a variety of topics, but Chief Economist Pill, Deputy Governor Ramsden and external Monetary Policy Committee member Mann, all appeared to endorse further monetary tightening. There was the suggestion from Ramsden that interest rates could fall in the future, but only after a near term peak was reached, and there was no indication from the speakers that there would be any accommodation made for any short-term weakness of the UK economy. However, the housing market continues to point to weakness, which might have additional downside pressures to discretionary spending in the coming months, during a very important period for retailers.

There was also some important news from the UK Supreme Court, which ruled that the Scottish government could not unilaterally hold another Independence Referendum, which means that the vote that was scheduled for next year will now not take place. The pound rallied on the back of this news, and back through $1.20 versus the US dollar and over €1.1650 versus the euro. There was little other news to support the GBP last week, with the PMI (Purchasing Managers’ Index) figures recording ongoing contractions in the manufacturing and services indices in the provisional November readings.

For this week, there are also no particularly important releases due. There has already been a survey from Zoopla/Hometrack which highlighted the downturn being experienced in the UK housing market. The scale of price discounts in house prices have stepped up in the latest month, and this is before the effects of the increase in mortgage funding costs on housing demand are fully felt. In terms of retail, there is the British Retail Consortium prices data for November due, which will give an insight into the scale of price discounts during the Black Friday sales.

In terms of the GBP, the risks are still there to the downside, but with nothing like the urgency seen in previous months. If there is a correction in the GBP it may come against majors other than the US dollar, which has struggled for traction after some sizeable falls in recent weeks. Any rebound the GBP enjoys against the USD might also be difficult to hold onto, given how quick and how large the correction has been, in my view.

Last week’s data and surveys from the US were a mixed bag, with a worsening in manufacturing and services, as measured by provisional November PMI figures, counterbalanced by a surprise improvement in new home sales for October. There was a larger increase in jobless claims in the week ending 19 November, but consumer sentiment rose by more than expected in the provisional November reading. Perhaps the release that created the greatest amount of market activity was the minutes of the Federal Reserve’s November monetary policy meeting. A substantial majority of the FOMC (Federal Open Market Committee) members agreed that a slowing in the pace of tightening would soon be appropriate, which markets took to mean that the peak in US interest rates might be lower. However, that appears to be the wrong take, in my view, and rather the Committee is suggesting that there is no pressing need to get interest rates to the terminal rate quickly, but rates will need to rise further from here.

This week’s Beige Book from the Federal Reserve, which is an assessment of current economic conditions, may highlight the ongoing dilemma that the Fed is facing. On the one hand the survey evidence suggests that economic activity will slow from here, or is already slowing. The economic data on the other hand suggests that certain areas, including the labour market, are still running hot and will require further, potentially significant, action from the Federal Reserve to bring under control. That will put additional emphasis, if any was needed, on the November labour market report at the end of the week. Non-farm payrolls are expected to rise by a further net 200,000, according to current market consensus, with the unemployment rate expected to hold at 3.7% and average earnings growth forecast to slip from 4.7% year-on-year to 4.6%. All in all, this report, if it comes close to the market consensus, won’t alter the likely terminal rate for US Fed funds, which still lies between 5.0-5.5% in my view.

As for the USD, if its weakness persists, then against the JPY and EUR might be where it is more obvious. These currencies either have weakened by far more than the fundamentals indicated, or have a mildly positive economic outlook relative to that of the US in 2023. I still question whether the market moves are in part down to worsening liquidity and position squaring, rather than any material change in market opinions towards the major currencies?

There are a few key themes for Euroland to focus on as we head towards the end of the year. Firstly, how will the war between Ukraine and Russia pan out, and could it escalate, or could the theatre of war be expanded? Secondly, will there be a mild or cold winter and what would that mean for energy demands for the European Union and more narrowly the Euroland bloc of countries? Thirdly, will the rise in European interest rates and worsening global economic environment lead to an underperformance of the Euroland economy, relative to the performance of neighbouring economies?

Last week didn’t really tell us anything on any of these fronts. From an economic perspective, there was some improvement in the headline producer price inflation environment for Germany, Finland and Spain, but increases in the rates from the Netherlands and Ireland. There was a surge in Italian consumer and manufacturing confidence in November, but a fall in Belgian business confidence and a smaller improvement in the latest German GfK (Growth from Knowledge) consumer confidence reading, whilst the German November IFO* survey recorded another dip in the current assessment reading, but a larger than expected rise in expectations, and German Q3 GDP (Gross Domestic Product) figures were unexpectedly revised up to indicate growth of 0.4% in Q3, from 0.3% in previous estimates. From a central bank perspective, despite a worsening in the Organisation for Economic Cooperation and Development’s outlook for Euroland 2023 growth, most central bankers speaking, argued for higher interest rates to further cool demand and bring inflation back to target.

For this week, I suspect there will be little significant movement on the economic news, which sees the likes of German, Spanish, French, Portuguese and Italian consumer prices figures for November released, and already this week, Euroland M3 money supply figures pointed to a sharp slowing in the rate of growth. The slower that money is going round the economy, the lower the growth rate is likely to be, in my view. The EUR has started this week strongly, but can it maintain its recent strength, or is the move at the beginning of the week a false indicator of what is to come?

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

Last week, the BoI (Bank of Israel) raised interest rates by 50 basis points to 3.25%, when a 75 basis point hike had been expected. The BoI stated that the interest rate would likely increase further, but noted that it expected inflation to be back within target during the second half of 2023. The urgency for additional rate increases appears to be reducing, although the recent weakening of the shekel may give the central bank a little additional cause for reflection. As for the other meaningful central bank meetings, the central bank of Hungary left interest rates at 13%, in line with expectations, the Reserve Bank of New Zealand hiked interest rates to 4.25% from 3.5%, taking them to a fresh post global financial crisis high, the Swedish Riksbank hiked interest rates 75 basis points to 2.5% and the South African Reserve Bank raised interest rates to 7% from 6.25%. Towards the end of the week, the Chinese authorities cut the reserve requirement for major banks from 11.25% to 11%, a move designed to help support the economy which is struggling for momentum. That prompted a move higher in USDCNY in the aftermath of the decision, although some of the CNY sell-off may be due to growing COVID lockdown protests across China also.

For this week, the calendar is fairly quiet with only the BoT (Bank of Thailand) decision of any note. This is the calm before the storm of the coming couple of weeks, where a lot of central banks will announce their final decisions of the year. For the time being though, the BoT decision is expected to be a 25 basis point rate increase, albeit the recent strengthening in the THB versus the US dollar may have reduced the risks of a tightening a little, in my view.