Sunak needs more funding
3rd September: Highlights
- Does the MPC need another hawk?
- A Powelless Fed to become even more dovish?
- Is better data pointing to a December taper?
Johnson’s no austerity vow under threat
It is believed that around £10 billion of additional funding is needed to support the NHS as the country returns to normal, with waiting lists for routine procedures at an all-time high.
The alternative to raising taxes is a reduction in services and a return to austerity, a choice the Government has promised not to make.
Sunak continues to issue statements that he is committed to keeping public finances on a sustainable footing, with a policy promise that Government debt should return to pre-Pandemic levels by the 2022/23 financial year.
While that is a worthy commitment, it is not cast in stone, and in order for the relationship between Prime Minister and Chancellor to not suffer again following Sunak’s call for a lifting of travel restrictions brought a stinging response from Boris Johnson, he may need to tread a little carefully.
As Johnson prefers to paint with a broad brush, leaving the details to others, he may need to be forced to swallow a dose of reality since, as things stand, the funding is simply not there to pay currently for the promises he has made.
The Office for National Statistics is likely to be far more optimistic in its next estimate of public finances since the recovery has been far more positive than it had previously reported. That should create something of a one-off windfall for the Chancellor.
The appointment of Huw Pill as the new Chief Economist at the Bank of England has not been greeted with universal approval. Pill will add a hawkish voice to the Monetary Policy Committee when he joins next week.
He will take an active role in the considerations at the meeting that will take place on September 23rd, when the market will be expecting further advance guidance on the Bank’s plan for the reduction of support for the economy.
Yesterday, the pound rallied against the dollar as the market awaits today’s data from the U.S. It reached a high of 1.3839, closing at 1.3833. Having broken through resistance at 1.3770, the pound looks set to rise when considered technically. However, any major upside surprise for the August employment data in the U.S. and all bets are off.
NFP estimates provide downside risk
Were that to happen today, it shouldn’t come as a surprise to FOMC members, since they predicted a slower recovery in Q3 than seen in Q2. With current estimates predicting that 750k new jobs were created in August. That is already a significant drop from the July headline.
The employment section of data for output points to a lower number of new jobs having been created in August.
The dollar is on the back foot following a slightly more dovish than expected speech from Jerome Powell last week at last week’s Jackson Hole Symposium and, were there to be a downwards revision to the July number coupled with a lower-than-expected figure for August, the dollar could accelerate its losses.
The market is also considering how likely it is that President Biden could cast Powell aside in favour of a choice provided by the liberal but influential wing of the Democrat Party.
Several members of the Banking and Finance committee, new to the role since the election, see Powell as not being sufficiently committed to either working with them on climate change and still too conservative to bring about changes to systemic risk and not willing to rein in the continued excesses of Wall Street.
It is expected that Biden will make his decision this month and should he side with his Party, the role of Treasury Secretary will also come under the spotlight as Janet Yellen, who currently fills that post, and has given Powell a ringing endorsement, may feel that her position has been so undermined that she may decide to fall on her sword.
The dollar index is under pressure ahead of today’s data. Yesterday it fell to a low of 92.21, closing at that level.
ECB losing that dovish feeling
The euro has risen in ten of the last eleven trading sessions as data shows that the recovery of the Eurozone economy is beginning to gather pace.
It may be a little premature to begin to consider the ECB considering bringing forward a cut in the level of support that is being provided to the economy, particularly in light of the slightly more conciliatory and dovish comments made this week by Bundesbank President Jens Weidman.
In the UK, the pace of the recovery has, to a certain degree, been determined by the success of its vaccination programme, and now that the EU has got its act together in that regard, there is no reason that the recovery shouldn’t accelerate.
A large portion of the recovery is driven by confidence both in investment made by industry and spending by consumers.
The rise of the delta variant had deterred consumers from going out but with consumer confidence growing and retail sales up, traders are beginning to see a light at the end of the tunnel.
Despite the more bullish outlook, The ECB is unlikely to be swayed yet in its determination not to repeat past mistakes by tightening policy for too long.
The only fly in the ointment for Christine Lagarde remains inflation. Data released this week shows that inflation is rising faster than had been predicted and if that spills over into wage negotiations that are due over the next couple of months, alarm bells will start ringing in Frankfurt.
The interconnectedness of the financial markets means that to a large extent the euro will continue to be driven by events in the U.S. That is particularly true given the significant percentage of the dollar index that is made up by the single currency.
Yesterday, the euro rose to a high of 1.1876, and closed within a couple of pips of that level. A break of the 1.1908 level that was last seen on 30th July could see the 1.20 level return to trader’s considerations.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”