Energy crisis No.1 issue
10th January: Highlights
- Secondary Omicron absences to hit economy
- Fed tightening to continue despite awful headline NFP
- Year on year inflation at an all-time high
London may have already seen Omicron peak
Health Secretary Sajid Javid spoke over the weekend of his belief that the peak of infections may have been reached in London, although he expects that in the rest of the country cases will continue to rise.
It is still likely to be a few weeks before Javid’s hopes can be confirmed, while the next cab off the rank as far as issues facing the Government is concerned will be the continued rise in the wholesale price of gas and its effect on the cost of living.
Boris Johnson is already under pressure to approve a reduction in the level of VAT charged on household energy bills while suggestions are being made that the large energy companies are charged a green tax on their profits.
With inflation unlikely to fall back to anywhere close to the Government’s target and the bank of England already committed to a cycle of interest rate increases, household bills are expected to rise sharply in the coming year while disposable income is hit by increases in taxation.
The UK economy is more dependent upon consumer spending than its G7 partners, so anything that causes a lowering of consumer confidence will create ripples of unease concerning activity and growth in the economy.
The wholesale price of gas has quadrupled over the past year as China, in particular, has needed to increase its purchases in order to cope with demand as its economy begins to see far stronger output as the global recovery gathers pace.
This week there are no significant data releases, so the pound is expected to continue to be affected by activity elsewhere. On Friday, Sterling rallied to a high of 1.3597, closing close to that level, as the dollar index was hit by the weaker than expected employment report for December.
Inflation is now the major concern
As data released last week for private sector employment pointed to a significantly higher figure for non-farm payrolls than was seen in November, there was significant disappointment that only 199k new jobs were created; the November figure was revised upwards to 249k.
It was easy to interpret the market’s view that the Fed will be unperturbed by the lower number, since there were at once excuses made by analysts and commentators about seasonal factors and the effect of the Omicron variant on the data.
The fact is still that the FOMC is now so concerned that rising inflation is so close to being out of control that it will be forced to tighten monetary policy even if the economy does show signs of slowing down.
It is interesting that despite the poor headline, the rest of the report was reasonable. The rate of unemployment fell from 4.2% to 3.9% while the participation rate, the number of working aged people either in employment or actively looking for work, rose marginally.
It is entirely possible that this report will be filed under outlier by the FOMC, and the next meeting will be at least as hawkish as the December gathering.
The dollar index fell to a low of 95.71 following the data but has begun to recover overnight. It is currently (0500 GMT) at 95.93
This week, inflation data will be released, with headline CPI expected to climb to 5.4%. Jerome Powell testifies to congress tomorrow, and he is expected to face fundamental questions about how inflation has been allowed to reach its current level.
Stagflation is becoming a real possibility
We have already seen that the rate of inflation is currently at a very wide range across the region, so questions are being asked about how the rate is calculated. That is no more than clutching at straws, since inflation is above the ECB’s target across the entire Eurozone.
The new Bundesbank President, Joachim Nagel, will face a baptism of fire as he relies to rally the other hawks to put pressure on Christine Lagarde to act to lower inflation at the next meeting of the governing council.
It is still to be seen if Nagel, a career technocrat at the Bundesbank has the stature to be as strong a force as his predecessor.
Jens Weidmann who quit as Bundesbank President five years early was vociferous in his criticism of the ECB’s negative rate policy and claimed (correctly) over many years that this would bring significantly higher inflation.
The question now is has inflation already reached the tipping point where it is now ingrained in the Eurozone’s economy/
Pressure will begin to increase on Lagarde if the euro, as markets expect, begins to fall towards the 1.10 level versus the dollar.
One further reason for Nagel to be under scrutiny will be the fact that it is fairly certain that the next President of the ECB will be a German. While Lagarde still has five years left on her contract, jockeying for position will start well ahead of that time.
The euro rallied against a weaker dollar, but that will merely provide bears with a better selling opportunity.
It reached a high of 1.1364 but has already given back part of those gains overnight. It is currently trading at 1.1333.
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.”