11 January 2022: Johnson’s decision, correct?

Johnson’s decision, correct?

11th January: Highlights

  • Omicron effect to be milder than feared
  • Powell’s second nomination is still not plain sailing
  • Employment fell in November, but still close to 10%

Omicron infections reaching a peak

With the Government’s Chief Medical Officer making optimistic noises about the peak of the Omicron variant of the Covid-19 virus, Boris Johnson’s decision for England to move to plan B looks like it could be vindicated.

The daily number of new cases while high is levelling off and with the vast majority of hospitalizations being those who have not been vaccinated, the country may be on the cusp of seeing the light at the end of a very long tunnel.

Data showing the performance of the economy in December and January is expected to show only a mild hit from the virus. The call to encourage people to work from home is possible and to go back to wearing masks seems to have been sufficient to slow the pace of infection.

The biggest risk over the next month or so will be the risk of the NHS becoming overwhelmed as it is hit by relatively high numbers of hospitalizations coupled with high levels of staff absences.

The effect of Omicron on GDP is expected to be around one month, that is to say that by early spring, the country’s level of growth will be what it would have been without the variant having emerged.

Data for output, particularly in the retail sector, are certain to show that consumers were more cautious than normal over the Christmas period. Retail and hospitality outlets will show a contraction, but that is expected to be short-lived. There is sure to be a significant increase in the level of shopping done online.

Month on Month GD data for November is due for release on Friday. This is expected to show robust growth as the economy began to improve before Omicron hit.

Overall, Q1 is expected to show moderately weaker output than would otherwise have been the case. However, with the perfect storm of inflation, increased taxation and rocketing fuel bills about to hit households, the retails sector is unlikely to see much growth.

The pound remains supported by the more hawkish stand being made by the Bank of England.

Versus the single currency, Sterling rose to a high of 1.2003 yesterday, the first time it has touched the 1.20 level since February 2020.

It fell against the dollar, which has begun to recover from the jolt it received from the weaker than expected employment report. It fell to a low of 1.3532, closing at 1.3578.

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A quarter of those in employment are looking to change jobs

The headline number for new jobs created in last week’s release of the employment report for December was significantly worse than the markets had expected, but it also contained, hidden in the detail, several factors that are going to keep the data volatile for some time to come.

In a survey, around 25% of those currently employed are looking to move to a new role this year. The average of this number is usually below 10%. One area of concern is the hospitality sector, where wages are relatively low, and benefits are highly variable.

The latest JOLTS survey of job openings shows that there are close to eleven million openings currently. That is the highest figure on record.

During the first week of the working year, around 3% of the workforce called in sick with a combination of the Omicron variant and winter flu. While this is hardly unexpected, it does serve to highlight a possibly less dedicated workforce.

With weekly jobless claims having plateaued at a lower level, those moving jobs either voluntarily or through redundancy are able to move to a new role reasonably quickly.

While the FOMC has moved its focus squarely onto inflation, employment looks set to provide further drama to the economic outlook.

When President Biden announced his support for Jerome Powell to remain as Chairman of the Federal Reserve with Lael Brainard becoming his Deputy, it was assumed that their path would be fairly smooth.

Powell is set to testify to congress this week, and some questions he faces are likely to be personal. A few members of the House Finance Committee remain concerned about his personal financial affairs in light of the near scandal over insider trading that threatened to engulf the FOMC last Autumn and led to some high-profile resignations.

This is likely to be a smokescreen designed to highlight concerns about the fact that Powell was appointed by a Republican President, and he remains too close in some people’s eyes to Wall Street.

The appointment of Brainard was designed to allay governance fears, but it seems Powell still faces some personal enmity.

The dollar index has begun to slowly build back following last week’s data surprise. Yesterday, it rose to a high of 96.23 but fell back a little to close at 95.95.

Inflation, even at a record high may be underestimated

The continued dovish stance taken by the ECB in the face of record inflation numbers is expected to have a severely negative effect on the value of the euro.

It has been predicted for some time that the euro will suffer a significant fall as continued divergences sees the UK and U.S. Central Bank’s begin to tighten policy.

With the dollar suffering from last week’s poor data, it has been the pound that has begun to rally versus the single currency. As already mentioned, the pound hit close to a two-year-high yesterday.

While we have always counselled against getting too far down a one-way street, diverging monetary policy is a fairly strong indicator of currency weakness.

Isabel Schnabel, a member of the ECB’s Governing Council and one time candidate for the role of Bundesbank President spike yesterday of her concerns about a possible underestimation of the inflationary effect of several ECB policies, not just continuing with negative interest rates in the face of rising inflation.

Green policies and rising energy prices are also of concern to Schnabel. While she shares concerns over inflation in keeping with her countrymen, she is far more level-headed and doesn’t see inflationary concerns around every corner or in every policy decision.

As such, she is far more likely to be listened to by Christine Lagarde since she brings perspective to the discussion.

She warned that Europe’s plan to shift to a low-carbon economy poses measurable upside risks to our baseline projection of inflation over the medium term.

The opposite of the movements in currencies due to divergence in monetary policy are equity markets.

While there is a correction taking place in the U.S. European stocks continue to rise backed by the availability of cheap money.

Yesterday, the euro fell to a low of 1.1285, but rallied towards the end of the day to close at 1.1326.

Have a great day!
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.”