Economy facing a tough winter
11th October: Highlights
- Johnson of Thatcherite mishmash of wishful thinking
- U.S. facing stagflation? Where does that leave the global economy
- In real terms, the Eurozone economy is already well above pre-Covid level
Household bills threaten to skyrocket
However, each economy is different, facing its own individual issues as well as those common to each.
In the UK, the wholesale price of gas, which has quadrupled this year, will filter through to households and contribute to a more permanent increase in inflation.
That problem will be shared with the Eurozone. The unique issue that is facing the UK is a major shortage of labour caused by Brexit.
The Prime Minister has spoken of the shortage being caused by the transition that has begun in the UK economy from a low-skilled low wage to something more technically or scientifically driven. He believes in taking advantage of the ingenuity of the workforce, which was typified by the development of a Coronavirus vaccine in record time.
Both the financial markets and the UK’s manufacturing and industrial sectors have seen through Johnson’s words, which is a case of fitting the narrative to the current situation.
If this were merely a factor of a larger transition that is taking place, then the Government was either naive in not announcing the possibility of labour shortage sooner or simply remained unaware.
Brexit will continue to wreak havoc with the economy, driven by the departure of foreign nationals who filled several diverse roles. This issue has been highlighted by the effect it has had on supply chains, but if there is to be a transition, it will be a slow and painful process.
This will also add to inflation as wages in labour intensive sectors will need to rise.
The effect on industry of the rise in gas prices is also training to become serious. Heavy users of gas like the steel industry face closures of facilities as their production becomes uneconomic.
In the domestic market there is a price cap on fuel, but this doesn’t apply in industry and there have been urgent calls for the Government to step in which have so far been resisted.
The pound continues to run into selling interest versus the dollar on any perceived rally as investors become sceptical about the medium to long-term prospects for the economy.
Last week, the pound rallied a little against a weaker dollar, recouping some of its losses from the previous week. It reached 1.3658, closing at 1.3615 but still looks quite fragile.
Next month’s taper still probable
Despite the number of new jobs created failing to reach the predicted level, the dollar remains well-supported. This is mainly due to the fact that expectations for a reduction in the level of support being provided by the Federal Reserve that is expected to begin next month.
The good news in the report, such as it was, came in the shape of a more significant fall in the unemployment rate than had been expected. It is now below 5%, coming in at 4.8%.
Most comments made by members of the FOMC support a cut in asset purchases, with the official announcement being made at the meeting which takes place on November 2nd and 3rd.
The biggest loser in the report was the loss of jobs in the public sector, following an OK report on private sector jobs released earlier in the week.
Furthermore, the hospitality sector that had been a major driver in the creation of new jobs, producing an average of 197k jobs since January, saw no new jobs created in September.
It is a long way from being realized, but there are growing concerns that the U.S. economy could be hedging for a period of stagflation, where growth in the economy falls significantly, but inflation continues to rise.
This issue will be on the FOMC agenda early next month and could be a factor in the decision to taper support, which should at least have a dampening effect on inflation.
It appears that the employment market is short of about eight million jobs and with the rate of growth slowing that shortfall may take a considerable time to be made up.
President Biden blamed that disappointing report on fears over the long tail being seen in the fight against the delta variant. This looks more like another case of fact versus narrative.
The dollar’s reaction to the data was fairly muted. It fell initially to a low of 93.84, but recovered to close at 94.10, just twelve points lower on the day.
Draghi set to push through reforms as League routed
Even with a highly popular Prime Minister in Mario Draghi, the country simply cannot help itself in demanding change at every election.
The League Party, which rose to power on the back of a policy of defiance towards Brussels, was virtually routed at recent local elections, with its leader even seeing support in his Milan hometown collapse.
The ability of Mario Draghi to push through a series of reforms is being held up by squabbles over tax reform.
Draghi’s promise to deliver reforms that will relaunch the country’s sluggish economy have been held up by political manoeuvring.
Italy has been promised EUR 200 billion over six years by Brussels if it can deliver a series of reforms to taxation and market competition law. So far, the ever-popular Draghi has been unable to deliver.
Elsewhere in the Eurozone, the President of the ECB, Christine Lagarde continues to insist that inflation remains transitory, despite concerns in other G7 nations that it is becoming more entrenched.
She believes that the ECB shouldn’t react to the rise in inflation, even if it is rising more in some nations than others.
In an interview with a major German newspaper, she repeated her belief that inflation will begin to fall as supply chains return to normal and the current gap between demand and supply rectifies itself.
The influential ZEW index of future expectations for both the German economy and that of the entire Eurozone will be released. It is likely that conditions are expected to continue to improve, driven by renewed consumer confidence.
The euro weakened versus the dollar for the fifth consecutive week. It fell to a low of 1.1529, but rallied a little following the U.S. NFP report, to close at 1.1569.
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.”