- The UK may already be in a recession
- Trump holds an eleven-point lead over Biden on economic expectations
- Producer prices plummet on lower energy costs
Average earnings falling, but not inflation
The January employment report will be published tomorrow, followed on Wednesday by the latest inflation figures.
Andrew Bailey, the Governor of the Bank of England, is facing the unenviable task of explaining why as average earnings continue to fall, the headline rate of inflation rose last month.
Bailey has said recently that the lowering of wage demands is crucial in driving inflation down to the Bank’s target of 2%.
Average earnings are expected to have fallen to 5.7% from 6.5% while the new claimant count will remain around 10k, leading to a fall in the unemployment rate to 4%.
It is notable that in every G7 nation, unemployment has remained well below historical averages despite the significant rises in interest rates that have taken place over the past two years.
The inflation figures are expected to show that core prices rose by 5.2% in January, after a 5.1% fall in December. It could be that the rate of inflation has reached something of a hiatus, and it may be that the target for inflation is no longer valid following the changes to the structure of the economy driven by the Pandemic and wars in Ukraine and Gaza together with the attacks on shipping in the Red and the Gulf of Aden.
Bailey will be in the invidious position of having to explain why he has been unable to drive inflation lower despite the level of pain he has inflicted as he and his colleagues on the Monetary Policy Committee raised interest rates to sixteen-year highs.
Speeches made last week illustrated the difference in the opinions of the independent members of the MPC.
Swati Dhingra called for rates to be cut at once, as she was asked to justify her vote for a cut at the most recent rate-setting meeting. Meanwhile, Catherine Mann believes that rates should have been hiked to push down even harder on inflation.
She believes that even if inflation dips close to the 2% target in the coming months, it will only remain at that level briefly before rising again. The issue, she believes, is the instability of energy pricing and the disparity between prices in the manufacturing and services sectors.
Last week, Sterling finished lower for the fourth consecutive week. The fall was only marginal, reaching 1.2518, before recovering to close barely changed on the week, at 1.2630.
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Will this week’s inflation data cause the Fed to move?
Powell when asked countered by saying that the Fed never has and will never be influenced by politics.
However, as the interview continued, it became clear that Powell’s motivation has a political element since he wants the Fed to remain independent,
Although he is a “card-carrying” member of the Republican Party and was originally appointed by Donald Trump, Powell will be concerned that Trump has become more interested in the Fed and has threatened several modifications that may endanger its autonomy.
In a survey conducted by The Financial Times that was published recently, it appears that voters trust Trump far more than President Biden when it comes to the economy. He has an eleven-point lead over the incumbent President in an area likely to dominate voters’ minds.
There has been no official poll since the state of Biden’s memory was questioned following the court hearing at which he was exonerated on charges of mishandling classified papers in his time as Vice President, although it is probable that the lack of trust in Trump will be offset in voter’s mind by fears that Biden may not be “up to the job” any more.
Inflation data is due to be released tomorrow, with headline and core prices expected to continue to fall. The fall in headline inflation is expected to be more marked, mainly due to the continued drop in energy prices. That fall may be short-lived if there is any significant increase in disruption of shipments of oil and gas through the Red Sea.
Several members of the FOMC spoke last week as the blackout following the latest FOMC meeting expired. The most interesting comments came from Cleveland Fed President, Loretta Mester, who strongly aligned herself with Powell’s recent comments about his desire to see rates remain as they are for a longer period to ensure that inflation continues to fall.
The dollar index trod water last week as there were no significant fresh drivers to create volatility. It continued its run of higher closes every week so far this year, but the rises are becoming smaller.
Last week, the index rose to a high of 104.60 and closed at 104.07.
Confession time is fast approaching.
The rate of disinflation that took place even as rates were still being raised has led to questions being asked about whether it was a genuine policy consideration to drive the economy close to a significant contraction, even risking a recession, due to some form of collective paranoia about rising inflation.
There were several comments made about interest rate expectations made by members of the Governing Council late last week that continued over the weekend.
The dovish case was made by Bank of Italy Governor, Fabio Panetta, who believes that “macroeconomic conditions suggest that disinflation is at an advanced stage, and progress toward the two percent target continues to be rapid”. He went on to say that “there has been no upward de-anchoring of inflation expectations if anything downside risks are emerging”.
Meanwhile, the Governing Council’s most hawkish member, Robert Holzmann from the Austrian Central Bank, commented that it is not guaranteed that the ECB will cut rates this year.
It is interesting to note that Holzmann appears to speak with far more “authority” than his colleagues. It is almost as if he is the one making the decisions, or at the very least has the “ear” of Christine Lagarde.
The Governor of the Bank of Spain, Pablo Hernández de Cos, believes that the release of the ECB’s projections for the economy for March will be pivotal in deciding future rate expectations.
These projections will show the level of confidence the ECB has in the rate of inflation reaching and maintaining a rate of 2% in the coming months. He went on to agree with Panetta that disinflation is, if anything, ahead of expectations.
The Euro has come close to losing its downward momentum recently, but any expectation that rate cuts may be closer than the market has factored in may see its fall accelerate.
Last week, the Euro was barely changed, closing at 1.0786, just one pip lower.
Have a great day!
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09 Feb - 12 Feb 2024
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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.