More in work, but real pay collapses
Morning mid-market rates – The majors
13th April: Highlights
- Jobless rate lowest since 2019
- Inflation continues to surge
- Lending survey points to bleak outlook
35k new jobs created in March
While the latest data is encouraging, there were warnings that the end of the trend for more jobs being created could be coming to an end.
The Office for National Statistics warned that it was only the significant increase in bonus payments, mostly linked to the Pandemic, that has meant that wage increases remain relatively close to the level of inflation.
Although the Bank of England is expected to continue to hike rates by twenty-five basis points at each of its next three meetings, the fear is that it will prove too little too late and the country is going to be expected to live with a rate of inflation that is well above the Government’s target for the rest of this year, the whole of 2023 and well into 2024.
This will be coupled by an economic slowdown over the rest of this year that could become a recession, although, were the economy to contract sufficiently to bring a recession, the Central bank would be expected to act.
The fallout from the Prime Minister, his wife, and the Chancellor all being fined for breaking lockdown rules last year will continue today as Boris Johnson faces the wrath of Opposition MPs amid calls for heads to roll.
So far, Johnson and Sunak have both refused to step down, hoping that the size of the Conservative Party’s majority will afford them some protection. However, were their own members to turn against them, they would be faced with little option.
Sunak, already facing accusations over his wife’s tax situation and having received the dreaded vote of confidence from Johnson, may be close to the end of his meteoric rise to the upper echelons of Government.
Yesterday, Sterling continued to hang on to support around the 1.30 level versus the dollar. It fell to a low of 1.2993 and closed at 1.3001.
The economies of the U.S., UK and Eurozone are all being threatened with recession as they each face slowing economies as they tighten monetary policy to fight rising inflation. The UK is expected to be less hawkish than the U.S. in its tightening and this may see the pound drift lower once buying interest around the current level is exhausted, with the next area of support coming at around the 1.2820 level.
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The Fed will be forced to act, but don’t expect clairvoyance
Given the rate at which prices have risen over the past year, the market is exhibiting a remarkable level of patience with the Federal Reserve.
Having admitted that the Central Bank treated the rise in prices with insufficient concern, its Chairman, Jerome Powell, and the rate setting Federal Open market Committee have switched to full on inflation fighting mode.
Yesterday, Lael Brainard, the Vice-Chairperson, spoke of her determination to see core inflation back down close to its 2% target.
The rate of inflation with volatile items like food and fuel prices stripped out, rose by just 0.1% in March, rising from 6.4% to 6.5% It is generally accepted that there is little that can be done about rising fuel and food prices since they are often driven by events outside the purview of the Central Bank and, as is the case currently, due to conflict elsewhere.
Brainard expects the extremely strong demand in the labour market to moderate over the coming months. There is even a school of thought that is predicting that the March headline will represent the highest in this cycle.
That is a brave call given what has gone before, and many analysts predicting the oil will average $100 per barrel this year.
The headline rate of inflation is now at 8.5%, up from 7.9% in February.
Brainard defended the Fed’s position, claiming that it has to tread carefully between lowering inflation and slowing down economic activity. She does not believe that the course of action being plotted will see the economy fall into recession.
The dollar index took the inflation data in its stride and saw only a moderate gain. It rose to a high of 100.33 and closed at that level. While that represents the first close above 100 since May 2020, there is expected to be significant resistance that will need to be cleared before any mare gains can be seen.
Negative rates cannot possibly be maintained after July
Confidence fell to -41 from -39.5 previously but against the markets’ expectation of a fall to -48, there was some relief seen.
For the entire Eurozone, economic confidence fell to -43 from -38.7, Given that what the data actually means is difficult to decipher, it is the rate of fall that is most concentrated upon by the market.
It is no surprise that the reading for the current situation in Germany fell considerably, given the effect that the conflict in Ukraine is already having on the economy.
With the Chancellor being forced to admit that the country will find it almost impossible to survive without imports of Russian gas, the outlook has become bleak.
Commenting on the data, the ZEW president said that experts are pessimistic about the current economic situation and assume that it will continue to deteriorate.
Professor Achim Wambach went on to say that the only glimmer of hope is the fall in expectations for future inflation by about 50%. While he didn’t expand on that comment, it is clear that confidence has risen that the ECB will act to bring down inflation.
There is a sense of expectation that the Central Bank may set out some form of timetable for tightening at its meeting tomorrow, although it may be June or even July before any plans are realized.
Wambach went on to touch upon the prospect of stagflation which remains, although it is not currently the Institute’s core belief.
The euro remains pressured, but is still being driven by the movements of the dollar. Yesterday, it fell to a low of 1.0821, closing at 1.0829.
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.”