Employment data, the key to taper
13th September: Highlights
- Economy taking longer to reach pre-Covid level
- Producer prices point to yet higher inflation
- Growth and stability pact under severe pressure
Average earnings will give an indication of future inflation
The latest monthly data from NIESR show that the economy is still 2.1% smaller and the rate of growth slowed in July. The MoM rise in GDP in July over June was just 0.1%, versus a 1% rise in June.
The currency market is still being held within its recent ranges by expectations that Central Banks will begin to withdraw accommodation on one side, and disappointing data on the other.
The most recent data releases in the UK have not been sufficiently poor to drive the pound lower, and the release of employment and inflation this week will contribute to the overall mood of wait and see.
The rate of employment is unlikely to move far from last month’s 4.7% when it is released on Tuesday. It may see a slight fall,but no substantial move is expected.
The market will also be interested in the change in average earnings. This is a major contributor to the rate of inflation and will also indicate the tightness of the labour market overall.
There are still estimated to be between 1.4 and 1.6 million people still on furlough. With that scheme due to be phased out at the end of the month, employment will remain one of the critical indicators for the Bank of England.
Bank of England Governor Andrew Bailey commented that the current fiscal situation, taking into account the proposed increase in National Insurance contributions, means that the Bank will not be looking to increase interest rates given the ongoing uncertainty.
Inflation data will also be released this week (on Wednesday), with the headline rate expected to jump to 2.8% from 2% in July. There is likely to be some discussion about this within the MPC.
The hawks like Michael Saunders believe the time has come to step on the brake, while the doves believe this to be a temporary phenomenon created by the disparity between supply and demand and the issues in the logistics sector.
Last week, Sterling remained in a range between 1.3890 and 1.3725. It closed at 1.3836. The data to be released this week would need to really feed the hawks for a test of several levels of resistance before the 1.4000 level to take place.
Retail sales and confidence data due for release
The Regional Fed Presidents who were most vociferous until the release of the Employment Report have now mostly decided to retreat back to their State Capitals, most with their tail between their legs.
One President who has decided to put her head above the parapet is Cleveland President Loretta Mester. She believes that the risk for inflation, the data for August will be released on Tuesday, is to the upside.
She also believes that the taper of asset purchases should still take place this year, despite the weak August Employment Report.
There is a growing view that the effect of the Delta Variant of Coronavirus hasn’t been fully priced-in to the pace of Q3 growth, and there may be downside surprise brewing.
The continued growth of infection is one of the many factors affecting the economy. Shortages of spare parts and raw materials along with transportation and other logistical issues
According to Jerome Powell, the economy has now met a substantial further progress target. While this is a marker for the commencement of the gradual withdrawal of support, it is unclear what happens if there is a backslide and the conditions return to a level which brings concern.
Inflation is expected to have risen again in August, with the headline reaching close to 5%. Investors are now becoming a little concerned about whether inflation is indeed temporary and this could lead to a bout of selling which could test the bottom end of the current range.
The dollar has become a little less supported over the past week as the euro began to gain a following. The index remained in the same range as the previous week, closing at 92.64.
Ecofin agrees that support needs to be in place for longer
There had been a fear that the whole idea of allowing inflation to breach the 2% level would be challenged. Some call the methodology being used to bring the level back below 2% hope, while others call it expectation.
Only time will tell which group is correct.
Most of the emergency funding plans delivered by Eurozone members had already been approved in July, so at this meeting it was a matter of reviewing the combined effect and how they will impact the Growth and Stability pact.
During the Pandemic, the Growth and Stability Pact has been virtually abandoned. The need for budgetary discipline is not considered vital given the current emergency. However, the issue will come when the EU Commission wants to re-establish the financial rules.
Germany is apparently furious about the way in which the southern states have been allowed to forego the level of financial discipline that almost brought the Union to its knees over a decade ago.
At the time of the financial crisis, three were at least a couple of saving graces. First, was the strength of Mario Draghi, who simply refused to allow the Union to be overwhelmed. He almost saved the day through little more than strength of will. The other was how the nations of the EU pulled together to help each other to ensure its survival.
That unity has been sadly lacking this time. It is interesting that in order to save the Union financially there is a degree of unity, but when it comes to the lives of a nation’s citizens it becomes every man for himself.
The finances of the Union have become a hot topic in the German Election Campaign.
Given how Germany flexed its muscles at the time of the financial crisis, the rest of the Union will be hoping for a less hawkish Government this time around.
The euro tested the bottom end of its recent range last week, but managed to hold above the 1.1800 level.
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.”