14 January 2022: Christmas sales strong but slowing

Christmas sales strong but slowing

14th January: Highlights

  • Johnson Lying Low
  • Wholesale prices levelling off
  • Dovish policy to allow the eurozone to grow at a faster rate than the U.S.

Projections for UK growth subject to interpretation

Prime Minister Boris Johnson disappeared from public view yesterday as he licked his wounds following the mauling he received from all sides following his mea culpa on Wednesday.

It was ironic that the reason for Johnson’s withdrawal was that he was self-isolating following news that one of his family has tested positive for the virus.

Even without its main player, this drama is far from over, as the result of an inquiry into activities in Downing Street during the various lockdowns is eagerly awaited by all sides.

While Johnson isn’t exactly hanging on by his fingertips and he received support from several of his Cabinet members yesterday, his position is still tenuous

Retail sales data for the Christmas period were released and several outlets recorded very healthy numbers, over the holiday period. Marks and Spencer fared extremely well, as did Tesco. Both of the retail giants expect to announce strong full-year profits.

Before he was mauled by MPs, the Prime Minister reinforced the point he has repeated on several occasions recently that the UK has the strongest growth in the G7.

While this is true by some measures, by others, the country has achieved only the fifth-strongest results.

As with many such claims, it depends on who you ask.

If comparing growth over the third quarters of 2021 and 2020, the UK did indeed show the strongest performance. However, comparing the third versus second quarter of 2021, the UK languishes in fifth place.

In the grand scheme, comparing such performance data is fairly futile, since in many cases, in fact in just about every case, it is a case of comparing apples and oranges.

Governments will always highlight data that shows their performance in the strongest light, while shying away from less impressive numbers.

The pound’s recent rally could be running out of stream as the dollar begins to reassert itself. Yesterday, Sterling fell marginally to a low of 1.3700, closing at 1.3703.

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2021 saw the highest rate of wholesale price rises on record

Data for wholesale prices in the U.S. continues to rise at record pace. Producer prices, which record the increase in the price of spare parts and raw materials at the factory gate, rose by 9.7% in December compared with the year before.

This data is considered to be a fairly accurate guide to the direction of consumer prices down the line.

As Lael Brainard, the administration’s preferred candidate for the role of Deputy Chairman of the Federal Reserve began her testimony to Congress yesterday, her predecessor joined with several of their colleagues in making supportive comments on past FOMC performance and future expectations.

Richard Clarida, deputy Chairman for Jerome Powell’s first term, commented that policy normalization over the coming year would be consistent with the Fed’s new flexible average inflation targeting framework.

This new policy will seek inflation that averages 2% over a timeframe that is not formally defined.

This is likely to make inflation and the Fed’s performance in tackling price increases less clear and will allow the central bank to virtually rank its own performance.

Other FOMC members spoke about how they see changes in monetary policy and the pace of interest rate hikes yesterday.

Philadelphia Fed President Patrick Harker commented that he expected to see three hikes in interest rates this year but could be persuaded on a fourth depending upon several factors.

Confirming the order in which he expects the FOMC to act, Harker sees rate rises starting after the end of QE, with a reduction in the size of the Central bank’s balance sheet following a normalization of interest rates.

Meanwhile, in her testimony to Congress, Brainard spoke of her expectation that Fed actions will bring down inflation while contributing to a full recovery of employment.

Jobless claims data appears to have plateaued around the 200k level. Figures released yesterday showed that there were 230 new claims in the latest week, up from an upwardly revised figure of 207k previously.

The dollar index fell to a low of 94.67 yesterday but managed to climb back to 94.87 towards the end of the day.

Optimism misplaced until there is a level playing field

There is a growing level of expectation that the Eurozone economy can outstrip the U.S. in growth over the next couple of years. While on the surface such a claim may indeed be true, it does not include inflation in the data and does not consider the level of support that the respective central banks will be providing.

It is assumed that the ECB will continue to make growth in its weaker economies its major goal, while that is not true of the Federal Reserve. As with reactive growth figures in the UK, the comparisons are flawed in several areas.

In its latest economic bulletin, the ECB considers the impact of the Omicron Variant as being highly uncertain. While that is unlikely to drive the Central bank away from its core strategy, it adds another level of concern.

Supply bottlenecks, rising commodity prices and concerns over how high energy prices can reach are all significant concerns for the ECB.

One comment that will have raised many eyebrows, is the contention that risks to the economy are fairly balanced.

The more hawkish Central banks in the Eurozone would no doubt disagree, claiming that rising inflation is the number one issue facing the region.

ECB Vice-President Luis de Guindos supplied a moment of clarity yesterday, commenting that perhaps inflation is not going to be transitory.

Not only is that something that has been obvious for a considerable time, he is even behind the curve with the term transitory, which has now all but disappeared from the Central Bank lexicon.

He went on to say that he expects inflation to fall back close to the ECB’s target in 2023 and 2024. This is also a somewhat controversial view, given recent Bundesbank comments that inflation above 2% is expected to remain for at least another two or three years.

The euro trod water to a certain extent as the dollar looks for a breather after a bout of position squaring.

It is still the core view of traders that at some point the euro will begin to lose ground, but that may be a little way down the road and coincide with rate hikes in the U.S.

For now, the Euro reached a high of 1.1481 yesterday but fell back to close at 1.1452.

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.”