14 September 2022: Unemployment lowest since 1974

Unemployment lowest since 1974

14th September: Highlights

  • Post-Pandemic employment boom is coming to an end
  • Headline inflation eases slightly
  • German recession looms

GBP – Rate of fall in unemployment is slowing

Unemployment fell again in August to its lowest level since 1975. However, the rate of decline slowed considerably. It is likely that the post-Pandemic boom that was exacerbated by the lack of EU migrants who returned home following Brexit is coming to an end.

The phenomenon of job-hopping, where workers change jobs more regularly to take advantage of higher wages on offer due to shortages in certain sectors is beginning to slow.

This is something that has been seen in the United States and has found its way into the UK jobs market.

The unemployment rate fell to 3.6% in the three months to August, down from 3.8% the previous month.

Average earnings jumped above 5% rising to 5.2% up from 4.7% in July.

It is expected that the economy will start to shed jobs as the economy begins to slow as demand is hit by the Bank of England’s tightening of monetary policy.

The new Chancellor of the Exchequer, Kwasi Kwarteng, has instructed the Treasury to concentrate solely on growth as a cornerstone of the new Prime Minister’s strategy to grow the economy to stave off the threat of a prolonged recession.

Truss is expected to announce thirty billion pounds in tax cuts, but this promise was made during the campaign to become leader of the Conservative Party, to reverse Rishi Sunak’s increase in National Insurance contributions, which only came into force in the Spring Budget.

With the rate of growth in the economy in July, below what economists had expected, the focus of the new Cabinet will be very much on growth.

A review of the Bank of England’s mandate has been demanded by the Prime Minister, which will most likely lead to greater oversight of the decision-making process, possibly involving Treasury membership of the Monetary Policy Committee, although its independence is not thought to be under any threat.

It is generally accepted that the decision made to make monetary policy independent of Government policy has been beneficial to the economy, although the choices of members of the committee have surprised some Chancellors, and confused others.

The pound continues to move away from its recent lows. It climbed to a high of 1.1520 and closed close to that level.

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USD – Headline inflation falls, but core rises on wages growth

The latest figures for inflation, which were released yesterday, showed a marginal fall in headline inflation but core inflation rose. The fall in headline inflation was mainly due to the fall in the price of gasoline.

While any fall in inflation is welcome, the rise in the core will be of concern to the Federal Reserve since it is a possible indicator that rises in wages are beginning to spill over into the prices.

The continuing Fed policy of tighter monetary policy is designed to dampen demand but since a significant proportion of inflation if outside its control rising wages will take longer to be affected

A new threat to the economy has emerged in the past few days. There is the threat of a national rail strike. The Federal Government has been meeting to make contingency plans to ensure that essential supplies get through.

A strike will cost the economy in the region of two billion dollars a day and threatens supply chain chaos. While trucking forms a significant part of the supply chain network, the rail system is the backbone of the economy, and any prolonged strike will quickly have a devastating effect on supply of goods and may be the difference between the economy growing and slipping into recession.

The inflation data confirmed, if any confirmation were needed, considering recent comments from FOMC members that the Central Bank will continue to tighten monetary policy. The rate of increase in rate hikes may slow, but the policy will remain unchanged, certainly for the rest of 2022.

There is a 20% chance that the Fed will hike by 100 basis points at the meeting later in the month, but the data isn’t really pointing to such an eventuality.

A lot is now riding on the data for retail sales that will be released tomorrow and the University of Michigan Economic Survey, which is due on Friday.

There was a technical blowout in the interest futures market yesterday which saw the odds on a 100-point increase reach 47%, but that was not a true reflection of the market’s view and will quickly correct.

The dollar index continues to strive to regain the 110 level. It reached a high of 109.75, closing at that level.

EUR – Governments, not ECB, responsible for energy market

Christine Lagarde’s patience appears to be wearing thin, at the continued dependence of the European Commission on the European Central Bank to be solely responsible for the performance of the economy. What makes the situation even more galling is that it is expected to act, one hand tied behind its back.

Ms. Lagarde contends that the exponential rise in the cost of energy over the past eighteen months or so is the single most important contributor to inflation, and yet the Central bank is powerless to bring it under control.

She wants more to be done at a government level, possibly the introduction of a cap, similar to what is being seen in the UK to allow the Bank’s policies to work.

There are two counterarguments to her belief that more support is needed. First, the cost. The evidence of the UK example shows that it could cost upwards of a quarter of a trillion euros to cap energy prices at current levels, while how it would work in practicality given the diverse use of different fuels and how winter affects different nations is another issue.

Within the Council of the ECB, there is a growing rift which is roughly described as being between doves and hawks but goes well beyond their belief in the path of monetary policy and almost borders on the raison d’etre of the European Community itself and is brought into sharper relief by the renewed aggression of Russia.

The weaker economies of Southern Europe believed that ceding control of their economies to, principally, Germany, would provide them with a degree of protection, both financially and militarily.

While that may have been the theory, in practice it has not worked out that way. There have been two major financial crises within the Eurozone, while the currency has not even scratched the surface, in any attempt to usurp the U.S. dollar.

Militarily, the nature of conflict has changed to such a degree as energy supply has been weaponized, rendering Germany powerless to come to the aid of its partners as it is suffering more than they are.

Until alternative supplies of gas and other energy sources are found, Russia will hold the European Union hostage.

Meanwhile, the euro is still under pressure, although the more hawkish attitude of the ECB is supplying little support. It remains pivotal around parity close at 0.9996 versus the dollar.

Have a great day!

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.