16 July 2021: Sunak praises success of jobs data

Sunak praises success of jobs data

16th July: Highlights

  • Employment data beats all expectations
  • Recent data as good as it gets
  • Supply bottlenecks drag output lower

But, alarm bells are beginning to ring over staff shortages

Data released yesterday showed that the economy is going to reach pre-Pandemic levels faster than had been expected. The employment report showed that the claimant count fell by 114k following an upwardly revised 151k fall in May.

The flip side of this strong showing for the economy is the growing concern that the country will face labour shortages in several sectors going forward.

Five years on from a Brexit vote which many feel was swayed by a belief that the country would be better placed if it relied less on workers from the EU, the country now faces a situation where it may need to amend employment law to allow foreign workers to return.

With inflation growing at a rate which must be ringing alarm bells at the Bank of England was further evidence contained in the employment report. Not only are more people finding work, they are also being paid more.

The data may be a little distorted by conditions created by the Pandemic but wages rose by 7.3% in Q2 while vacancies remain at record levels.

The unemployment rate remained at 4.8%.

A report released overnight from the House of Lords Economic Affairs Committee called upon the Bank of England to justify its main policy for supporting the economy. The Committee wants to better understand the link between QE and inflation and how and when it will be unwound.

There is a concern that the Bank is using QE to finance the Government’s bond issuance, a suggestion that has been strongly denied by Andrew Bailey.

The pound failed to move out of its recent range yesterday. It fell to a low of 1.3805, closing at 1.3828

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7% growth unlikely to be seen again

The U.S. economy continues to dominate the global recovery from the Pandemic with its share of global activity rising from 21%at the end of 2020 back to 25% which is close to its historical average.

60% of all trade is now denominated in dollars while a similar percentage of other currencies are anchored by the Greenback.

Once the pandemic is over (which may still take some time) the U.S. is likely to reassert its dominance of tech although it is going to have to find a way to build as well as invent devices. It seems too obvious that the U.S. doesn’t realize teh ease with which China is able to copy its tech since a large proportion of devices assembled there.

The current global shortage of semiconductors shows that while the minds of Americans can drive technology forward, they will still rely on supply chains of physical parts which are dominated by Asian countries.

The growth of U.S. debt will also keep it shackled to Asis. U.S. foreign debt has risen from $2.5 trillion in 2010 to $10 trillion today. The relationship between debt and trade is what keeps negotiators returning to the trade talks despite the antipathy between the U.S. and China.

Fed Chairman Jerome Powell is still concerned that new variants of Coronavirus may emerge with numbers of infections beginning to grow again. While the U.S. is not yet seeing the spikes that are affecting the UK and mainland Europe, Powell continues to justify Fed support for the economy by addressing his fears that the Pandemic is not yet over.

Fears remain in the retail and manufacturing sectors that the Fed may be considering tapering ist support as a prelude to raising rates.

Given the level of debt being taken on which is fuelling the domestic real estate sector a rate rise would amount to far more than a gentle tap on the brake.

The dollar index remains infatuated by any sign from the Fed which points to a tightening of policy. Yesterday it rallied but, again, couldn’t challenge the 92.80 level.

It reached a high of 92.70, closing at 92.59.

Output dips by far more than analysts expect.

It is difficult to comment on the eurozone economy before next week’s ECB meeting since Christine Lagarde has informed the market that there will be a sea-change in policy concerning the replacement of support once the current measures expire.

This has meant that for the past few days, the single currency has been even more, if that were possible, driven by the dollar which means that the Federal Reserve now holds all the cards.

Output in the Eurozone fell by 1% in May due in large part to supply difficulties experienced by logitics businesses and, ironically, Brexit. The fall in trade following the UK’s departure from the EU has had an effect on both sides of the English Channel.

Analysts had expected a fall of only 0.4% which means that the date at which the economy will return to its pre -Pandemic level is still some way off.

Factory output is still 1.4% below its February 2020 level.

The devastating floods which have hit Germany, Belgium, The Netherlands and parts of Northern France while horrendous on a domestic level will serve as another reminder to Ursula von der Leyen of how much work needs to be done to turn what is still a fairly disparate group of nations into a more centrally governed state that can react to such natural disasters is a more concerted manner.

Next week’s ECB meeting dominates the outlook for the coming week with speculation rife about what to expect. There is no doubt that Lagarde believes the outcome will be positive for the market’s view of the Eurozone and maybe the currency but the risk to the Bank’s credibility remains very high.

Yesterday, the euro fell versus te dollar but is building a degree of support to coincide with resistance beig seen by the dollar. It

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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.”