Savings shrink as inflation returns
18th August: Highlights
- Employment continues to improve, but for how much longer?
- Retail sales fall could be due to logistics issues
- Q2 GDP confirmed at 2%
Employment on the rise but still 200k below pre-Covid level
Although the Bank of England Governor continues to believe that raised levels of inflation won’t become a permanent feature of the economy, it is in the here and now that savers are seeing their deposits lose value.
Today’s release of inflation data for July is expected to see headline inflation fall back to 2.2% from 2.5% in June. While this will be a welcome step, there are several factors still at play that could deter the Bank from tightening monetary policy.
It seems that there is a general agreement among the majority of MPC members that ensuring that the recovery is both robust and sustainable is preferable to what they believe will be a transitory rise in inflation.
It is true that there are factors that can be construed as temporary such as the level of demand far outstripping supply, logistical issues especially around the number of workers self-isolating, and the general level of shortages of raw materials.
Furthermore, it is doubtful that today’s data will have any meaningful effect on the Bank’s monetary policy following yesterday’s employment report.
The claimant count continued to fall, but the figure was significantly lower than as seen in June. It is believed that this is because the number of people finding work was almost totally offset by the number of jobs that were lost
As the furlough scheme continues to be withdrawn, the economy may find itself in a state of limbo as the level of employment remains around 200k below the pre-Pandemic level and the number of new jobs begins to fade. That will mean there is a core number of unemployed until the economy starts to move on from the Pandemic and there is genuine growth over and above the recovery.
The pound fell again yesterday as it reacted to a return to the trend towards a stronger dollar.
It fell back to the lower end of its recent range, reaching 1.3726, closing at 1.3743.
Economy sees several bumps in the road
As the recovery began to take hold, there was a surge in retail spending and jobs figures showed that job creation was both healthy and robust.
However, while recent comments made by regional Federal Reserve Presidents appear to be bullish about the recovery, concerns look to be creeping in about whether their words stem from a genuine belief or are more wishful thinking.
The Chairman of the Federal Reserve Jerome Powell spoke yesterday of his concerns about the uncertainty being raised by the continued spread of the delta variant of the Covid-19 virus.
Comments like it remains to be seen what the effect will be, hardly provide sufficient confidence that the FOMC will be in a position to begin to taper support as early as October or whether their confidence in the recovery is truly merited.
The past three data releases have been far weaker than had been predicted, and soon questions will begin to be asked about the strength of the recovery and whether this is more than a bump in the road. Powell will point to several occasions when he has said that there will be setbacks, but his cautionary words were lost as growth and employment data surged ahead.
Powell went on to say that Covid will be with us for a while, and businesses will have to learn to improvise and adapt. This is a far cry from his more recent comments that have tried to play down calls for a more hawkish view of monetary policy.
Answering students’ questions at a Town Hall gathering last evening, Powell commented that the Fed is in the process of putting away its emergency tools, but with millions of service jobs still to be recovered, the task of supporting the economy is not yet at an end.
The dollar recovered from its recent bout of weakness as the overall picture for the economy remains positive despite recent weak numbers.
The dollar index rose to 93.16, closing at 93.14 as significant resistance around 93.20 looms large.
Return to growth to see recovery continue
With hopeful signs coming from the economies that were expected to be more affected by the virtual collapse of tourism, it would seem that the overall economy can begin to look forward.
As with both the UK and U.S. economies, analysts continue to concentrate on the recovery of both activity and employment. Since the U.S. is also recovering from the incredibly damaging events over the election and the UK should be harvesting the benefits of Brexit, such a view is fair enough.
However, for the Eurozone, post-recovery growth is still very much in the lap of the Gods. Structural issues will continue to be an issue, bad loans held by banks will need to be deferred (again) and immigration is again turning into a hot topic
The fact that the ECB has adopted a lower for longer mantra in regard to interest rates and, it appears, won’t begin to consider the taper of support until the end of Q1 ‘22, inflation will remain an issue. In the past, when inflation was a major issue to economies, winter always brought concerns as fuel prices rose due to increased demand.
There are far more factors in play now regarding the price of oil and gas with political issues playing a significant part.
Next year there will also be political issues to muddy the waters, especially with Michel Barnier announcing his probable candidacy for the French Presidency with a right-wing take on immigration.
The euro fell yesterday despite the positive GDP data, which gives some indication of market sentiment. It reached a low of 1.1708, closing at 1.1710. It remains perilously close to major support.
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.”