Inflation won’t fall due to rate hikes
18th January: Highlights
- Inflation unlikely to fall before summer
- Yellen chooses MLK Day to tackle inequality
- German economy is still lower than it was pre-Covid
Natural effects will drive prices back to acceptable levels
A survey published yesterday showed that real incomes in the UK are set to fall this year as consumers struggle with gas prices, tax increases and Omicron
The Government is fairly sure that the new variant is on the wane now and will be considering putting plans in place to reopen the economy following the restrictions that were put in place before Christmas.
Although he is hardly in a position to celebrate it, it seems that Boris Johnson and his Ministers got the call on Omicron absolutely right as they gambled that it would be less damaging to those who caught it, particularly those who are double or triple vaccinated.
The era of historically low interest rates is ending, and it will not be missed by everyone. While borrowers have been able to fix mortgage rates at remarkably low levels, which has contributed to both the pace and size of house prices, savers have had to take on board greater risk in order to gain anything like the return that earlier generations were able to obtain.,
This has been a contributory factor in the average working age rising. While deregulation allowed savers to handle their own pension pots, not every decision has led to higher rates of return.
The jury is still out on Boris Johnson’s future as Prime Minister. Since his confession over Downing Street parties last week, Johnson has been keeping his head down, and rightly so. He is far from out of the woods, with most of his supporters stalling by insisting on waiting for the result of the report being complied by the Cabinet Office
Astonishingly, twelve separate events are being investigated and given the level of rule-breaking, the only surprise is that the scandal didn’t break earlier. From that, it is hard to imagine that Johnson expected to get away with lying about both his knowledge of and participation in such a high volume of events.
So far this year, the financial markets have been counter-intuitive and have displayed their ability to work contrary to simple principles. At some point, the entire market expects the divergence of monetary policy to drive the dollar higher, with Sterling trailing behind and feeding off scraps.
Over the past few trading sessions, that dollar weakness has begun to abate.
The pound has lost ground every day since last Thursday, and that trend has continued overnight.
Yesterday, the pound fell to a low of 1.3637, closing at 1.3743.
Jobs are plentiful, willing workers? Not so much
That is far from the case. Vacancies are still there in significant numbers; however, the workforce has been reluctant to return.
That is a factor of the Pandemic. Sickness is still a major issue. There is a considerable number of workers who have the virus, several million people who are self-isolating, while there is also a cohort of those fit to work who are holding fire on returning to the workplace until the Omicron Variant is under control.
Despite concerns over the virus, the latest employment report showed that employment is heading towards the level it was at before January 2020.
The transient nature of the employment data means that the Fed is most likely correct in beginning to tighten policy. While it will take some time for its actions to be provable, the FOMC is moving towards normalization at the right time.
It is expected that the first interest rate will quickly follow the end of support for the economy as bond purchases end. They are currently being withdrawn at a rate of $30 billion per month. Three or possibly four rate hikes will take place in 2022 and once rates reach a neutral level, the reduction of the size of the Fed’s balance sheet, bloated by holdings of both Government debt and mortgage-backed securities, will commence.
Housing data and jobless claims are the stars of the show this week. Neither will have anything approaching a major effect on the value of the dollar. Next week sees the release of activity data, together with the first preliminary cut of Q4 GDP.
It is likely that the markets will continue to read water until that data is released. Personal consumption expenditures will also be released, giving a preview of the trend in inflation.
The dollar index appears to be approaching the bottom of its recent trend. Yesterday it climbed to a high of 95.35, closing at 95.23.
Inflation, Omicron and ECB generosity slowing activity
That all changed last year when the ECB announced a change to its inflation policy and Germany, figuratively at least, became just another Eurozone member.
Germany has been sidelined in its position of hegemony over the group. Pre-Pandemic it was expected that Angela Merkel, her successor and a few like-minded countries would be able to drive the creation of a more Federal State, again following the German model.
Given the continued disturbances being created in the east, it was also expected that a Eurozone joint defence force as a prelude to a Eurozone Army would be created.
Now, Merkel has gone, her successor has bigger fish to fry, and the biggest supporter of Federalism, Emmanuel Macron if struggling to be re-elected.
According to recent stories, Macron, who has tried to round up support by bashing the UK and its Government over Brexit, has decided to concentrate more on the issues within his own borders.
He is trying to convince voters that an economic boom is happening in France, just three months before the Presidential Election takes place.
When the population look back on the great fanfare that preceded Macron taking office, they will be disappointed that he has become bogged down in detail and trivia and not been able to promote his grand plan.
It will not be easy for any Government that has been in office during the Pandemic to be able to cover themselves in glory.
Two examples are Belgium and the Netherlands. Both countries are stable politically, both have coalition Governments that are able to promote unity, but lockdowns driven by the rise of the Omicron Variant before Christmas, saw people on the streets protesting.
The euro may now be at the start of its long march lower as it begins to lose ground versus the dollar.
Yesterday it fell to a low of 1.1391, closing at 1.1406.
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.”