Jobs data continues to improve
Morning mid-market rates – The majors
19th May: Highlights
- In the UK, the recovery centres on jobs
- Yellen remains on the front foot
- Inflation above 3% an affront to Germany and the Bundesbank
Could the UK really see a shortage of workers
There are several issues which may happen later in the year around inflation and further stimulus to derail the rosy glow on Boris Johnson’s cheeks. One Of the issues could be the lack of a skilled labour force.
There has been a surge in ambition from those who worked in hospitality and were either laid off or furloughed during the various lockdowns. That has meant that as the reopening has begun bar staff, waiters and kitchen staff appear to be in short supply.
At the other end of the skills spectrum, the absence of a full year’s training has meant that certain skills in engineering and manufacturing could also suffer.
On the surface, yesterday’s data was encouraging without being spectacular. The unemployment rate fell, from 4.9% to 4.8%, as did the number of claimants. The fall was less than seen last month but the trend remains positive.
One small inflationary hint was seen in the rise in the three-month average of earnings to March from 4.4% to 4.6%.
There is going to be a far lower peak in jobless than the Government had feared at the height of the Pandemic and this may give Rishi Sunak a little wiggle room as the debit column headed benefits falls and the credit column for tax receipts rises.
With inflation data expected later this morning, the focus will turn to the Bank of England.
There is still a significant majority of the MPC in favour of keeping the level of purchases steady, that may change should there be a significant rise in prices or a continuation of data that points to a rise later in the year.
The pound rose to a high of 1.4220 yesterday as the dollar index fell. It closed at 1.4192. It now looks to have sufficient momentum to challenge the year’s high of 1.4243 seen in late February.
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Tax benefits of full employment to support recovery
There is little doubt that the market shot for the stars over employment but was disappointed at only reaching the moon.
Yellen has developed an attitude that if two trillion isn’t enough, let’s try three trillion.
She gauges the mood of the country as wanting to see a recovery from the Pandemic whatever the cost. That typifies the shift in U.S. politics since the election. While in most democracies, such a move is a natural phenomenon, in the U.S. the shift to the left is almost seismic.
Already smarting from concerns about where and more importantly, how coronavirus arrived, to then place a huge burden on the relationship by asking the Chinese Government to increase its investments substantially although there remains the threat of a trade war, could be a giant leap of faith and diplomatic skills.
Corporate taxation was cut substantially by the Trump administration but the time for such gifts is now in the past. While Biden wants to reverse the cut from 35% to 21% totally, he is unlikely to get that past Congress.
This evening’s release of the minutes of the latest FOMC meeting will drive the market dynamics for the rest of the week at least.
Given the comments made by FOMC members since the meeting it is impossible to imagine that anything was discussed that could reverse recent policy.
With a rise in rates unexpected before 2023, although the tapering of bond purchases will begin early next year, it remains a major question whether the market will allow the Fed to simply continue to make what are beginning to seem like flippant or glib comments.
The dollar is still under pressure which points to a short-term acceptance of dovish monetary policy.
Yesterday, the dollar index fell to 89.69, closing at 89.79. Having broken the 90 level, it will take a major turnaround in policy or more likely rhetoric to see the greenback recover.
Interest rates being driven by debtor nations
There were several votes taken where countries’ populations were asked to verify their Government’s decision.
Well at the time of the agreement, Germany made everyone promise that the ECB would act like the Bundesbank when it came to inflation.
That was the last time German inflation reached above 3%
The ECB has done a good job of keeping inflation under control. Although it may also be true that successive crises have ensured inflation has been rather too low.
The cost of keeping inflation at manageable levels has been the near destruction of several economies. The restrictive debt to GDP rules that are part of the budgetary rules mean that it has taken a long time for countries like Greece, Italy, Spain, and Portugal to recover while another, Cyprus, may never be the same again.
So, what does Germany get out of being a member of the European Union and why should it continue to provide succour to weaker nations. The notion of dominance of monetary policy is no longer valid. It is certain that German inflation will rise above 3% this year and an expected influx of foreign workers will deprive Germans of jobs bringing a lurch to the right.
It was always expected that France would stand side to side with Germany to create a more Federal Europe with a unified defence but that is now hard to imagine, particularly if Le Pen becomes President.
The euro remains unsure of its own continued existence and is now no more than a makeweight for the dollar index. As the dollar weakened yesterday, the euro rose to a high of 1.2233 and remained close to that level.
That is good news for the fight in inflation but makes an export led recovery more difficult.
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.”