1 October 2021: Pound steers from longer term woes

Pound steers from longer term woes

1st October: Highlights

  • Pound recovers a little despite stagflation fears
  • Q2 GDP revised marginally higher
  • German inflation rises at record rate

No end in sight to driver or raw materials shortage

The market’s perception of the state of the UK economy has seen a rapid decline over the past couple of weeks. While there were concerns about the recovery slowing down through the third and fourth quarters, following the second quarter where the UK saw GDP growth that was the strongest of any G7 country, the market has seen a series of headwinds develop that are not all Covid related.

The entire G7 is suffering from logistics issues that have been caused by demand outstripping supply as the global economy emerges from the Pandemic. The fact that vaccination programmes in the developed world all started at roughly the same time means that each nation was chasing a finite number of raw materials and spare parts, with inevitable consequences.

In the UK fiscal support via Government initiatives has been a success, but that clearly has to end at some point and with the furlough scheme, additional Universal credit payment and VAT reduction all having ended or are about to end, there is concern about the true state of the economy.

While there is no real fear of the economy slipping back into recession yet, one of the market’s greatest fears, that of stagflation, is being mentioned. In order for an economy to suffer from stagflation demand has to slow dramatically and that is not yet evident, while employment falls while inflation rises almost out of control. That is the doomsday scenario, since it is difficult for an economy to escape once it takes hold.

Just as the boom in the economy was probably overstated, the fear of stagflation setting in is similar, but even the fact that it has been mentioned by commentators is a concern.

The fuel crisis is slowly abating as common sense take over overtakes panic buying, but the true effect of Brexit on transport and logistics will remain until there is a plan to solve the issue put in place.

It has been said before that Boris Johnson is a grand plans kind of Prime Minister, leaving the details to his ministers However, he doesn’t have the calibre of person in his Cabinet to be able to grab the ball and run with it.

Sterling’s recent collapse slowed yesterday as the currency basically ran out of sellers for the time being. It recovered a little, reaching 1.3517, but fell back to close at 1.3477.

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Evading a difficult situation

Jerome Powell reckons that inflation is beginning to abate in the U.S. and the Fed may have dodged a bullet. Whether he is also about to do the same personally remains to be seen.

Since Elizabeth Warren announced that she would oppose Powell’s nomination for a second term in office, there has been a deathly silence from those supposed to be in his corner.

Yesterday, President Biden signed into law an emergency Bill to avert the shutdown of the Federal Government but fails to end fears of a government default since the debt ceiling remains unchanged.

Funding is now in place until December 3rd. Just how close to the precipice the issue came is perfectly illustrated by the claim that parts of the Administration would have begun to close down from today.

With problems other than Covid-19 coming to the fore, it feels like the aftermath of a great battle has started, with mopping up of issues created by the Pandemic vying with pre-existing issues for attention.

There is no doubt within the medical community that although the vaccination programme has done its job in averting the worst of the virus, it could still return if there is a further mutation or nations let their guard down too quickly.

The Delta Variant remains a threat, although the vaccine is seen to be more effective against it than was first feared.

The pressure remains on the Administration to raise the debt ceiling. Treasury Secretary, Janet Yellen, commented yesterday that the rise has to be in place by October 18th for a crisis to be averted.

Opinion pieces in several serious newspapers did Janet Yellen’s job yesterday and came out in Support of Powell’s renomination. The Washington Post denounced Elizabeth Warren’s comment that he is a dangerous man emphasizing that this is one person’s conclusion and that it lacks wider support.

Her claim that lack of oversight could have seen banks lose $300 billion as the economy turned south last year. However, the fact that they didn’t, seems to show that there was sufficient oversight in place.

The dollar paused in its headlong rush higher yesterday. It reached a high of 94.50 but ran out of steam to close at 94.26.

Lagarde unaffected by German inflation result

At the risk of repeating herself, ECB President Christine Lagarde was called upon again yesterday to confirm that easy monetary policy is here to stay.

When asked about the record rise in inflation in Germany, her response appeared to be that since Germany is the strongest economy in the Eurozone and inflation is rising all across the Union, it is natural that it would be highest in Germany.

It is highly likely that Jens Weidman and his colleagues at the Bundesbank see things quite like that.

The preliminary estimate is that inflation in Germany rose by 4.1% in August, up from 3.9% in July. The fact that it missed the market’s expectation of a rise of 4.2% will be of no comfort whatsoever.

It is understandable that a Central Bank that has done everything in its power to fight rising inflation for so many years only to find itself hamstrung by a central bank it has no power over will demand an explanation.

The change that has come over the region as the Coronavirus Pandemic came has seen Germany potentially fall back into the pack, only to rise again.

There is little doubt that the large yet weak economies of Italy, Spain, and Greece, among others, desperately needed the level of support that was put in place but with those economies now growing, it is right that Lagarde’s contention that rates will remain lower for longer is questioned.

There may still be some delight in certain capitals that Germany is impotent over that question, but when the crisis is finally over and the time comes to question how these countries are going to repair their national balance sheets, they may again look to Berlin for guidance and support.

The euro remains weak versus the dollar and lost ground again yesterday. It fell to a low of 1.1562, closing at 1.1588.

Have a great day!
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.”