Inflation data due this week
Morning mid-market rates – The majors
20th June: Highlights
- Return of Union Militancy means wages have to rise long term
- Yellen doesn’t believe a recession is imminent, or certain
- ECB’s current situation mirrors 2012. Has Lagarde something up her sleeve?
GBP – Level of price rises followed by retail sales
In May, headline inflation rose to 9%, and it is expected that a small increase to between 9.1% and 9.3% will have been seen in June.
The wholesale price of fuel has moderated, and this has only just started funnelling through into forecourt prices. The Bank of England has been reticent in providing any idea about how quickly they expect their tightening of monetary policy to begin to have an effect.
The constant drip feed of hikes contrasts with both the FOMC which is using a method of far larger hikes and also possibly the ECB which may still hike by fifty basis points next month.
Andrew Bailey, the bank’s Governor, when pressed by journalists in his press conference following last week’s announcement, commented that he believes that inflation could reach 11%.
Huw Pill, the Bank’s Chief economist, admitted in an interview last week that the bank had underestimated the pace of the rise in inflation and suggested that the Bank will consider larger hikes soon. There had been a series of unforeseen shocks like the war in Ukraine. While no one could have predicted the effect of the war, the way in which the Central bank has reacted is to act in the conventional way to fight an unconventional crisis
It is hard to imagine that the MPC, which has already confirmed that fighting inflation is its priority, believes that inflation is likely to rise by a further 2% but still hikes in increments of just twenty-five points. Is their goal really to bring inflation back under control, or are they hedging their bets against a fear of driving a slowing economy into recession?
The idea of a soft landing for the UK economy is no longer even being discussed, since a recession may already have started in all but name.
All the Bank of England can do now as far as the economy is concerned is try to limit the effect of the Government’s tax increases and hope for an agreement from OPEC to significantly increase supply of oil. The oil price moderated over the past few days, but until it is significantly below the $100 level, there will be little relief for the transport sector and private motorists.
Last week, Sterling had something of a roller coaster week. It traded as high as 1.2406 and threatened to conclusively break the 1.20 level by trading as low as 1.1933 before bouncing back to close at 1.2241.
This week’s inflation data will be crucial for the short-term value of Sterling. Data for retail sales will also be released, and that will provide a barometer on how the consumer is holding up.
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USD – Fed’s latest bulletin sees slower growth but no recession
Following last year’s comment from Fed Chairman Jerome Powell that inflation was transitory and would last, this year we have his predecessor and current Treasury Secretary, Janet Yellen, saying that it is the entire economy that is in transition.
It is fairly clear that there is a transition taking place between the low inflation low interest rate economy that has existed since the end of the financial crisis and the new world we are currently facing.
It is certain that there will be other shocks, both within the U.S. and also the global economy, so her words will probably ring true far more than Powell’s did.
Yellen went on to say that she feels that a recession is far from certain, something that the majority of economists will agree with, but she does see a slowdown in output which will affect GDP. This is the prime task facing her boss, President Biden, and he plans to be particularly active in the area of the economy.
Yellen feels that having seen particularly high growth as the economy came out of the Pandemic, that it is only natural that it takes a breather before it resumes healthy growth with moderate to low inflation.
Last week’s seventy-five basis point in the Fed Funds rate came as no surprise to the markets since it had been well advertised in advance, but that isn’t to say that markets didn’t see heightened volatility. The Fed hopes that providing sufficient advance guidance to markets will allow them to adjust gradually. So far that tentatively appears to be working.
The well-respected President of Minneapolis Federal Reserve, Neel Kashkari, spoke following the FOMC meeting of his willingness to see another similar hike at next month’s meeting to enable the Fed to get on top of rising inflation.
His colleague, James Bullard, President of the St. Louis Fed, believes that it is still possible for both the U.S. and Eurozone to achieve a relatively soft landing as both economies slow.
Last week, the dollar index exhibited a degree of strength, trading as high as 105.79, but it closed on Friday barely changed on the week at 104.64.
This week, there are further speeches being made by FOMC members including Powell on Wednesday, while data on consumer sentiment and new home sales will be released.
The Fed will also release the results of the recent stress tests on banks, which will illustrate how the financial community has coped with the new paradigm affecting the markets.
EUR – Germany remains behind a barricade
Given the time periods involved, it is perhaps unfair to say the European Union lurches from crisis to crisis, although the question needs to be asked about why there are few circuit breaks in place to allow it to deal with the inevitable stresses in the financial markets.
There appears to be little preparatory work done between crises that enables such events as we see now returning.
The fact that the Eurozone is a mixture of strong and weak economies with very different records of financial discipline lies at the heart of the problem.
Since Angela Merkel decided to step down, there has been something of a vacuum in the de facto leadership of the entire Union.
Ursula von der Leyen, Merkel’s choice as EU Commission President, has been nothing short of a disaster. Merkel’s determination that a German would take control after her departure created a further issue in that since a German couldn’t also take control of the ECB, Christine Lagarde was appointed as something of a compromise choice.
Lagarde has displayed fairly strong political nous, but has been far too dovish when it comes to inflation. Had Jens Weidmann been appointed, his intolerance of inflation would have seen the ECB act far more quickly/.
Since it seems that there is a fair chance that some weaker economies will transit into contraction in the coming months, the ECB’s use of the PEPP programme for the length of time it did, may prove to have been futile.
Even when the Central Bank hikes rates next month, it can do very little to slow inflation in several nations, which will need to act independently within their own borders. This takes away one of the principles of monetary union, which should be a catalyst for a complete overhaul.
The war in Ukraine couldn’t have come at a worse time for the Union. It has set back the recovery from the Pandemic and the looming debt crisis that will continue to exist, despite the measures announced last week, while banks are seeing more and more bad debts piling up.
The thread by which the EU continues to survive, the unyielding commitment of members to see it thrive, is all that remains to hold things in place. Germany is going to have to come out from the bunker that it has been shielding behind recently, and the new Chancellor and Bundesbank President are going to have to step up to the plate.
The euro continues to toy with parity, although each time it begins to descend, buying interest appears.
Last week, it fell to a low of 1.0359, but recovered to close at 1.0501.
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.”