22 October 2021: Rate rise could end recovery

Rate rise could end recovery

22nd October: Highlights

  • Sterling running out of steam
  • Jobless claims still moving in the right direction, just a little slower
  • Lagarde’s charm offensive with Weidmann fails spectacularly

Economy facing perfect winter storm

Prime Minister Boris Johnson is refusing to face the prospect of the country’s recovery stalling as inflation, supply chain issues and rising cases of Coronavirus threaten to derail his plans.

The latest data for Covid-19 infections shows that more than 50k new cases were reported in a day for the first time since July. This marks just the second time since January that the rate has reached that level.

Hospital admissions are rising too, although fatalities remain lower than were seen the last time infections were at the current level.

The Government is refusing to countenance a return to restrictions that were ended a few months ago. It is relying heavily on the booster dose of the vaccine.

The data shows that the majority of those infected are either below twenty or over eighty. With the half-term break taking place next week, this may provide a natural firebreak in the lower category.

Several calls have been made on the Government to reintroduce social distancing and mask-wearing measures. This is being resisted, with the public being simply encouraged to take sensible precautions.

The rise in inflation is still being viewed as temporary, although the Bank of England will begin to feel pressured as the headline rate looks set to continue to rise.

The next MPC meeting is a couple of weeks away and will be preceded by the autumn Statement that will be presented to Parliament next Wednesday. More dovish MPC members still believe that raising rates to counter inflation will be counterproductive. Chief Economist, Hugh Pill, believes that the decision on rates is finely balanced.

Business leaders have called for the Government to ensure that if they are serious about promoting investment, they need to ensure that their tax burden is not increased.

Data for consumer and industrial confidence that was released last evening shows that it fell for the third consecutive month and has reached an eight-month low.

The pound remains supported at lower levels but having topped -out at the same level for three consecutive sessions, it is running out of steam.

Yesterday, it reached a high of 1.3833 and closed at 1.3791.

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Leading indicators may have a negative effect on FOMC

The dollar’s recent move lower is a clear indicator that it is still reactive to the prospect of the Federal Reserve withdrawing accommodation at its next meeting, which takes place on November second and third.

The latest leading indicator for the economy shows that the country’s growth trajectory is lower than seen in the first half of the year.

The Conference Board Index rose by 0.2% in September, following rises of 0.8% and 0.9% previously.

The market had expected a moderate fall, but the Index was still expected to show a 0.55 improvement.

The latest data for jobless claims shows that the number claiming benefits continues to fall, although that number is also moderating.

In the latest week, 290k claims were made, down from 296k in the previous period. The four-week average is now at 320k, down from 335k.

It is hard to gauge exactly what the Central Bank’s expectations are for the coming period.

The economy is still being pressured by what can be considered temporary factors like the level of demand outstripping supply which wouldn’t necessarily be alleviated by the withdrawal of support, although it would calm fears over what is beginning to be labelled rampant inflation.

A change in the oversight of FOMC members was announced yesterday, with a new ban being introduced on trading in individual stocks. This comes six weeks after two committee members resigned after being questioned about their own investments.

Chairman Jerome Powell also became embroiled in the row but managed to prove his innocence.

Powell is still in limbo regarding his reappointment when his current tenor expires next February, but as the furore dies down, it has become clear that having been appointed by a Republican President is a charge that he cannot do anything about.

The dollar index is now coming close to the bottom of its perceived correction. Yesterday, it rallied to a high of 93.79, breaking a six-session losing streak. It eventually closed at 93.75.

Schnabel, a hawk with a more flexible mind

With a lame duck Chancellor and a Central Bank President intent on leaving his post early, the landscape at the top of German politics and economy is set to change.

Jens Weidmann’s departure from the Bundesbank and ECB is being seen as something of a double-edged sword. While Weidmann’s replacement will have similar views on inflation, they will express them in a more flexible manner. Early indications are for Weidmann to be replaced by Isabel Schnabel.

Schnabel is already an executive member of the ECB’s Governing Board. Although the title of Bundesbank President is more prestigious, it may be seen as a backward step.

Schnabel may have her eye on being the next ECB President and having seen Weidmann’s path to that job hampered by his domestic role, may prefer to remain in her present position.

With the path of ECB policy fairly well set in stone, the next few weeks will be the euro driven by outside influences, particularly the FOMC decision of the taper of its own economic support.

Germany’s industry is in something of a meltdown, although it should be emphasized that that is a term relative to its past performance.

Producer Prices are at their highest level since 1974 and despite this being a precursor of future consumer inflation, there is very little that can be done given the outside influences pushing the price of both energy and raw materials to extreme levels.

The rising price of gas has been well publicized, but the oil price is now around $80 per barrel, and that is also an eight-year-high.

While other G7 Central banks are on a path towards tiger monetary policy, the ECB’s determination to not move too early coupled with the peculiar influence of having to deal with nineteen individual economics is likely to see the euro suffer in the coming weeks/months.

Yesterday, it retreated to a low of 1.1619, and closed at 1.1623.

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.”