MPC remains cautious
24th September: Highlights
- BoE votes unanimously to keep rates and support unchanged
- Labour and supply shortages hampering recovery
- Growth slowing markedly in September despite positive consumer data
End of furlough brings a degree of risk to BoE’s plans
Issues over supply as demand has returned following the lockdown have been exacerbated by the scarcity of HGV drivers. This has been caused by two factors that are linked by Brexit.
Since UK haulage firms could employ drivers from within the EU at a low wage in comparison to what was expected by British drivers, the sector failed to employ local workers.
As soon as the EU nationals began to leave the UK due to the changes to employment rules post-Brexit, the shortage began, and costs began to rise due to the demands of locally sourced drivers.
Prime Minister Boris Johnson maintains that the issue is a short-term problem, but in truth, it is becoming a self-fulfilling prophecy that is feeding off itself.
Since it takes around nine months to obtain a heavy goods vehicle licence, the shortage will continue. Add to this issue the cost of training and the relatively poor pay and conditions, and it is easy to conclude why Johnson is under pressure to amend employment law to allow drivers from the EU to return.
The meeting of the Bank of England’s Monetary Policy Committee that concluded yesterday voted 9-0 to leave both interest rates and the level of support being provided to the economy unchanged.
This was a slightly more dovish outcome than had been expected with the more hawkish members of the committee concluding that inflation is unlikely to rise to unacceptable levels and the situation is a temporary outcome of the level of support necessary to keep the economy on course.
A major factor in the decision was the withdrawal of the Government’s furlough scheme at the end of this month and the effect this may have on employment data. This, added to the crisis in the wholesale gas market and the withdrawal of the £20 per week additional benefit payment, means that the consumer will be hit hard and could face a tough winter with the consequent knock-on effect on confidence.
The pound rallied yesterday, clawing back most of its losses from the previous sessions. This was due to the inability of the dollar to break through substantial resistance and the market’s realization that while the Fed is on course to begin to taper its own support, but there is many a slip between cup and lip.
Sterling made a high of 1.3750 and closed at 1.3721.
Taper to start this year… unless
In plain English, the Central bank basically told the market that it is on course to begin to taper its support for the economy provided the economy performs as the Fed expects it to. Over the next couple of months.
The most hawkish part of the message is that the Bank expects to hike interest rates a little sooner. Previous announcements had driven an expectation that rates would remain unchanged for the whole of next year, but that has now been changed and rates are likely to be hiked once in 2022.
Yesterday’s market reaction was to look at that as more of an imponderable, since a lot of water will flow under the bridge before that decision needs to be made.
Despite Fed Chairman Jerome Powell insisting the strength of the next employment report will not be a factor in when the taper will begin, the market is likely to be whipped into something of a frenzy as the release date of October 8th approaches.
Were there to be a significant upwards revision to the August figure and an improvement marked by the September data, there would be a major change in the market’s belief that the taper will begin at the next meeting, which will take place in the first week of November.
Despite the demand that facemasks continue to be worn in Federal buildings as the delta variant of Coronavirus brings an uptick in cases, the economy continues to grow significantly.
Data for housing starts was released earlier in the week, and this showed an increase that points to an easing of the crisis in delivery of raw materials.
Next week, data for durable goods will be released on Monday, with house prices on Tuesday, with the final cut of Q2 GDP released on Thursday.
The dollar fell back yesterday as the knee-jerk reaction to the FOMC meeting subsided.
It fell to a low of 92.98, closing at 93.10. Resistance at 93.40 looms over the index, and it will take a major positive piece of news for that level to be broken.
Concerns over a weaker euro drive inflation fear
Data for inflation will be released next week and despite there being a considerable amount of time until the ECB’s rate setting committee meets again, Christine Lagarde will feel the hot breath of the hawks on her neck.
While it is often not advisable to concentrate on a single part of the economy at times such as we are seeing right now, inflation has been such a driver for monetary policy ever since the Bank’s inception, that it is impossible to downplay its importance at this point in the cycle.
The fact that Lagarde managed to whip up the more dovish members of the Union into agreeing a more dovish tone to the target was an achievement in itself.
The hawks believe that this will be a relatively temporary measure that can easily be reversed, since it is a matter of semantics, but that change plus the promise of a more permanent support mechanism when the current one ends in March next year doesn’t bode well for a smooth passage.
There is a growing concern that inflation data that will be released will exceed the already raised expectations of many observers.
This will hasten calls for the beginning of the withdrawal of support, but the doves will point to several headwinds still to be negotiated before that can happen.
The future of the PEPP support programme is currently due to be discussed in December but if inflation exceeds expectations by a considerable margin, there are likely to be calls for that to be brought forward.
The euro remains like a cork in rough seas driven by the machinations of the dollar. Yesterday, it rallied to a high of 1.1750, closing at 1.1738. Although it still looks vulnerable, it has managed to remain above support at 1.1670.
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.”