26 April 2023: Unrealistic wage demands drive inflation higher

26 April 2023: Unrealistic wage demands drive inflation higher


  • Coronation to boost the economy but far more impetus necessary
  • Risk aversion drives the dollar higher
  • Spain suffers more than any other Eurozone nation from real wage fall
GBP – Market Commentary

Britons need a dose of realism according to Huw Pill

Bank of England Chief Economist Huw Pill, speaking on a podcast in the U.S. yesterday expressed his belief that the people of the UK need to wake up to the reality that they have no divine right to relative wealth.

He believes that workers and firms should stop trying to pass on higher costs by raising prices or demanding higher wages.

Until people accept that rising inflation has made them poorer, inflation will continue to rise. Simple economics shows that the UK as a significant importer of natural gas has seen its expense base rise exponentially, while its income from exports, mostly of services, has not risen as quickly.

If the cost of what you’re buying is rising faster than what you are selling, you are going to be worse off.

This is causing the current flare up in inflation which is causing the Bank of England to continually hike short-term interest rates.

While this is the simple unvarnished truth, it is unlikely to sit well with the man in the street, who is unlikely to to welcome criticism having seen real wages fall continuously for a year while the Central bank apologetically raises interest rates.

Pill’s comments came on a day when both PepsiCo and McDonald’s both posted higher profits that were boosted by higher prices for their goods, while food price inflation reached 17.1%.

The Coronation of King Charles III which takes place at the end of next week is likely to increase the feelgood factor in the country as well as boost tourism income, but in the cold light of day, the economy is still struggling three years after Brexit.

Rather than a series of one-off benefits, the Government needs to reduce the tax burden on both companies and individuals in order that there can be greater investment in growing their businesses and buying goods to kick-start the economy.

Yesterday, there was something of a reduction in risk appetite in the financial markets which favoured the dollar. The pound fell to a low of 1.2386 and closed at 1.2406. The expectation that the ECB is currently more hawkish over inflation than the Bank of England has seen the Euro continue to outperform Sterling. The single currency rose to a high of 1.1266, closing at 1.1306.

USD – Market Commentary

Latest data points to a looming problem

Another day, another prediction of a recession in the U.S. economy. Data published over the period since the March employment report has been almost uniformly weak, which jars with the number of jobs being created by the economy, which when studied closely still points towards a soft landing.

The clamour for the Fed to cease hiking interest rates since it risks driving into the economy into a recession is mostly coming from businesses in the financial sector who fear that their customers cost base is being increased to such an extent that they will no longer be able to borrow from their bankers which slows the economy, but also reduces bank’s profits.

There are reasons for the attitude of the Federal Reserve to be tempered soon although the stubbornness of inflation, which while not having plateaued. is not falling as fast as expected after a year of interest rate increases.

First quarter earnings have been divided in a number of aspects by company size. Meta, the owner of Facebook saw a 28% fall in income between January and March, while by and large tier two businesses have seen their profits grow marginally.

This in itself does not herald a recession despite the louder voices of big tech making themselves heard above the others. The collapse of Silicon Valley Bank sent shockwaves through the tech sector both startups and more established businesses, who saw their interest costs rise significantly during the quarter.

Some hedge funds are warning that damage to stock markets from higher interest rates is not yet reflected in the prices of individual stocks. That is their explanation of why the U.S. could see a recession later in the year.

While FOMC members enter a period of blackout prior to their meeting on May 3, the market fully expects them to hike rates to 5% and also that this will be the last hike in this cycle unless inflation begins to rise again, which isn’t seen as even a remote possibility.

If the likely scenario plays out, commentators will fall over themselves in self-congratulation for having been correct in predicting that the eventual top for the Fed Fund rate would be 5%.

In the absence of any usable comments from the FOMC, the market has contented itself by attaching undue importance to secondary data releases.

The fall in consumer confidence saw a fall in risk appetite which pushed the dollar away from its trend lows.

The index rose to a high of 101.95 and closed at 101.86.

Today sees the publication of durable goods orders for March. This will complete the picture of activity in Q1 and will be followed by tomorrow’s release of the first cut of GDP data for the period between January and March.

EUR – Market Commentary

Banque de France fears contagion from France’s issues

The French economy has performed moderately over the past two quarters, neither suffering from overly excessive inflation, nor seeing an economic contraction that threatens its economy falling into recession.

All the issues surrounding President Macron currently spring from first his determination to raise the retirement age to 62 for those born before 1955.

While most European Union members have a retirement age of sixty-five or sixty-six, spare a thought for the Danes who retire at seventy-four.

Denmark prides itself on its packages of social care and pays for them with an unusually high retirement age.

The Governor of the Banque de France, Francois Villeroy de Galhau, warned yesterday that he needs to curb generous public spending, which is a thinly veiled attempt to reduce the effect of the rise in retirement age, or see the country suffer a rise in inflation and slower economic growth, possibly a recession.

In a letter to the President, de Galhau said that while the makeup of headline inflation which has seen energy and food costs rise significantly in France, the situation in the country is no different to the rest of its European partners.

However, in order for the economy not to be infected by a social and economic disease, which could quickly spread to goods and services prices, social spending needs to be reined in.

Public debt currently stands at 116% of GDP, above the EU average of 90% and way above the figure agreed in the growth and stability pact of 60%, although that agreement is considered to be dead in the water, following the Pandemic.

The fear is that a new kind of contagion could rapidly spread across the EU. While Brussels struggles to propose Growth and Stability Pact 2.0, if there are nations whose budget deficits and debt to GDP ratio exceeds what is proposed. It will be that much more difficult to bring them back into line.

The euro is facing a crisis of confidence from traders every time it attempts to test resistance at 1.1080. It tried and failed to breach that level again yesterday, reaching a high of 1.1067, before falling back to a low of 1.0964 and eventually closing at 1.0972.

Have a great day!

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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.