Larger retailers suffering
26th August: Highlights
- Supply chain issues hitting service sector
- Traders await fresh Fed guidance
- ECB economist sees only limited effect of Delta Variant
Warnings of Christmas shortages already in the pipeline
Logistics firms are struggling to fill vacancies for transport workers, Brexit red tape adds to delays, there is a global shortage of semiconductors and another rise in Coronavirus infections is seeing hundreds of thousands of workers self-isolating.
The situation has the potential to disrupt Christmas deliveries already, and several major food outlets are closing outlets. The closures are temporary for now, but if the situation continues, an escalation could become unavoidable.
Supply chains are disrupted to such an extent that it is becoming more and more difficult to fill in the gaps,
There are calls for HGV drivers to be classed as essential workers as the sector suffers from a lack of staff due to the long hours and poor pay and conditions.
The Government has made no attempt to replace the shortage created by the departure of foreign workers following Brexit, with many observers criticizing the trade ministers for a lack of foresight across logistics and several other sectors of the economy. There have been calls from haulage contractors and business groups for the post-Brexit immigration rules to be relaxed in order to attract more EU drivers.
In the vehicle trade, shortages of parts for new and used cars have become critical, as have supplies of mobile phones.
The supply difficulties will soon become a concern to the Bank of England as demand continues to outstrip supply and with costs rising, inflation may become a more permanent fixture.
This could have the knock-on effect of making the Bank consider tightening monetary policy a month or two earlier than it intends, risking the recovery.
We are entering a critical time for the economy, with Chancellor Rishi Sunak turning off the support tap next month as he completes the withdrawal of furlough payments.
The pound. Continues to drift ahead of the Bank Holiday, although traders are gearing up for a more volatile week next week. Yesterday, it recovered more ground against the dollar, reaching 1.3767 and closing at 1.3762.
Market poised to react to FOMC chair’s speech
The reason for this is twofold. There are concerns that the recovery may have reached its peak, while the continued rise in cases of the delta variant may also lead to a slowdown in activity and output.
The U.S. is suffering from the same global shortages as other major economies, and this is driving issues in the car industry in particular where delivery dates are beginning to cause alarm.
Over the past decade, the U.S. has tried to reverse the trend of vehicle imports, with foreign manufacturers receiving significant subsidies to build vehicles in the U.S. even if many of the non-industrial parts are imported.
The Fed Chairman’s Jackson Hole address is one of the year’s highlights for economists in a normal year, but with the Fed poised to begin to taper its support for the economy and the first rise in interest rates since December 2018.
Employment is the continuing concern although the most recent NFP data has been positive, there is a lingering doubt that job creation could slow significantly.’
Data for weekly jobless claims continues to decline but, again, concerns remain that new job creation is slowing. If there is an increase in claims when they are released later today, that will begin alarm bells ringing for next week’s release of NFP data for August.
Data released yesterday showed that durable goods orders remain strong. This is a positive sign for the long-term health of the economy, since it is a good indication of the confidence forms have to invest in longer-term capital-intensive projects.
Later today the second cut of Q2 GDP will be released and there is expected to be a slight upwards revision from 6.5% to 6.8%.
This is unlikely to have any effect on the wording of Powell’s speech tomorrow. First, the Fed is well aware that the economy performed exceptionally well between April and June, and Powell will be well aware of the data.
The dollar index continues to be in the doldrums as global risk appetite turns slightly higher. It fell to a low of 92.80 yesterday, closing at 92.81.
The ECB plods on
He believes that the economy remains on track to see robust growth this year.
The word robust has been used by several members of the Governing Council to describe everything from output to activity, inflation, productivity and now, growth.
The robustness of the economy is therefore in little doubt, and this may be yet another covert announcement that the ECB intends to sit on its hands for as long as possible to let the level of support that has been poured into the economy do its thing.
The issue with this is that while the pot is continuing to simmer nicely, there are still several issues in the background that could cause the fire to go out.
Banks have been let off the hook to a certain degree in that its ability to pay dividends has been restored. While bankers pointed out that this is merely in line with the actions of Central Banks around the world, those in the Eurozone face a unique issue of capital adequacy.
There is still talk that the ECB will make its purchases of assets permanent, or maybe even forgive the debt and that is the magic potion that Christine Lagarde alluded to recently.
That would indeed be a bold move, but it would set a precedent and would probably fall foul of the EU’s regulations concerning state aid.
For now, the region has entered a quiet period, even the level of vaccinations is robust, so for now, the fate of the euro remains in the hands of the dollar or more specifically, those of Jerome Powell.
Yesterday, the single currency rose to a high of 1.1774, there looks to be a degree of resistance around the 1.1780 level and ran out of momentum, closing at 1.1772.
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.”