Pressure on Bailey rising
26th November: Highlights
- Increasing demand pressures factories
- More Fed officials open to increasing rate of taper
- Covid surge savaging Eurozone economy
Flexible working set to bring a big economic benefit
Over the past six months, Bailey has been accused of muddled thinking over inflation. His comments about rising prices have been proved to be wrong on several occasions, while his sanguine attitude blaming temporary issues that would soon fade.
More recently, Bailey was severely criticized for how he appears to have misled the markets in his advance guidance prior to the most recent MPC meeting.
While he is under no obligation to provide the market with clues as to the thinking of the rate-setting committee, if he chooses to, the market has a right to be able to believe that what he says is likely to happen.
The degree of certainty with which he hinted at a rate hike which didn’t happen has led economists to question whether his actions were deliberate. In the end, the vote was 7-2 in favour of no change. Such a huge miss shows, at the very least, that he doesn’t appear to have his finger on the pulse.
Chancellor of the Exchequer Rishi Sunak is not a particularly forgiving man, and it is expected that he will be having a conversation with Bailey about how the Bank has allowed this situation to become close to out of control.
Elsewhere, holiday shoppers will face a double whammy in the run-up to Christmas. There will be a scarcity of items on the shelves, although this is not expected to be as severe as was first threatened, although the goods that are available will be more expensive.
Bottlenecks in supply chains driven by a shortage of lorry drivers are being exacerbated by manufacturers of products made in the UK finding it tough to keep up with demand,
Yesterday, the pound remained under pressure versus the dollar, despite the markets being thinned out by the holiday in the U.S.
It reached a low of 1.3305, closing at 1.3322. It was also lower versus the euro, closing at 1.1886 as the pressure on Bailey rises.
Powell can afford to take a bow as tough decisions beckon
Data released this week, in particular jobless claims, has set the tone for greater confidence across both the consumer and business sectors.
There is a growing expectation amongst market commentators that the pace of the taper in the additional support for the economy that was announced at the most recent FOMC meeting will be increased at the next.
There have been several FOMC members and Regional Fed Presidents lining up to express their opinion that such a move could be beneficial. It would then naturally follow that the Federal Reserve would be in a position to begin to tighten monetary policy sooner than had been expected.
Despite this hawkish outlook, inflation appears to be levelling off.
This week’s data for Personal Consumption Expenditures showed an unchanged rate of growth at 4.5%, while the factory gate price of raw materials and labour fell.
Producer prices were 0.5% lower in October after a 0.4% increase in October.
The outlook for the economy has proved to be far stronger than was expected at the end of the third quarter. Full year GDP is now expected to be over 5% after a disappointing third quarter.
Most major financial institutions, including Morgan Stanley and JP Morgan Chase have raised their predictions for full year GDP and also brought forward the date of the first interest rate increase.
Jerome Powell will be hoping he has a calmer year in 2022 and be able to make more considered judgements once the emergency tools are back in the cupboard.
The market took an opportunity to take some profit yesterday, which led the dollar index to its first lower closing rate in over a week.
Its gains have become smaller over the past few days, which may indicate a more significant correction to follow. It fell to a low of 96.65 and closed at 96.77.
Economy grows by just 1.7% in Q3
While it is too early to say that Germany is no longer the powerful driving force it once was, it has certainly been more badly affected by Covid-19 than several of its neighbouring states.
It may be that the fall in the level of activity has been so severe that it is only natural, that a rebound will take longer than originally predicted, but with growth slowing and inflation rising, it will undoubtedly send a shiver down the spine of those in Frankfurt who have long memories or an interest in studying history.
The most recent data for activity for the entire Eurozone defies what is happening in Germany, but the upbeat PMI’s for November are unlikely to last.
Europe is back under a cloud of Coronavirus infections, and it is more likely that more nations than the three who have already acted will be forced to perform some kind of lockdown.
This couldn’t have happened at a worse time, with retailers of all sizes relying on the boost that they get from Christmas sales to turn their year around.
It is rumoured that Angel Merkel, in one of her last acts as Chancellor, called for a new lockdown in Germany, but she was rebuffed in the Bundestag.
Yesterday’s release of the ECB’ accounts showed that the worrying trend in inflation is likely to continue. The rate of rice increases is at a seven-year-high, while growth is moderating despite being higher than seen in the previous quarter.
It is still expected that the current round of support will end in March, although there has been no change in Christine Lagarde’s promise that it will be replaced by further measures.
The December meeting of the ECB’s Governing Council is likely to be highly contentious, but no change in policy is likely to be announced.
The euro made a small gain yesterday in holiday thinned markets. It reached a high of 1.1229 but closed just a few pips higher at 1.1208.
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.”