27 September 2021: Sunak bullish about recovery

Sunak bullish about recovery

27th September: Highlights

  • Fuel issue unlikely to find a quick solution
  • Fed members in favour of November taper
  • German election to spawn yet another coalition

Unneeded funding being unexpectedly returned

According to various sources, there are close to 100k vacancies for HGV drivers across the UK. The Government’s plans to reduce the shortage look like they will fall well short of what is needed.

The reaction of the transport minister is similar to that of the health minister at the start of the pandemic, trying to ignore the issue until it was clear it wasn’t going away without intervention.

With the shortages in supermarkets slowly worsening and deliveries of fuel to petrol stations also becoming a significant issue, it wasn’t helpful when the only answer the transport minister had when asked for a comment at the weekend was the that the issue is being overplayed and the queues at petrol stations are merely being caused by the British penchant for joining a queue.

The Business Secretary issued Government plans specifically aimed at the fuel supply sector yesterday. The plans include provision of short-term visas to drivers coming from abroad and the suspension of competition rules to allow better information sharing to ensure provision to those areas where supplies are particularly low.

Inflation has been a sleeping beast for such a long time that rumblings of its re-awakening appear not to be being taken sufficiently seriously.

Chancellor Rishi Sunak has been almost gleeful in providing permission to the Bank of England to allow inflation to exceed the 2% target as long as, to use Andrew Bailey’s words, the effect is transitory.

Just as it is impossible to predict in great detail just how high inflation is likely to reach while the Central bank continues to provide its current level of support, it is just as impossible to say when it will return to normal.

Given the current level of knock-ons that are being experienced currently that weren’t in any way predictable, it is also impossible to predict what shortages there will be in supply as winter arrives.

To say that supply will catch up with demand at some point, reckons without the issue of logistics that has already been discussed.

This week, the UK’s data calendar is fairly light, but following last week’s MPC meeting the market is likely to remain in a state of flux awaiting more solid information about the beginning of the withdrawal of support.

The pound reacted more to the U.S. Central Bank announcement than it did to the MPC meeting.

Last week, it reached a low of 1.3609 in a knee-jerk reaction to the slightly hawkish Fed announcement but recovered to end close to where it started at 1.3686.

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Market already looking forward to NFP

The FOMC meeting which took place last week fed the market more of the same in response to its demand for more information about when the taper of support for the economy will end.

This will without a doubt be the hot topic for analysts and traders well into the fourth quarter.

There is little doubt that the recovery from the Coronavirus Pandemic has slowed in the third quarter, which ends this week.

IN comparative terms, while its economy has performed adequately, the U.S. has slipped behind the rate being seen in the Eurozone, while keeping pace with the UK.

One negative for the entire recovery could be the reaction to the possible default of Chinese real estate conglomerate Evergrande, which missed the payment deadline of an $83 million interest payment as it appears to be running out of cash.

While this issue is important in itself, it illustrates perfectly the issues facing banks wanting to deal with China’s second-largest property developer. The interest remains to pour funding into their operations, but its balance sheet and other vital pieces of information are shrouded in mystery.

Cleveland Fed President Loretta Mester spoke last week, following the FOMC meeting, of her approval of the Fed beginning the taper of asset purchases in November. The next FOMC is at the beginning of the n, so that would dovetail perfectly.

She went on to say that there is a frothiness in housing and equity markets, although she fell short of describing rising prices as a bubble.

Jerome Powell will make a speech at the opening of a Fed Conference and is likely to echo Mester’s sentiments.

Data due for release this week includes durable goods orders, house prices and Fe’s favoured inflation measure, Personal Consumption Expenditures.

The dollar index remains well-supported. It remains shy of resistance at 93.40 having closed last week at 93.27.

Most causes of current inflation are temporary

While German Central Bankers were concentrating on who will govern their country for the next four years, ECB president Christine Lagarde took the opportunity to reiterate that she remains unconcerned about inflation, as she still considers it to be transitory.

It is probably more likely that she is correct than for Andrew Bailey, given the extreme supply concerns that remain in the UK that are probably more related to Brexit than they are to the Pandemic.

The German election ended close to a dead heat between the two major Parties. The only winner in such a result will be the smaller Parties like the Greens, who will now hold the balance of power when the inevitable coalition negotiations begin.

The post-war demands over the voting methodology continue to have the effect of fragmenting power in Germany to ensure that no single Party can emulate the rise of National Socialism that brought Hitler to power.

One issue the EU and UK have in common is the problems with the wholesale energy market, in particular the supply of gas as winter arrives.

In her speech, Lagarde warned that the gas issue could last longer than Covid supply shocks.

A slew of leading indicators will be released for the Eurozone this week that will paint a picture of how consumers and manufacturers view the recovery. Consumer and industrial confidence data will be released.

The IFO report was released on Friday, with the business climate weakening slightly following a very strong report for August. Expectations for the economy fell marginally as concerns over the Delta Variant remain.

Inflation data will also be released this week, and there is little doubt that it will spark conversation across several individual Central Banks.

The euro remains under pressure as the ECB continues to pump record amounts of support into the economy.

It fell to a low of 1.1683 but climbed back to close at 1.1720.

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.”