Rate rise too close to call
2nd November: Highlights
- Skills shortages worsening
- Yellen denies economy overheating
- ECB to face battle with market over rates
Manufacturing output improves marginally
It is possible that this may be the shape of things to come, as the upskilling that the Prime Minister has alluded to in several speeches lately comes to fruition.
In the short term, the shortages of raw materials that have hindered the recovery from the Pandemic remains an issue, but with data for manufacturing output improving a little, it could be that the issues are beginning to slowly resolve themselves.
Manufacturing output rose from 57.7 to 57.8, hardly a major improvement but more importantly manufacturing is still well into positive territory and well above the 50 level which denotes expansion.
The big story this week for the UK economy will be the outcome of the Bank of England meeting that concludes on Thursday lunchtime.
For the first time in a while, the outcome of the vote on interest rates will be equally as important with any guidance from the Governor. Andrew Bailey delivers in his post-meeting press conference.
The price of diesel fuel at the pumps, reached a record high over the weekend. It reached 147.94 on Sunday, surpassing the previous record of 147.93 seen in April 2012.
Apart from 12.5million diesel car drivers in the UK, the price increase is sure to have a knock-on effect on household prices for heating oil.
This will have a significant effect on one side of the conundrum facing the Monetary Policy Committee.
While the ECB has clearly decided to deal with growth over inflation, it is likely that the UK will be forced to deal with inflation in the hope that the supply side difficulties will subside more quickly.
There is little doubt that the UK faces a tough winter even if inflation is curbed by interest rate rises. The housing market is sure to see a slowdown while continued disputes with the EU, France in particular, may see shortages in the shops.
The pound fell to a low of 1.3641 versus the dollar, but it closed right on the daily support level of 1.3660.
But, she also still believes that inflation is transitory
In the view of some members of Congress, the Chairman of the Federal Reserve represents the final part of the Conservative right that was, in the view of many, disgraced by President Trump.
The re-election of Jerome Powell for another four years from next February when his current term expires, will be seen by many, not just those most intimately involved, as a considerable influence over the recovery of the economy from the Coronavirus Pandemic.
Having taken bold decisions which have brought the country to where it is now, despite numerous distractions, considered by many to be on a par with Alan Greenspan and his handling of the LTC collapse more than twenty years ago.
As well as endorsing Powell for what seems like the hundredth time, Janet Yellen gave her view on the current state of the economy.
She still believes that inflation is transitory and that the economy is not yet overheating.
Shortages that are driving fuel price rises are bringing concern to business leaders, although the issue is being brought under control.
Yellen, in Dublin, spoke of the fact that the U.S. is still five million jobs short of the pre-Pandemic level.
She admits that inflation is higher than it has been in several years if not decades, but she puts this firmly at the door of the pandemic and as the entire economy returns to normal in the coming months the market’s self-correcting mechanisms will kick-in.
It remains certain that the FOMC will vote to begin the withdrawal of support at its meeting which begins today. For now, those expectations are driving the dollar higher.
Yesterday, the dollar index reached a high of 94.30 before giving back half of its gains from Friday and closing at 93.89.
German angst over inflation rising
Christine Lagarde may be the President often European Central Bank, but the decision-making process is undertaken by 25 individuals.
The six members of the executive board and the Central Bank Governors of the nineteen Eurozone member states each have a vote.
The issue is that in the recent past, the tail has been wagging the dog. Not in terms of financial clout, but certainly in the terms of simple numbers.
The decision to concentrate on growth over inflation is correct, given the way the opposite policy since the financial crisis has held growth in a stranglehold.
While Germany clearly believed that the creation of the Eurozone would allow them to inflict fiscal discipline upon the high-interest rate high inflation economies of Southern Europe, in the end they have bitten back by agreeing the current policy of allowing support to do its job.
Last week’s ECB meeting solidified the fact that advance guidance of no change in support until the current round of PEPP won’t change.
It may be that early in the new year, the ECB may need to review when interest rates will return to positive territory, since economic theory means that with inflation beginning to get out of hand in certain states, retaining negative interest rates is simply wrong.
In Germany there was almost complete agreement amongst the newspapers in condemnation of Christine Lagarde, with one commentator calling on her to do something.
The irony of that statement is that she has done something. She has turned the Eurozone economy away from its infatuation with inflation. That has led the President of the Bundesbank to depart, almost admitting defeat in his quest to ensure that Draconian measures to keep inflation in check have failed.
The ECB’s policy is good news for exporters, who are able to sell their goods at competitive prices since the euro is continuing to weaken.
Yesterday, the single currency fell to a low of 1.1546, before recovering to close at 1.1604.
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.”