Supply chain issues worsening
31st August: Highlights
- Growth may undershoot predictions if supply chain issues not fixed
- Powell signals tightening before years end
- ECB sees inflation as a global problem
Calls for army drivers to be drafted in
It is facing a perfect storm of concerns that while not unique to the UK could blow the recovery off course.
First, there are shortages of raw materials due to demand outstripping supply and as an island, actually getting resources to where they are needed is fraught with issues.
Second, there is a genuine shortage of qualified lorry drivers that has been exacerbated by the departure of migrant drivers from Europe due to Brexit and a lack of competitive pay and conditions within the industry.
Finally, the very specific global shortage of semiconductors is affecting deliveries of spare parts and finished goods across a very wide range of sectors of the economy.
The issue of drivers has come in under the radar, since, despite Road Haulage Unions complaining about pay and conditions, for some time Haulage had had a plentiful supply of drivers from the EU.
The Government has been slow out of the blocks in suggesting a remedy, with their only suggestion so far is to hire British drivers who can be relied upon not to suddenly disappear.
Kwasi Kwarteng the business minister rejected calls for immigration rules to be relaxed. He commented that this would be a short-term fix. The fact is it would be something of a climbdown as far as the independence created by Brexit is concerned.
With training taking up to nine months, this is likely to be an issue that could affect several areas of the economy. It will certainly exacerbate the demand over supply issue and add to inflation. That, in turn, could see the Bank of England pressured to act before the recovery is complete.
Expectations are for the Bank to reduce support early in the New Year, but it could be forced to bring that date forward if employment is not too seriously affected by the reduction of Government support and should inflation look like rising faster than has been forecast.
The pound remains heavily influenced by expectations for cutting support in the U.S.
It rallied to a high of 1.3781 last week, but any perception of strength may be temporary.
Versus the single currency, it rose to a high of 1.1707 following two weeks of losses.
Versus the dollar and euro, it closed last week at 1.3764 and 1.1667 respectively.
Majority of Regional President agree on timing of taper
Powell’s Deputy, Richard Clarida was the first cab off the rank, claiming that the Fed had done a good job in stimulating employment. He added a note of caution concerning this week’s release of NFP for August.
He commented that he expects further gains in the Autumn. This is perhaps a hint that the concerns of the market over the August headline are justified.
Cleveland’s Meister, Philadelphia’s Harker, Atlanta’s Bostic, and St Louis’ Bullard all made speeches in support of the taper, ranging from progress over inflation to the market’s actions in pricing in the cut in asset purchases.
Powell commented that the economy and labour market have healed well and will be able to deal with less support by year-end. This is at the dovish end of the market’s expectations and saw the dollar lose some ground.
Those Regional Fed Presidents who made comments were each more hawkish than the last.
Powell believes that inflationary pressure is temporary and was keen to confirm that the withdrawal of support and a rise in interest rates are two entirely different subjects.
As he said recently, the Fed is preparing to put away its emergency tools and return to what it is designed to do, deliver full employment while inflation remains close to 2%.
This week will be driven by the August employment report that will be delivered on Friday. With two shortened weeks, the market may be a little short of liquidity, exacerbated by the fact that there is a very wide range of predictions for the data.
It is universally accepted that the headline will be lower, with 650k the most bearish of estimates.
Powell’s comments sent the dollar lower on Friday. It fell to 92.62, closing at 92.68
ECB claims prices will begin to fall as recovery takes hold
The market has accepted that when Christine Lagarde said that the Bank has put its plans in place, and they will be given time to work, that she meant it.
While it is traditional for most of mainland Europe to take August off, the lack of comment on the data that has been released this month has been remarkable.
The Eurozone economy faces similar issues to the rest of the developed markets. Supply chains continue to creak, and inflation remains an issue, the size of which depends on who you ask, depending, of course. if you can find anyone to ask!
One, unnamed ECB official commented last week that the majority of the Governing Council believes that inflation is a temporary phenomenon that will fade over time and that in any case inflation is an issue facing the entire global economy which is a factor of the steps taken by Central banks to avoid a recession, driven by the Coronavirus Pandemic.
The most recent data released by the Eurozone shows that the recovery continues to take hold, albeit at a slower pace than in other regions, although it must be remembered that the Eurozone was on the brink of recession even before the Pandemic hit.
The ECB’s promise that rates would be lower for longer, and that support will be around in some form for a considerable time, means that the euro is likely to remain depressed for at least the next two quarters.
Last week, the euro remained in a relatively narrow range, between 1.1802 and 1.1693. It closed at 1.1794.
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.”