4 May 2022: Government stymied by rising prices

Government stymied by rising prices

4th May: Highlights

  • Johnson says Government can’t help everyone
  • Job openings still rising, adding to wage inflation
  • Retail sales to tell the story of the economy

Prudent spending, the crux of a strong recovery

Prime Minister Boris Johnson admitted yesterday that being able to help the population deal with the rise of the cost of living is beyond the capabilities of the Government.

Johnson refused to consider a windfall tax on energy companies who are making record profits as the cost of both petrol and gas go through the roof.

BP made a record profit of £6 billion in the first quarter. This has further stoked public indignation amid accusations of profiteering.

In an interview yesterday, Johnson went on to say that using public funds to try to offset the increase in energy prices would be impossible given the size and scale of the problem.

The cap on energy prices was raised on April 1st and already the level of those either already in arrears or being forced to make compromises in other areas of the household budget is already rising exponentially.

During the current quarter, the use of gas to heat homes will be at its lowest annual level. However, an expected further rise in the energy cap in October could trigger a poverty crisis in the UK, the likes of which hasn’t been seen in a generation.

Johnson acknowledged the threat posed by rising inflation, but made no mention of the role of the Bank of England in bringing it down. This has been taken as an acceptance of the continued independence of the Bank of England, despite the importance of its monetary policy decision-making.

The Monetary Policy Committee will announce the result on its ballot on interest rates tomorrow, amid expectations that there will be a unanimous 8-0 vote in favour of a further twenty-five basis point increase.

Were there to be any dissenters, it could see the pound accelerate its recent fall versus the dollar, given the expected result of today’s FOMC meeting in the U.S. later today.

Were Andrew bailey to prove to be a little more dovish about future monetary policy decisions when he faces the press tomorrow, the concerns about further divergence in monetary policy will see the pound possibly test the 1.20 level versus the dollar in the medium-term.

Yesterday, Sterling managed to clamber a little higher versus the Greenback, reaching a high of 1.2567. However, it was unable to cling on to those gains and drifted back to close virtually unchanged at 1.2499.

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Market trusts Powell to figure it out

As already mentioned, the Federal Open Market Committee of the Central Bank will conclude its meeting later today, with a hike of fifty basis points in the target of fed funds virtually baked in.

The Committee made up of four officials from the Federal Reserve who are permanent members accompanied by four Presidents of Regional Federal reserves is determined to face inflation head on having completed its mission to support the economy through the Pandemic.

In the current line-up, the four Regional Presidents come from St. Louis, Kansas City, Cleveland and New York. John Williams from New York is also Vice-Chairman currently.

Each has spoken of the need for a more hawkish policy recently. This has led the market to believe that this and the following meeting will see fifty-basis-point increases as well as the beginning of the reduction in the size of the Fed’s balance sheet which has ballooned from the addition of liquidity during the pandemic.

The first week of any month is characterized by data being released which shows the strength, or otherwise, of the employment sector.

Yesterday, data for job openings was released, this was little changed from March. 11.55 million openings remain after 11.34 million previously.

Given the positive number of new jobs expected to have been created, the data for which will be published on Friday, this shows that the workforce is continuing to revolve, moving from job to job, most often for more pay.

The effect of this is to add to the growing concerns over wage inflation. Higher wages add to business costs which are passed on to consumers, adding to inflationary pressures.

As well as the FOMC decision, data for economic activity will be released later today.

Services output is expected to have risen from 58.3 in March to 58.7 in April. This will allay fears that have been growing of a significant slowdown and will most likely embolden the Fed to remain on course.

Yesterday, the dollar index took something of a breather. It failed to make a fresh high, reaching 103.67 and closing at 103.48.

While support for the dollar, driven by expected monetary policy divergence, remains high, it may see a slight correction as the market recalibrates its expectations.

Short term gains mask long term problems

Data for retail sales in April will be released later this morning. The data is a significant indicator of how well the economy is faring. It anecdotally takes into account many aspects of the economy, including employment, confidence, producer prices and sentiment.

There has been one area of the economy that has been at a record high recently and that is employment as was seen in data released this week.

However, the rest of the economy is in danger of sinking without trace as the conflict in Ukraine continues.

The fighting that continues to rage in the east of the country, in the area most recently governed by Russian backed separatists, shows no sign of letting up.

It is hard to imagine how the Ukrainian army battling the superior might of the Russian forces can survive, but so far, they are managing to keep them at bay.

The successes of the Ukrainian army will only serve to harden the resolve of Russian President Vladimir Putin to send further troops and equipment to the area to try to break Ukrainian morale and the resolve of the people.

Economically, the conflict has caused significant hardship, both direct and indirect. Ukraine is receiving two billion dollar a month from the U.S. in direct aid, as well as significant supplies of equipment from the UK.

The European Union is also helping by regularly adding sanctions on both Russian individuals and businesses.

The knock-on effect of the conflict on Europe’s doorstep will manifest itself in the retail sales data that will be released later today.

The numbers for March included a significant boost attributable to the continued lifting of restrictions following the Pandemic. However, the true effect of the conflict will be seen in retail sales that are expected to have fallen from a 5% rise in March to just 1.4% in April.

It is hard to imagine that against this background of a dramatically slowing economy, the ECB is beginning to consider hiking rates to combat record inflation.

The euro will begin to accelerate its recent losses following a brief lull after today’s FOMC meeting, with parity now a real prospect.

Yesterday, the single currency also trod water as the market took stock. It rose to a high of 1.057 and closed at 1.0520.

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.”