Bank could be in a photo finish with the Fed

The Bank of England’s new Chief Economist comes from a tried and tested background in the City of London.

Huw Pill follows ex-Goldman Sachs colleagues Mark Carney and Ben Broadbent on a well-trodden path to Threadneedle Street.

It had been suggested that the Bank was looking into a more diverse hire. Since Andrew Haldane announced in April that he would be leaving his post, BoE Governor Andrew Bailey had said how keen he is to tackle the lack of racial inequality at the institution, but in the end nothing has really changed.

Pill is believed to be on the hawkish side of monetary policy and will start next week. He is a far more conventional economist than his predecessor and will bring a more conservative, less unconventional view to the MPC

The £20 per week Covid bonus that was being paid to those receiving the Government’s all-encompassing Universal Credit benefit will end in October as Rishi Sunak continues to look at ways to begin to recoup the huge debts that the country has built up over the past eighteen months.

Despite calls for the increase to be made permanent by many homeless and debt support charities, Sunak is determined to begin to tighten fiscal policy.

House prices in the UK continue to rise. In August, the average cost rose by 2.1% month on month, leading to an 11% rise over this time last year. That is up from 10.5% in July.

While prices continue to surge, mainly due to a lack of stock, the volume of transactions is lower primarily due to the removal of the Stamp Duty Holiday.

While there are calls for it to be delayed again, the Government appears determined to end the furlough allowance that has been paying most of the wages of those who are unable to work due to their employers being closed.

The effect of the removal of this measure will be a major consideration for the Bank of England. While it will be too early for the effect to be considered at this month’s MPC meeting, analysts will have pencilled the October meeting into their diaries as the date when they will expect to receive updated advance guidance.

The pound rallied against a weaker dollar yesterday. It rose to a high of 1.3798 but fell back to close at 1.3769 as profit taking took over.

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Supply chains, Covid-19 and a Chinese showdown threaten

The Fed appears to be entering a crucial period with the decision about its Chairman when Jerome Powell’s term ends next February seemingly up in the air, and several headwinds brewing that could blow the market’s expectations off course.

The continued rise in cases of the Delta Variant of the virus will be closely monitored, supply chain issues that have been exacerbated by a slowdown in the Chinese economy and the clean-up after Hurricane Ida swept across Louisiana and neighbouring states all have the potential to delay any FOMC action.

It remains likely that the Fed will have begun to taper its support for the economy by the end of the year, but doubts are growing that it will happen at the October FOMC.

Throughout the week, there have been downgrades in expectations for tomorrow’s August Employment report. Yesterday’s release of private sector employment dampened predictions further, coming in below expectations at 374k versus a predicted 620k.

Today’s weekly jobless claims data will prove a further clue to tomorrow’s headline, which is expected to be around 750k, but there are several bank economists that see that as optimistic, predicting it could be nearer to 650k.

The Fed’s most recent guidance said that Q3 is unlikely to reach the heights of Q2 in job growth, activity, or output, so a single report is unlikely to change the longer-term outlook.

The four-week average of weekly jobless claims is currently at 366k, and the market is looking towards looking for a number below the average to maintain the trend.

There have been no further rumours about the fate of Jerome Powell. Having received such a ringing endorsement from the Treasury Secretary, it would seem to be ruthless for President Biden not to re-appoint him, but he faces significant pressure from members of his own Party to suggest a more liberal candidate.

The dollar index remains in a state of flux awaiting more evidence on Fed actions. Yesterday, it fell to a low of 92.37 and closed at 92.50.

Can Lagarde hang on to the lower for longer mantra?

The financial markets had until the past week completely discounted any change to the level of support being provided to the Eurozone economy in the coming months.

Having been provided with all the advance guidance it needed following the changes to inflation policy and the comment from Christine Lagarde that the current level of support would remain in place until next March, with further policy changes to follow, made up trader’s minds.

The euro has been viewed as an almost one-way bet, but over the past days, there has been something of a change. This is not due to opinion, but emanates from data.

There has been something of a change in PMI’s and employment that continue to improve albeit at a more conservative pace than elsewhere and the success of the region in combating the rise in canvases of the Delta Variant have seen confidence improve across both manufacturing and the consumer sector.

Lagarde spoke yesterday of the need for support to be focussed on areas of the economy that continue to struggle. This is a change of emphasis, since in the past she has been known to favour a more blanket form of support that encourages stronger sectors and sees support trickle down.

Jens Weidman, the President of the Bundesbank, spoke yesterday of risks being clearly skewed towards higher inflation but also commented that the PEPP is still an appropriate measure, but it must be gradually withdrawn as the emergency fades.

This is a more conciliatory tone that has been heard from him recently, and may be a signal that the next ECB meeting may not be as controversial as had been feared recently.

Fitch ratings, one of the more respected agencies, reported yesterday that it doesn’t expect key interest rates in the region to be raised before 2025. While it had no immediate effect on the currency, should this idea take hold, it is likely to keep the single currency on the back foot.

Yesterday, the euro rose to a high of 1.1857, closing at 1.1839.