12.5% of businesses are short of staff

Andrew Bailey, the Governor of the Bank of England, believes that there are up to two million people who are eligible to find employment who, basically choose not to. In a speech yesterday, Bailey called upon those who are considering their options, to reconsider their choices and re-join the workforce at the earliest opportunity.

Coupled with the withdrawal of the furlough payment by Chancellor Rishi Sunak in the next few weeks, an overall lack of workers is beginning to hamper the recovery.

Bailey commented that the latest data he has seen for payments and mobility suggest that the recovery is levelling off and companies are becoming desperate for workers to fill vacant roles.

It may be that there is a game of cat and mouse developing where businesses are advertising opportunities, yet the workers who would generally fill those roles are holding out to see if there is a possibility of the rate for the role increasing given the advance being seen in inflation.

In the end, this will be a self-fulfilling prophecy since the workers will only accept the jobs at a higher rate and this will feed through producer prices and affect consumer inflation at the most inopportune time, just as the winter begins to bite at household expenses.

It is estimated that as many as six per cent of the workforce may simply be biding their time.

However, a sea change in the employment market post-Pandemic is about to arrive. Those who know that their job no longer exists and have been happy to accept a payment of 80%, now 60% of their wages to do nothing are about to get a rude awakening.

Bailey expects this return to work to be a major factor in reducing inflation, as he sees pay negotiations being less confrontational than many expect.

The pound managed to recoup most of its losses over the week so far yesterday. It rallied to a high of 1.3862, closing at 1.3847.

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Job jobless claims provide a timely boost

Following a few weeks of something close to doom and gloom, weekly jobless claims data allowed risk appetite to blossom again. While this was not particularly good news for the dollar, it gave back most of the gains made so far this week,

Weekly jobless claims fell to a post-Pandemic low of 310k in the latest week. This brought the four-week average down to below 340k

Employers are clearly managing to hang on to workers despite the increase in cases of the Delta Variant of Coronavirus.

The change in the pace of growth between July and August was moderately lower. The burst highest r in activity most recently was brought about by the lifting of restrictions on dining out, theatre and cinema, and tourism.

Pent-up demand having been quenched to a large degree, this brought activity down to a more continuously achievable level. Supply disruptions still dog manufacturing, and this will follow through to a clear follow through over continued demand being met by a shortage of supply.

This will be yet another inflationary influence on the economy and lead to the FOMC not waiting much longer to begin to withdraw support.

As the strength of the recovery has waned, the timing of the Fed’s taper of asset purchase becomes more critical. Too soon and it could choke off the recovery, too late and it may be impossible to get the inflation genie back in the bottle.

Given the interconnectedness of the global economy, it is expected that the U.S. wouldn’t act arbitrarily in a manner that would harm any of its G7 partners.

Nevertheless, the timing will be critical and as the countdown towards the next FOMC meeting commences, traders are unsure of the likely outcome of the next two meetings.

The hawks feel that Jerome Powell should provide a timetable by the end of the month, while the doves believe that by the end of the year is sufficient.

The dollar index lacks the momentum to break higher, but still has significant support around major support levels. Yesterday, it fell to a low of 92.37, closing at 92.43.

ECB in shift of emphasis

Today’s ECB meeting was expected to leverage the good news that has been emanating from the Eurozone over the past few weeks.

However, it seems to have spread more confusion.

It seems that the Bank isn’t used to playing down good news and was a little confused about how the market would interpret its views.

The ECB President spoke following the meeting of a reduction in the pace of bond purchases but, despite the rhetoric, the market has been fed and contrary to most definitions that is not to be considered as tapering, it is merely a repositioning of the support.

It should still be considered that the ECB is getting a little ahead of itself and has been quick to react to the first piece of good news that has emerged even since before the Pandemic started.

Lower for longer didn’t survive as a mantra for too long, and this can only be considered a reaction to the pressure that is being felt over the pace of increase in inflation.

Lagarde is trying to placate both the hawks and the doves. The hawks are concerned that the rate of inflation may be difficult to restrain, while the doves, driven by the level of borrowing by their own Governments, fear that the interest payments on their debt will get out of hand.

A moderate pace of activity has been met by a seemingly equally moderate level of redirection of asset purchases.

The pace of bond purchases in the first three months of the year was moderate. It was then announced that the pace would increase considerably, only for the Bank to get cold feet about inflation and bring the level back to pre-Q2 levels.

This is an example of the attempts at proactivity that the ECB has found difficult.

The Financial markets were as confused about the Central bank’s actions as the rest of us, and cut short euro positions, just in case.

The single currency rose to a high of 1.1844, closing at 1.1833. It remains wedged between natural buyers at 1.1780 and sellers close to 1.1920 who cannot envisage the euro again attempting to breach the 1.20 level.