Can the Bank of England hike with a lockdown possible?

Inflation data for September was released yesterday and the headline fell marginally to provide a little relief to the Bank of England.

The consumer price index fell from 3.2% year on year to 3.1%. While a single piece of data won’t have too much effect on the Bank’s plans, every journey starts with a single step.

Factory gate prices as depicted by producer price data, continue to rise, climbing from 11.2% to 11.4% over the same period.

While the country continues to face major bottlenecks in the logistics sector, exacerbated by the shortage of HGV drivers, inflation is unlikely to fall back below 3% in the short to medium-term.

The country appears to be slipping back towards a fourth Coronavirus lockdown as, yet again, the Government is seen to dither over making the decision.

Health Minister Sajid Javid is facing his first crisis in the role he took over from the disgraced Matt Hancock in the Summer. In a press conference last evening, Javid admitted that the daily rate of new cases could reach 100k as another variant of the virus has been detected.

Javid refused to authorize any change in the regulation to counter the virus even dismissing the idea of a return to the compulsory wearing of masks on public transport.

The British Medical Association has made accusations that the Government has taken its foot off the brake and is being wilfully negligent in not reimposing restrictions.

The daily rate of new cases has been above 40k for more than a week.

Although only one in five workers are now at their place of work every day, calls are being made for the Government to encourage working from home, having withdrawn that guidance a couple of months ago.

With inflation still an issue and the MPC said to be considering a rise in interest rates, the economy is beginning to show signs that the initial surge in growth as activity returned to close to normal is beginning to dissipate with shortages for both the retail and wholesale sectors remaining an issue.

The pound continues to benefit from bets that the Bank will hike interest rates at its meeting in a couple of weeks. It rose to a high of 1.3834 yesterday, closing at 11.3821. Having seen almost identical highs two days running, it may be running into resistance, which could lead to a divestment of long positions and a return to its recent range.

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Q3 growth predictions falling ahead of next weeks data

Preliminary data will be released next week for the country’s GDP in the third quarter. It is expected to show a significant fall from the stellar second quarter, and analysts are asking whether it may be sufficient to derail the Fed’s plans to begin the withdrawal of support.

So far, several FOMC members continue to support the taper of asset purchases beginning soon after the meeting that will report on 3rd November.

Businesses of all sizes continue to express concerns about a shortage of skilled labour which is beginning to affect sales. Stresses within supply chains are intensifying and there is no sign of any relief being found before year-end.

Congestion begins at ports and is filtering down through wholesale shortages through to the retail customer.

In concert with the Bank of England, the Fed is now facing a similar dilemma. Central banks are expected to be ahead of the curve in order to fulfil their goals of growth with controlled inflation, coupled with close to full employment. However, the infatuation with claiming that rising inflation is temporary looks like forcing them into actions contrary to those goals.

If the FOMC decided to begin to withdraw support, although this is still a long way from raising interest rates, it could send out a signal that it is satisfied with the current situation.

The issues within supply chains are now becoming so commonplace that a leading ratings agency has created a Supply Chain Stress Index. This monitors bottlenecks and concerns about the free flow of goods and raw materials.

The index was set at 100, being the pre-Pandemic level. In August, it reached close to 135.

It is becoming a cliché that the next FOMC meeting will be the most important of the Pandemic and is now a self-fulfilling prophecy driven by the dynamics of the recovery from the lockdowns precipitated by the Pandemic.

The dollar index remains in a corrective phase, with the market still unclear of the Fed’s intentions. It is still considered that the taper will begin in the middle of next month, but the market’s view is that that is far from certain.

The index fell to a low of 93.54 yesterday, closing at 93.60. A major test of the support at 93.50 is looking likely. How the index reacts to that will set the tone for the period between now and the Fed meeting.

Technical versus fundamental factors will create a classic chicken and egg situation for traders.

Weidmann to be replaced by pragmatic Schnabel?

Jens Weidmann, the President of the Bundesbank, and a fierce critic of the European Central bank’s policy for dealing with rising inflation, is stepping down from his role five-years early.

Citing personal reasons, Weidmann made it clear in his final speech to colleagues that he remains dissatisfied with rising inflation that is considered, in Germany, to be a precursor of economic catastrophe.

While the world has moved on from the post-war hyperinflation that brought the country to its knees, The country’s psyche is still set to view any rise in inflation as a threat.

The fact that the ECB seems to have set itself on a course whereby rising inflation will be ignored is believed in Germany to be a case of letting the inflation genie out of the bottle, with its return being far more difficult than Christine Lagarde and her more dovish colleagues and advisors believe.

Lagarde was fulsome in her praise for Weidman. His loyalty and willingness to try to find a compromise were commended, as well as his belief in the whole eurozone model.

The search for a replacement for its Central Bank President will add to the current unease being felt by the German people, as the country still needs to find a government from the close result of the recent Federal elections.

Lagarde’s central policy of considering rising inflation as transitory was often criticized by Weidmann, and as a leader of the frugal Five, he will be sorely missed.

It will be interesting if the Central Banks of Belgium, The Netherlands, Austria, and Finland come more into line with policy now.

As well as the search for a Government and a Central Bank President, the German economy is facing several concerns as it tries to combat domestic growth with the task of being a good European. It could be that the two are incompatible, as has been suspected for some time.

The one size fits all mantra has been silent for quite a while, but the needs of countries with varying paces of growth and a requirement to remain within a fiscal straitjacket may see it rise again.

It is the view of several analysts that the euro remains in a false position with a test of 1.15 being more likely than a test of 1.18. A lot depends on the actions of Central Banks, given the status of the single currency within the makeup of the index.

Yesterday it rose to a high of 1.1658, closing at 1.1651.