12 May 2022: Emergency budget, a real possibility

Sunak facing rising calls for support

Pressure is building for the Government to act to provide support for those who are suffering from the recent rise in the cost of living.

Earlier this week, the Prime Minister agreed with recent comments from the Chancellor that help with soaring energy bills, in particular, is not possible given the amount of support that was provided in several ways during the Pandemic.

Opposition MPs as well as trade unions and consumer groups are calling for various schemes to be put in place to provide relief to those who, in many cases, are being faced with either warming their homes or putting food on the table for their children.

Boris Johnson has been countering the calls for tangible support by looking into the future and promising that his policies will provide the level of growth that will continue sustainable employment in skilled jobs, while his levelling up agenda remains the mainstay of Government policy.

Although last week’s local elections were extremely poor for the Government, particularly in cities, the message that was delivered during the General Election regarding moving activity to more deprived areas continues to receive support.

With Johnson having weathered the Partygate scandal for now, his opposite number in the Labour Party took the bold step of confirming that were he to receive a fine for his part in the Beergate affair, he will step down as leader.

Sir Keir Starmer has been accused of adding to the pressure on the Chief Constable of Durham, where the event took place by turning the relatively minor offence he may have committed, into a national event with a possibly significant outcome for the country.

Since Central Banks have begun to either tighten monetary policy as is being seen in both the UK and U.S. and talk about beginning, as in the case of the Eurozone, individual data releases have become less significant, except as moving parts in the overall scenario.

Overall, the pound remains under pressure due to the relative widening of the gap between interest rates in the UK and U.S. There will be pockets of minor corrections, while the overall trend remains for a weaker pound.

Yesterday, it fell to a low of 1.2237 versus the Greenback, closing at 1.2254. That continues a run of five lower daily closes.

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Hawks still see 2.5% as neutral

Individual data releases in the U.S. are being treated as more significant than in the UK as the Central bank is prepared to be more proactive in its attempts to achieve its dual goals of growth in the economy while keeping inflation under control.

Up to now, that has been treated as an either/or situation, with the Fed’s attention switching from support for the economy to tacking rising inflation. Ignoring inflation while supporting the economic emergence from the Pandemic may be beginning to bear fruit.

Recent data for activity and output has held up reasonably well while the most recent employment report was, on the surface at least, positive. Job openings remain fairly constant at a little over eleven million, which means that the 400k+ new jobs created in April were the result of those already employed moving to new roles, most often to see a rise in wages.

This form of wage inflation is yet to have a significant effect on consumer price inflation, although producer prices, the cost of raw materials and other items at the factory gate remain strong.

It is a little early to claim that the FOMC policy of front-loading rate hikes is succeeding, but yesterday’s release of both headline inflation, together with the data adjusted for volatile items, saw it fall marginally.

Headline inflation fell from 8.5% to 8.3% in April, while with food and energy removed, it fell from 6.5% to 6.2%.

With another fifty-basis point hike expected at the mid-June meeting, and the commencement of the reduction in the size of the balance sheet it may be that inflation has peaked, although there are still several uncertainties prevailing.

Yesterday, the dollar index continued its march towards its medium-term target of 105.

It rose to a high of 104.11, closing at 104.01. As it gets close to the target, the size of the daily increments is beginning to shrink as weak longs liquidate positions. So far, those who have been riding the train since the break of 100 are holding their nerve, but that could change any day.

Lagarde facing continued pressure

Finally, it seems that the ECB President has either seen the light, or been beaten into submission by the rising tide of calls for a hike in interest rates in order to start to tackle rising inflation.

It remains an issue exactly what level of inflation the ECB is about to target.

The average rate across the entire region is fairly meaningless, particularly to those countries who find themselves on either end of the scale.

Yesterday, Christine Lagarde speaking at a celebration of the thirtieth anniversary of the Slovenian Central Bank, where, incidentally, inflation is currently 6.9% versus a eurozone average of 7.5%, agreed that the first tightening of monetary policy via a rate hike will take place early in the third quarter

She did, however, qualify her remarks by continuing to insist that it wouldn’t happen until after the support provided by asset purchases has ended.

While this makes sense, it is unsure whether the ECB may consider ending asset purchases sooner than previously indicated.

Lagarde chose her words carefully so as not to incite any false interpretation, but nonetheless, the markets took this as the clearest signal yet, that rates will increase sooner rather than later.

It is too soon to be considering the size of any hike but it is likely that the divergence between overall monetary policy in the U.S. compared to the Eurozone will continue to widen.

This will have a material effect on the value of the euro, although sentiment may slowly begin to change as traders become less interested in absolutes and concentrate more on the direction of monetary policy.

Lagarde appears to have abandoned her concerns about the uncertainty of output and activity within the region in order to concentrate more on inflation. It is impossible to put a time on when an intangible like uncertainty may end, but it is clear that the time has come, and may have already passed, for the Central bank to focus on rising prices.

The euro fell again versus the dollar yesterday. It reached a low of 1.0501, closing at 1.0513.