BoE likely to remain watchful for a couple of months

Concerns that the likely slowdown in the economy in the third quarter compared to Q2 are growing. There are also medium-term fears that the fourth quarter will provide a downside surprise.

Comparisons continue to be made about the actions of the BoE, ECB and FOMC. Prior to the past two weeks or so, a tightening of monetary policy through a reduction of asset purchases in the U.S. was the clear favourite.

The UK economy has been the most consistent performer since the recovery started, that is due in no small part to the fact that the UK stole a march, by starting its vaccination programme first and has been able to maintain its performance.

Outside the direct result of the Pandemic, there have been several factors that have threatened to derail the recovery, but have, so far, failed.

Brexit has been ignored to a certain extent, but it is likely that the issues of the agreement will raise its head again in the New Year. The situation over the Northern Ireland protocol will remain an issue that could blow the entire deal off course.

There is a shortage of lorry drivers that has been making headlines. However, there are shortages in several other sectors of the economy, including retail, hospitality, and farming.

Skills shortages have also been exacerbated by workers returning to their home countries following Brexit.

The Governor of the Bank of England has reversed his decision to insist that colleagues at the Bank return to work for at least one day a week. This is a direct contradiction to Rishi Sunak’s view that making work from home will be detrimental to both personal and corporate development.

In many city centres outside of London, there is a concern that this could be the death knell for high streets, which see worker’s lunchtime and after work activities as vital to the survival of both retail and social outlets.

The pound looked as though it was on the brink of a significant advance against the dollar following last week’s data. However, as the dollar has begun to recover, the pound fell back yesterday to a low of 1.3818, closing at 1.3835.

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Pressure to cut asset purchases falls

Last week’s release of the employment report for August came as a big shock to the market, but provided the FOMC with a degree of space to discuss and decide the timing of their taper of asset purchases.

Prior to the most recent data releases, which admittedly were backwards looking, there had been a significant amount of positivity generated by Regional Fed Presidents who were calling for the taper to begin sooner rather than later. It was only the slightly downbeat message from Jerome Powell that began to call the timing into question.

Now, it seems that the FOMC meeting that will be held on the 21st and 22nd of this month will have to discuss not only the when, but also the if, certainly for this year.

That will allow the Fed’s members to make a considered decision rather than an expedient one.

Powell has said on several occasions that the reduction of asset purchases will only take place when the conditions are right.

With inflation expected to return to more acceptable levels this month, and the recovery to slow a little, it could be that the FOMC may delay the taper and certainly won’t be acting this month as some analysts had predicted.

Renowned economist Joseph Stiglitz, a former Chief Economist at the World Bank, believes that the crisis shouldn’t be wasted, and the time is ripe to incorporate several other areas of concern into the Bank’s thinking.

He believes that climate change, inequality and the market economy are worthy of review. These are the concerns that those looking for Powell to be replaced have also highlighted.

With the Labor Day holiday taking place yesterday, the market was a little thin, but the dollar managed to stage something of a recovery.

Yesterday, the index rose to a high of 92.31, closing at 92.21.

The possibility of a cut in asset purchases this month grows

Over the summer, many paragraphs have been written extolling the virtues of the Fed’s performance in delivering the conditions for a recovery of the economy post-Covid-19.

While the Fed has been praised, questions have been asked about the ECB’s new inflation policy and how Christine Lagarde would manage to keep the Bank’s hawks at bay while allowing the medicine to take effect.

When the current round of support comes to an end, the ECB has said it will introduce a more structured form of support that allows crises to be dealt with in a more holistic manner.

Lagarde is no Mario Draghi, but if she manages to promote growth across several individual economies that were expected to suffer both this year and next, she may be considered on a par.

For example, the French Finance Minister confirmed yesterday that the French economy will grow at 6% this year and 4% next.

France is one of the targets for the Bundesbank President when he talks about tightening interest rates and to hell with national debt problems, or words to that effect.

There is even talk that there may be an announcement about future policy at this week’s ECB meeting.

Inflation has reached 3%, but the same reasons appear to be applicable. Inflation is a global issue; it is a factor of the extraordinary support that has been delivered, and demand continues to outstrip supply.

Lagarde may be in the clear for now, but if wage settlements start to take inflation into consideration, the bubble may burst.

The euro suffered as the dollar began to recover yesterday.

It fell to a low of 1.1855, closing at 1.1869.