Wage pressures not yet manifesting themselves

Today’s release of employment data for January is unlikely to have any significant effect on the market, since jobs data has now settled into a range that is positive but not dramatically so.

Average earnings remain steady well below 4%, but that may change when public sector bargaining begins.

The release of inflation data tomorrow will more likely see a reaction from traders. It is expected that inflation will have only risen slightly in January as signs that price rises are beginning to moderate are seen.

However, the price of fuel at the pump reached another record high yesterday as the tensions in Ukraine pushed prices higher.

Petrol averages 151.2 pence per litre, while diesel peaked at 151.57. This is marginally higher than the price that was seen last November, immediately before the price began to fall.

Any continuation or escalation of a potential Russian invasion of Ukraine will push prices even higher and could derail the Bank of England’s plans for a gradual tightening of monetary policy now that it has begun to raise rates.

The Central Bank was quite downbeat in its latest report on the economy going forward.

As well as fuel price rises, higher interest rates are expected to see mortgage costs increase, which will have a far greater effect on the housing market than the removal of the tax break did.

Household income is expected to decline by around 2% this year when all the negative factors are considered.

The accumulation of savings that have been gathered over the past two years during the various lockdowns may soften the blow somewhat, but they won’t bring the windfall many consumers had hoped for.

The current expectations for GDP as the economy continues to recover from the Pandemic will not continue, and growth will revert to trend next year.

The full effect of Brexit on the economy remains to be seen, with little new to go on, as the wrangling over the treatment of Northern Ireland continues.

The pound remains mired in a narrow range as traders await data releases. Yesterday, it fell to a low of 1.3490 and closed at 1.3523.

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FOMC members not unduly concerned about 50bp hike

The FOMC is preparing to front load interest rates hikes when it meets next month to consider how to halt the rise in inflation.

James Bullard, the President of the St Louis Federal Reserve and a senior member of the FOMC, spoke yesterday of his concern on sentiment of high and rising inflation. He believes that rates should be hiked by 50bp at each of the next two meetings to both signal the Central Bank’s intentions and to produce the desired effect.

The time for promises is now past, and major action is required in an effort to regain the initiative following almost a year of reactivity.

Bullard is considered more of a hawk than his colleagues on the FOMC, so his thoughts are not unexpected. However, it remains to be seen if he is able to convince them to follow his lead.

It is certain that a rate hike will be announced on March 17th, but the size of the hike has lurched towards 50bp recently.

As inflation continued to grow late last year and the Fed announced the withdrawal of additional support, the pace of which was doubled as prices continued to rise, it was assumed that a series of 25bp hikes would take place.

Now it seems that the Fed wants to regain control quickly and is prepared to shock the market.

A 1% hike over two meetings will be a risk to growth and activity, as well as the stability of the market. There are fears from some more dovish observers that hitting the brakes so hard could push the economy into recession.

This is an extreme view given the level of growth that has been seen recently, but the Fed needs to tread carefully if it wants to wrest control of a market that has seemed close to out of control over the past couple of quarters.

Traders have entered a period of indecision that is only driven by comments from Fed members and data on inflation or employment.

The dollar index remains in a narrow range relative to the recent past.

97.25 and 94.50 appear to be the extremes of that range, and yesterday it remained comfortably within those parameters. It rose to a high of 96.43, closing at 96.28.

Collapse is a possibility as the EU’s identity is threatened

Questions are being asked about the purpose of the European Union and the benefits of being a member.

The more grandiose ideal of preventing war appears to be in tatters, since having a potentially aggressive neighbour will remain a destabilizing factor. The number of former Soviet bloc members has brought a separate set of issues, while it has not had the desired effect of forming a buffer.

The idea of preventing war is now outmoded, as the whole of Europe is bound together, with or without the European Union, in such a way economically as to make conflicts more easily contained.

The financial benefits of membership were lost on the public in several nations as financial discipline was forced upon more profligate nations whose public spending was severely curtailed by Brussels.

Now, the tables have been turned, and it is those same financially disciplined nations who are seeing inflation galloping away into the distance, and a Central bank that appears to be either unwilling or unable to rein it is.

At the time of the financial crisis, membership of the EU was seen as preferable to being on the outside but Brexit, while far from perfect, has shown that there is a life outside of Brussels’ control.

The Presidential Election in France looms large now and although President Macron has hardly cemented his position with his failed attempt at diplomacy recently, he has benefitted from a weakening of the position of his main rival.

Marine Le Pen has lost support as the French public again take the election of a far-right candidate to the brink before pulling back.

French artisans working in the fishing or farming sectors are traditionally militant, but they still fear going through some form of Frexit that a President Le Pen could drive.

The odds now favour a second term for Macron, which would be radical, but he would probably be far weaker than he was four years ago. Perhaps this is the reason why he is considering inviting the person expected to stand against him at the 2026 election, to join him.

Christine Lagarde is a politician far more than she is a Central Banker, and rumours are growing that under a future Macron Administration she will be offered the role of Prime Minister. She is a committed European, so she has that in common with the current President.

However, the issue now is, are committed Europeans a dying breed?

The euro remains in a reactionary state. Yesterday, it fell to a low of 1.1280 and closed at 1.1294.

The single currency is far closer to major support than other G7 currencies, despite the more hawkish tone from the ECB. Were that to change due to any perceived weakness in the economy, it could come under major pressure.