Market believes inflation reached 4% in October

The UK Employment Report for October was released yesterday. It showed that vacancies are continuing to rise as the effect of the departure of migrant workers following Brexit remains a significant issue.

Following the end of the Government’s furlough scheme, the economy added 160k new jobs. This will provide a degree of relief for the Bank of England which had cited concerns over jobs as one reason that they had held off on raising interest rates.

The Bank could easily break with the tradition of not raising rates immediately before the Holiday Season by tightening monetary policy at its meeting on December 16th.

Andrew Bailey’s comment that every MPC meeting from now is in play as far as a rise in rates is concerned has sharpened trader’s interest. However, following the surprise that rates weren’t raised at the most recent meeting will add a degree of caution.

The unemployment rate fell from 4.6% to 4.3% as the claimant count also fell. A shortage of workers remains an issue that will exacerbate logistical issues caused by bottlenecks in supply chains.

247k jobs were added to the economy in the third quarter. This should also provide a degree of support to the idea of a rate rise to cool rising inflation.

Andrew Bailey commented that the data released yesterday and the November report, due in four weeks’ time, will be significant factors in the Bank’s decision on interest rates.

Bailey believes that the transition out of furlough has not fully worked its way through the system, and the picture will become clearer following the November data. There remains a concern amongst analysts that a rise in seasonal workers seen during the Christmas period may also distort the data.

Food processing and road haulage are two sectors that are particularly hard hit by the Brexit migration, and it will take some time for the shortages to be repaired.

Today sees the release of inflation data for the UK. It is expected that the headline will rise from 3.1% to 3.9%. This will ramp up the pressure for a rise in interest rates.

The pound recovered a little ground versus the dollar as the conditions for an interest rate increase became a little clearer.

It rose to a high of 1.3472 but fell back to close at 1.3422 as the dollar reasserted itself.

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Inflation not a deterrent to retail sales

The U.S. consumer appears to have begun shopping for the holiday season early this year according to retail sales data that was released yesterday.

Rales grew by 1.7% in October, up from a rise of 0.8% in September.

Industrial production and capacity utilization data was also released, and this also showed a healthy increase.

The U.S. economy appears to be emerging from the soft patch it was experiencing towards the end of summer, and the start of the taper of additional support by the Federal Reserve appears to have been well-timed.

Concerns over supply shortages have encouraged consumers to make purchases when products become available to avoid concerns over empty shelves later in the year.

Data released by both Walmart and Home Depot showed that the retail sector is coming back to health following the Pandemic.

Fears over stagnation have been allayed by the strength of the data although rising retail fuel prices will have contributed to both retail sales and inflation.

The race to become the next Chairman of the Federal Reserve looks to be ending. President Biden has promised a decision between the incumbent, Jerome Powell and Lael Brainard in the next four days.

It is a little ironic that Brainard is the more experienced of the two having spent many years at the Central bank in various positions. Powell, a lawyer by profession, proved to be an inspired choice by Donald Trump and Steve Mnuchin when the former President removed current Treasury Secretary Janet Yellen from the position of Chairperson.

Were Brainard to be chosen, Wall Street may shiver at the prospect of greater governance and oversight over its dealings.

The dollar index appears to be settling into a new, higher, range.

Yesterday, it continued to rally, reaching 96.24 and closing at 96.05. Technically it looks ripe for a correction with the strongest support now at 94.50 with a mild degree of buying interest at 95.20.

Growth versus inflation remains a key battle

The relationship between GDP and inflation continues to be key in the monetary policy deliberations at the ECB.

For now, the policy of lower for longer mantra continues to be dominant. Yesterday’s release of an update to Q3 GDP data confirmed that the economy grew by as seasonally adjusted 3.9% year on years and 2.2% quarter on quarter.

The rate of increase is clearly a testament to the level of support that the ECB has and continues to pump into the economy.

While growth is fairly anaemic compared to other developed nations, the Central Bank appears content with moderate growth given the dire predictions earlier in the year concerning stagflation and another long and deep recession.

Austria, France, and Portugal were the best performing economies in Q3, while Italy and Germany lagged a little.

Germany is suffering from the highest rate of inflation driven by supply chain issues especially in the industrial and manufacturing sectors.

Looking into the medium to long-term future, the European Commission is going to need to portray a more Federal approach to data releases if the Eurozone is to thrive and become a leader in the global economy.

For example, when U.S. growth data is released, no one compares the performance of, say, Kentucky with Maine or California with Texas.

Employment data was also released yesterday. It showed a 2% rose in Q3, compared to a market estimate of 1.6%.

Christine Lagarde dashed any hopes of a change of heart from the Central Bank in a speech yesterday. She said that any change in monetary policy in an attempt to rein in inflation would be counterproductive and could choke off the recovery.

The Head of Deutsche Bank came out strongly, disagreeing with the narrative of temporary inflation. There is only one type of inflation, and its cause will always be a temporary phenomenon

However, the spread of what is considered to be transitory inflation won’t stop increased wage demands, which remain at the root of the issue.

The euro has sold on the back of Lagarde’s comments. It fell to a low of 1.1311, closing at 1.1312, as the possibility of tighter monetary policy remains a distant dream.