Employment on the rise but still 200k below pre-Covid level

Savers in the UK have been suffering for some considerable time as interest rates have remained at historically low levels. Now, with rates set to remain low for some time yet, inflation has returned to wipe out even the meagre returns that can be achieved without taking on a degree of risk.

Although the Bank of England Governor continues to believe that raised levels of inflation won’t become a permanent feature of the economy, it is in the here and now that savers are seeing their deposits lose value.

Today’s release of inflation data for July is expected to see headline inflation fall back to 2.2% from 2.5% in June. While this will be a welcome step, there are several factors still at play that could deter the Bank from tightening monetary policy.

It seems that there is a general agreement among the majority of MPC members that ensuring that the recovery is both robust and sustainable is preferable to what they believe will be a transitory rise in inflation.

It is true that there are factors that can be construed as temporary such as the level of demand far outstripping supply, logistical issues especially around the number of workers self-isolating, and the general level of shortages of raw materials.

Furthermore, it is doubtful that today’s data will have any meaningful effect on the Bank’s monetary policy following yesterday’s employment report.

The claimant count continued to fall, but the figure was significantly lower than as seen in June. It is believed that this is because the number of people finding work was almost totally offset by the number of jobs that were lost

As the furlough scheme continues to be withdrawn, the economy may find itself in a state of limbo as the level of employment remains around 200k below the pre-Pandemic level and the number of new jobs begins to fade. That will mean there is a core number of unemployed until the economy starts to move on from the Pandemic and there is genuine growth over and above the recovery.

The pound fell again yesterday as it reacted to a return to the trend towards a stronger dollar.

It fell back to the lower end of its recent range, reaching 1.3726, closing at 1.3743.

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Economy sees several bumps in the road

Since the end of the first quarter, the FOMC has given the impression that it has the recovery under control and there will be a tightening of monetary policy that will bring inflation back under control.

As the recovery began to take hold, there was a surge in retail spending and jobs figures showed that job creation was both healthy and robust.

However, while recent comments made by regional Federal Reserve Presidents appear to be bullish about the recovery, concerns look to be creeping in about whether their words stem from a genuine belief or are more wishful thinking.

The Chairman of the Federal Reserve Jerome Powell spoke yesterday of his concerns about the uncertainty being raised by the continued spread of the delta variant of the Covid-19 virus.

Comments like it remains to be seen what the effect will be, hardly provide sufficient confidence that the FOMC will be in a position to begin to taper support as early as October or whether their confidence in the recovery is truly merited.

The past three data releases have been far weaker than had been predicted, and soon questions will begin to be asked about the strength of the recovery and whether this is more than a bump in the road. Powell will point to several occasions when he has said that there will be setbacks, but his cautionary words were lost as growth and employment data surged ahead.

Powell went on to say that Covid will be with us for a while, and businesses will have to learn to improvise and adapt. This is a far cry from his more recent comments that have tried to play down calls for a more hawkish view of monetary policy.

Answering students’ questions at a Town Hall gathering last evening, Powell commented that the Fed is in the process of putting away its emergency tools, but with millions of service jobs still to be recovered, the task of supporting the economy is not yet at an end.

The dollar recovered from its recent bout of weakness as the overall picture for the economy remains positive despite recent weak numbers.

The dollar index rose to 93.16, closing at 93.14 as significant resistance around 93.20 looms large.

Return to growth to see recovery continue

The Eurozone economy grew by 2% in Q2 according to data released yesterday. This confirmed the estimate that was provided a few weeks ago and maintained hopes that the recent recessions in the region had been dispatched to the rear-view mirror.

With hopeful signs coming from the economies that were expected to be more affected by the virtual collapse of tourism, it would seem that the overall economy can begin to look forward.

As with both the UK and U.S. economies, analysts continue to concentrate on the recovery of both activity and employment. Since the U.S. is also recovering from the incredibly damaging events over the election and the UK should be harvesting the benefits of Brexit, such a view is fair enough.

However, for the Eurozone, post-recovery growth is still very much in the lap of the Gods. Structural issues will continue to be an issue, bad loans held by banks will need to be deferred (again) and immigration is again turning into a hot topic

The fact that the ECB has adopted a lower for longer mantra in regard to interest rates and, it appears, won’t begin to consider the taper of support until the end of Q1 ‘22, inflation will remain an issue. In the past, when inflation was a major issue to economies, winter always brought concerns as fuel prices rose due to increased demand.

There are far more factors in play now regarding the price of oil and gas with political issues playing a significant part.

Next year there will also be political issues to muddy the waters, especially with Michel Barnier announcing his probable candidacy for the French Presidency with a right-wing take on immigration.

The euro fell yesterday despite the positive GDP data, which gives some indication of market sentiment. It reached a low of 1.1708, closing at 1.1710. It remains perilously close to major support.