Fed likely to overtake BoE in Tightening race

Inward investment into the UK is still at a very healthy level but is not being matched by direct investment into businesses by the companies themselves.

While 50% of investors believe that the attractiveness of the UK has improved over the past quarter, only 30% of business owners agree.

Supply chain difficulties, rising energy costs, finding suitable employees, and rising wages are all factors that are making businesses hang on to what they have, rather than invest in their futures.

One of the most obvious areas that is being neglected is investment in new machinery. There has been a significant drop in the level of retooling, which is delaying the creative process across several sectors

Prime Minister Boris Johnson appeared to have refined a degree of his bullish bluster at yesterday’s Prime Minister’s questions in the House of Commons.

Where last week he exuded the hangdog expression of someone caught in the act, yesterday he was not only prepared to defend himself and his record in office, but he was also prepared to go on the attack, criticizing the Opposition at virtually every opportunity.

While this was more like the Boris Johnson that won a landslide election victory, he still faces the twin threats of a police investigation into Downing Street Parties and the imminent publication of the report written by the Cabinet Office offering its findings on the same subject.

The entire House of Commons waits expectantly to find if Sue Gray is going to administer the coup de grâce that is going to sink the Prime Minister.

It is very possible that the report will be delivered today, with Sir Keir Starmer, the Leader of the Opposition, pressing the Prime Minister yesterday to keep his promise of releasing the report to the public exactly in the form it is delivered to him.

The pound suffered yesterday at the hands of a strengthening dollar as the FOMC remained hawkish in its outlook.

While this is a short-term reaction, investors are concluding that although the Bank of England has already hiked once, it is likely that in the longer term, the Fed is going to overtake it and prove to be the more hawkish over tightening monetary policy.

Sterling fell to a low of 1.3444, closing at 1.3467 versus the dollar, while it retains a degree of strength versus the single currency despite the 1.20 level appearing to be a tough hurdle.

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Reduction of balance sheet to become a priority

The FOMC concluded its first meeting of 2022 yesterday and while there was no physical action taken to tighten monastery policy, Chairman Jerome Powell continued his hawkish comments that have been present at the two earlier meetings.

It was confirmed that the withdrawal of extraordinary support for the economy is eminently going to be concluded, and this will allow the Central Bank to raise short-term interest rates at its meeting in March. That meeting will take place on March 15/16 and is slated to be the next time the FOMC meets.

In his comments following the meeting, Powell reiterated his determination to sustain the fight against inflation for as long as it takes to allow the Fed to achieve its twin targets around growth and employment.

Powell’s comments were generally not only as expected, but well received. It now seems that having retired the term transitory when describing rising inflation, the next word to be removed from the Fed dictionary will be taper. It is unlikely that any tapering will be necessary, possibly for the rest of the current decade.

Workers in the oil sector have been offered a 1% pay increase for the coming year by the lead employer in the sector as inflation crosses over from the supply side of the economy. While the U.S. is not used to seeing militancy from workers, the current situation is likely to change that, at least in the short term.

The offer has been described as ridiculous by the steelworkers union, and it is certain that this is going to be a tough negotiation.

Data for the country’s trade position was released yesterday, and it saw the deficit rise above $100 billion. The deficit widened by 3% from December as retail inventories skyrocketed. Imports grew for the fifth successive month as demand continued to grow.

As mentioned recently, the level of confidence emanation for the consumer sector is gaining strength that is not being equalled by manufacturing output.

Today a slew of data is due for release. The first cut of Q4 GDP will be the most significant, followed by weekly jobless claims and the often-volatile data for durable goods orders.

Q4 DDP is expected to be a little above 5% This is unlikely to be affected by the Omicron variant which is likely to be more prevalent in Q1 ‘22.

The dollar index surged following the FOMC meeting. It hit a high of 96.53, closing at 96.48, comfortably its highest level so far this year.

Reduction in support unlikely to reduce prices

Speculation is beginning to grow that the level of support that is being pumped into the economy by the ECB will be significantly reduced when the current round of PEPP ends in March.

With inflation expected to hit another record when this month’s data is released, the pressure on the Central bank to act is becoming too high to ignore.

With the IMF having cut its predicted level of growth in the region this week, the fight to keep a serious level of support remains, but with inflation expected to peak at around 7% towards the end of this quarter, something has to give.

The battle to become the next President of Italy has become far more competitive. The expectation at Mario Draghi would be a shoo-in has clearly been overstated, although he does remain in the race.

Tension and mistrust amongst the parties represented is growing and at today’s fourth vote, the threshold needed for victory has been lowered.

Following a high degree of horse-trading, no consensus candidate has emerged. The outcome may be agreed today, but it is just as likely that a fifth vote may be necessary.

While Draghi is the clear favourite with the people, he does not have sufficient support amongst any of the diverse set of political views currently on display.

Being his own man, Draghi would want to do things his way in what is essentially a ceremonial post where he is expected to gently encourage the Prime Minister to act in the manner the President expects.

Following yesterday’s FOMC meeting, the euro suffered more than most at the hands of the dollar. With headwinds gathering, not least of all, potential armed conflict in Ukraine and a consequential rise in already sky-high energy prices, the single currency may have finally begun its march towards long-term support at 1.10.

The most concerning issue could be the weaponizing of Russia’s supply of gas to Western Europe. Many observers believe that if President Putin is either backed into a corner or doesn’t get what he wants from this demanding situation, he could act in a manner that could cripple the Eurozone economy.

Yesterday, the euro fell to a low of 1.1235, closing at 1.1240. It has continued to weaken during the Asian session, falling to a low of 1.1215.