What would a hike do for Bailey’s reputation?

Household savings rates have again reached levels that were first seen over a year ago as hopes grow that they will provide a cushion for middle income families who face enduring the most of higher expenditures over the next twelve months.

House prices and pension pots have both risen significantly, despite the economy not yet at its pre-Pandemic Level. A rise of 8.4% last year compares to a rise of 3.3% in 2019. The rise is double the average over the past ten years.

The effect of inflation on savings will moderate the rise in the next twelve months, while asset prices, particularly house prices, level off.

The much-vaunted trade deal between the UK and U.S. is still not agreed, as President Biden is concerned over the situation over the Northern Ireland Protocol and what the outcome of invoking Article Sixteen would have on the peace process.

While Biden doesn’t wish to hold the deal over the heads of the British Government, he is concerned about recent developments.

The Irish Foreign Minister spoke yesterday of there being real gaps between the UK and EU over the implementation of the Protocol.

It has been said recently that flexible working may add as much as £55 billion to the economy over the term of this Government, but concerns are now being voiced about the haphazard way home working is being organized.

It appears that the Government has discovered the potential for further growth but is planning to allow it to grow organically. The issue with that is that there are several sectors that will suffer as town centres bear the full brunt of less footfall, carrying the threat that a major change of life that has existed for 75 years or more may be about to end.

Bank of England Governor Andrew Bailey is going to struggle to improve his image no matter what happens at the MPC meeting that takes place in a couple of weeks’ time.

He has been noticeably reticent to speak about the prospect of a rate hike but will face fundamental questions if the Bank doesn’t act to curb inflation. The vote is likely to hinge on reports about the potential effect of the new variant of Covid-19.

The worst-case scenario is that the Bank hikes, mortgage rates rise and interest rates on household borrowing follow suit, then the economy slows to such a degree that the hike has to be reversed.

BoE Chief Economist Huw Pill commented recently that the burden of proof now lies with the doves, but their case is becoming stronger as Omicron cases grow.

The market awaits today’s U.S. employment report for November, so yesterday was a day for tidying up positions. The pound reversed the previous day’s fall, rising to a high of 1.3333, closing at 1.3299.

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New cases beginning to grow

Treasury Secretary Janet Yellen is no stranger to the glare of market attention that is focussed on the Fed Chairman during testimony to congress. She suffered at the hands of politicians on numerous occasions during her tenure as Fed Chair, and also had to face a belligerent President.

Yellen has been content to allow Jerome Powell to grab the headlines this week, Powell having just received the significant boost of being given a second term in office by a more considered President.

Even today’s November employment report has been a little overshadowed by the official retirement of a term that has been almost as familiar to traders as Brexit.

Inflation in the U.S. is no longer considered transitory, although it took Powell an inordinate time to provide his definition of the term. Unfortunately, there are two dictionary definitions. Powell chose to use one allowing the market to believe they may have meant the other.

Testimony in front of Congress is the perfect palace to come clean, and such is Powell’s’ s popularity that no one accused him of misleading markets.

Powell’s renewed contract allowed several of his FOMC colleagues to come out to play yesterday, making several comments supportive of Powell’s hint that the next FOMC meeting may provide an opportunity to accelerate the pace of withdrawal of additional support.

Raphael Bostic, President of the Atlanta Fed, commented that the FOMC needs to make sure that it is on top of inflation as it is beginning to look like a permanent fixture. He went on to say that the longer inflation prevails, the greater the risk to the economy.

He was followed by Thomas Barkin of the Richmond Fed, who also showed concern about rising inflation. Barkin blames it on the virus and fiscal support, and the time to act more urgently has arrived.

He went on to say that it is easier to impose an inflation target from below, while trying to gain control when it is higher than the objective rate requires fiscal and monetary discipline.

This week’s data on jobless claims saw the headline rate climb back above 200k, but the rise was not as high as was feared.

The dollar index appears to have settled into a range straddling the 96 level.

Yesterday, it rose to 96.17, closing at 96.12. It had earlier fallen to a low of 95.82.

Highest inflation since euro’s inception driving questions

Christine Lagarde has slightly altered the tactics she is using to dampen a more hawkish tendency that is beginning to pervade members of the General Council of the European Central Bank.

She has set out her stool to show that while inflation may very well be higher than had been expected, it is vital that the weaker economies of the Eurozone be supported if a repeat of the 2008 financial crisis is to be avoided.

One major issue that will continue to be a factor long after Coronavirus ceases to be a problem will be the level of borrowing those nations have undertaken during the Pandemic.

With the ECB buying new paper as it is issued, the average debt to GDP ratio of the entire region has climbed to around 100%, while the most indebted nations reaching close to 140%

One further effect of the ECB’s asset purchases is that prices have been held at artificially low rates.

While the debate about continued purchases begins to heat up, the more pressing question will be how does the ECB divest itself of all this paper, unless it simply holds it until maturity The question will then be how with the national Central Banks fund themselves in the face of rising interest rates and a lowering of demand.

Rising Produces Prices in the Eurozone are now running at 20% on a n annualized basis, driven by increasing supply bottlenecks and logistical issues. The data released yesterday showed that a major indicator of future inflation is still running hot.

There is a school of thought within the ECB that while the economy is holding its own while heavily supported, Lagarde and her supporters are storing up issues for the future.

This is another reason the single currency is failing to attract long-term support.

Yesterday, it fell to a low of 1.1295, closing at 1.1298. A break of support at 1.1250 could be seen today if the Employment report is strong and that would herald an acceleration of an expected fall towards the 1.10 level.