4 July 2022: Dhingra confirmed for MPC

GBP – Anti-Brexit member to bring fresh perspective?

While the Fed acknowledges that Jerome Powell may have been a little flippant about rising inflation, the FOMC have actually taken significant steps to rectify his error.

This in contrast to the Bank of England, which has agreed that it underestimated the rate at which inflation would accelerate, but has made no significant effort to rectify its error.

To many observers, the MPC appears to remain unsure about how it can tighten monetary policy without tipping the economy into recession.

Its series of dovish hikes have had no significant effect on the rise in inflation and while it is clear that the supply side of the economy cannot be dealt with by hikes in interest rates, the demand side certainly can. However, the drip drip of twenty-five basis points coupled with dire warnings from the Bank’s Chief Economist are unlikely to have the desired effect.

This is particularly true when Huw Pill holds his hands up to being the person who didn’t see inflation rising as fast or as far, and he and his department told the MPC so.

The lack of confidence that Parliament has in the Prime Minister could not have been seen in starker relief than in its reaction to, yet another, scandal emanating from the Government’s back benches.

The fall from grace of the Deputy Chief Whip has again been laid at Boris Johnson’s feet. He is now expected to listen to every bit of tittle-tattle and rumour and move people into, or more importantly out of, his Cabinet based upon innuendo and not wait for the facts to emerge.

While this may be a ridiculous premise, it does in reality point to how far Johnson’s stock has fallen.

Last week, Sterling came close to again breaking below the 1.20 level, but in the main, buying, related to month-end contracts, saw it rally a little. It reached a low of 1.1975, closing at 1.2099.

This week, Huw Pill will speak about the prospects for tighter monetary policy and data for services output in June will be released. While this data is unlikely to predict a coming recession, the trend is for it to fall further in coming months.

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USD – Fed fighting the devil it knows, recession can wait

The man in the street in the U.S., The one who has a steady job, a house loan and two children to educate, is beginning to notice that the amount he has left at the end of the month to put away for college fees etc. is far less than it was.

The TV has been talking about inflation, brought about by the emergence of the country from the Pandemic for some time, but it is only now as inflation reached 8.6% that he is beginning to feel the pinch.

This is a man who voted Democrat at the end of 2019 in order to try to rid the country from the curse of Trump.

That has patently failed, with the Democrats expected to lose their majorities in Congress this November and Trump hanging like a spectre over the 2024 election.

He would like to blame the Chinese as Trump did for most things, but he had been told that the country is self-sufficient in energy now, so why is gasoline still above $5 per gallon?

The president of the Federal Reserve says he is committed to getting inflation down, but the newspapers are talking of the end of the low interest rate, low inflation economy that has existed since the Financial Crisis.

Apparently rising inflation is something of an overshoot with demand coming from the emergence of the country from the Pandemic, China’s inability to keep up is a significant reason as is the War in Ukraine (wherever that is) and the rising oil price.

All of these factors are part of the readjustment and the Fed is not about to launch the country into a recession just to get inflation down.

The two per cent target for the Federal Funds rate is now a thing of the past, and once inflation starts to fall, the FOMC will most likely announce a new, higher, target for interest rates.

Get used to a higher mortgage payment and fewer offers if you decide to sell. A lot of the excess demand is being generated from real estate.

Last week, the dollar index returned to strength. It rose to a high of 105.64, just below the high for the year of 105.79 but did manage its highest close, at 105.10

The highlight of this week will be the release of the June Employment report. Expectation is for a slightly lower reading for new jobs. It is expected that the headline NFP will be around +250k after a rise of 390k in May.

EUR – Economy taking a significant battering

Inflation reached a record level in May in the Eurozone, as the rising cost of energy and the conflict in Ukraine weighed heavily.

Inflation hit a high of 8.6% in June, following a rise of 8.1% in May. As in several G7 nations, demand continues to grow, although the effect of the end of the Pandemic is fading, while supply issues are becoming more serious almost daily.

While the ECB is preparing to hike rates for the first time in eleven years, questions remain about how many hikes there will be and in what denomination?

Investors and analysts are beginning to favour fifty basis points more strongly, although there are one of two caveats.

One of the major issues facing Christine Lagarde and her colleagues is the question of one size fitting all.

While smoke economies are facing a severe recession, they are not seeing inflation rising out of control. Whereas, there are those who are seeing inflation well in excess of ten or even as high as fifteen percent for some, a hike whether it is twenty-five or fifty basis points will make no difference.

As the dust settled on the financial crisis of 2012, it was expected that some radical reforms would be enacted to bring countries closer together. In truth that was never going to happen since, fiscally, the gap was and remains exceedingly wide.

Once inflation has moderated, it is hard to see it falling back to the ECB’s flexible target around two per cent, they will have to persevere with explaining why yet another month has gone by with prices rising at an above target rate or bite the bullet and agree that those days are gone.

At some point, and it is likely to be when the European Parliament Elections come round again, there is likely to be a move towards wholesale reform of monetary union with the possibility of it being watered down. Experience has now taught that further union is probably impossible until The United States of Europe becomes a thing.

Last week, the euro suffered again at the hands of the dollar. It fell to a low of 1.0365, that is just above its low for the year, and closed at 1.0429.

This week, data for producer prices will be released, and although expected to be high, may have moderated very slightly from last month.