Johnson called upon to cut VAT on energy bills

In the House of Commons yesterday, the Opposition Labour Party’s Deputy Leader trotted out her complaints and criticism about the Government’s handling of the Pandemic and its economic fallout.

With no prospect of a General Election in the UK until May 2024, any criticism is simply an exercise in futility.

Before the end of last year, the Government lost a seat in Parliament in what had been considered a safe seat. While this could be construed as public criticism of the Government’s performance, again fairly futile, the more interesting fact is that the winner of the seat was the third Party in Parliament, the Liberal Democrats.

A sitting Government can expect to lose popularity during a term in office given the high profile and often unpopular decision-making process it has to undertake.

It is usually the main Opposition Party that benefits, but the result of the By-Election was more of a commentary on the public’s view on the performance of the Labour Party.

The Government has experienced both sides of British politics over the past few years. During the Brexit negotiations, Theresa May’s Government faced several defeats in Parliament as its slim majority dwindled. Now, Boris Johnson has close to an eighty-seat majority and can do pretty much as he chooses.

Neither a slim nor a rage majority are particularly healthy for the country and highlight the inadequacies of the country’s two-Party system of Government.

The recovery in the economy was beginning to show signs of stalling even before the Omicron variant arrived at British shores. Inflation d continued shortages of raw materials and finished goods have been blamed.

Businesses are beginning to run low on cash reserves again, and this will affect investment plans going forward.

Since he came to office, Chancellor Rishi Sunak had been given a free pass to make himself popular by doling out cash to virtually anyone who came knocking.

His situation has become more uncomfortable as his pot of cash has shrunk, and he needs to be more discerning about who is most deserving of support.

The withdrawal of furlough payments at the end of Q3 has been proven to correct, given that employment data continues to improve. However, as the Omicron variant drives more businesses into short term shortages of workers, the limiting of support to the hospitality sectors has been criticized for being both narrow in effect and insufficient in size.

The Bank of England, having hiked rates at its most recent meeting, is now going to face pressure to repeat the performance at every subsequent meeting. It is fairly clear that a twenty-five-basis point increase, while setting the tone, will have no material effect on inflation while confidence may begin to wane.

The next meeting of the MPC will take place on February 3rd and speculation will begin soon about whether another hike is likely.

Before that, inflation and employment data will be released, as well as data for retail sales over the Christmas period. Since Andrew Bailey has already said that the bank will be reactive in the early months of the New Year, those data releases will take on greater significance.

The pound continues to be driven by the direction of the dollar index. Yesterday, it tried to break higher, almost reaching the 1.36 level, making a high of 1.3598, but it fell back to close at 1.3549.

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Minutes confirm hawkish turnaround

The employment report for the private sector is a precursor to the headline NFP report and is usually released a couple of days before the main event. It is generally fairly indicative of the direction the non-farm payrolls will take, although there have been one or two high profile aberrations.

The data was released yesterday and showed a rise from 505k in November to 807k in December. The November figure was revised slightly lower from 534k, but that detail attracted little interest.

It is always a dangerous undertaking to predict the NFP figure since it is made up of several estimates and seasonal variations, but the market has got itself into bullish mode ahead of tomorrow’s numbers.

Before that, today will see the release of the final weekly jobless claims for 2021. While the initial claims number is expected to remain below 200k, there is no real expectation for a significant fall.

Expectations for tomorrow’s headline number has again been raised close to 500k new jobs created.

The minutes of the latest FOMC meeting were released last evening. They showed that the bullish sentiment that saw an acceleration in the pace of removal of added funding was almost unanimous.

The main statement showed that the Fed expects to begin to reduce the size of its balance sheet fairly soon after beginning to raise rates, and this could happen as soon as the QE programme ends in March.

FOMC members expect three hikes this year and a further three in 2023.

Members believe that conditions for a rate hike could be met fairly soon. The use of that phrase was just about as close as they could get to promising a hike in March.

While the exact wording came as something of a surprise, the bank’s far more hawkish stance came as little more than confirmation to the market.

As such, the dollar index continued its recent correction. It fell to a low of 95.88 initially following the announcement, but quickly recovered to close at 96.16, thirteen pips lower on the day.

Germany is still unable to supply customary support

Germany is having a poor time, both influentially and economically. What started as a charm offensive by Angela Merkel to show that the country was prepared to act democratically as the region moved towards a more Federal basis has become something approaching virtual irrelevance.

This has been worsened by the country’s economic performance being overshadowed by several of its admittedly smaller neighbours.

Economically, Germany is suffering due to its size and need to import raw materials and spare parts for its industrial and manufacturing base. The global shortages are having a significant effect on output and although there are signs that the situation is improving, it is moving at too slow a pace for Germany to catch up in the short term.

Having compared itself to the U.S. and China in terms of both quality and relative output, Germany is now being compared to Italy and Spain, and not always favourably.

It is hard to predict the effect that the departure of Angela Merkel will have on the country’s standing within the EU. It is fairly clear that Olaf Scholz is more of a technocrat than Merkel and may not be able to impose his personality on the decision-making process.

In fact, such a role as figurehead may still fall on Mario Draghi should he rise to the position of President of Italy.

Draghi still has a significant store of credit within the EU, given his time as President of the European Central Bank.

Following the departure of Jens Weidman from the position of Bundesbank President, a job he held for almost ten years, the Cabinet has approved the appointment of Joachim Nagel to replace him.

Nagel is thought to be more of a bureaucrat than Weidmann, although he will be tasked with keeping the Central Bank’s anti-inflation message.

Data released yesterday in Germany showed that the composite PMI for both services and manufacturing fell into contraction. This will bring further concern as inflation is still above twice the ECB’s target.

The euro continues to cling to the 1.13 level versus the dollar. Yesterday, it climbed to a high of 1.1346, but fell back to close at 1.1311.