Chip shortages hitting UK car sales

Deputy Bank of England Governor Ben Broadbent spoke yesterday of his belief that inflation in the UK will reach 5% by the end of the first quarter of next year.

He sees a tightening of the UK labour market as the main cause of the rise. Echoing the thoughts of several FOMC members, Broadbent commented that the bank will need to be agile in its treatment of growth and inflation and be prepared to act at every meeting.

A survey conducted by the Financial Times and published yesterday concluded that the majority of economists and traders do not consider a rate hike to be the outcome of next week’s MPC meeting.

More time needs to be taken to evaluate the risks to the economy of the new Coronavirus Variant.

Indeed, Broadbent spoke yesterday of his uncertainty about how to vote at the meeting for this reason.

Most of those surveyed believe that the effect of the Omicron variant on GDP will be modest.

Broadbent’s colleague on the MPC, independent member Catherine Mann, spoke last week of her concern that Omicron could add to inflation if there is an increase in demand for goods over services, reversing a trend that has been growing in the past few months.

Arch hawk, Michael Saunders, believes that the committee will want to see more information about the effect of the variant before making up their minds.

Shortages in the building trade appear to be easing as data for housing output rose in November. The same cannot be said of the automotive sector where the global shortage of microchips has caused Nissan to slow production of vehicles built in the UK.

The pound received a modest boost from Broadbent’s comments taking the view that if there is no hike this month that the pace of rate increases in 2022 will be quicker given the expected rise in inflation. It rose to a high of 1.3286, closing at 1.3256.

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Fed to face a tough call

Trading in financial markets is now totally dominated by the changes in monetary policy being determined by Central Bank policy meetings.

The Federal Reserve’s Open Market Committee will meet next week and, despite the onset of the Omicron variant, will vote to accelerate the pace at which it is withdrawing support for the economy.

With Chairman Jerome Powell as good as admitting last week that the bank got it wrong over both the pace, and size of the increase in inflation, traders believe that they won’t make that mistake again.

A stream of Regional Fed Presidents have spoken in support of the acceleration of the taper of support in the weeks since the last meeting where the announcement of the withdrawal of support was made.

Investment bank Goldman Sachs published a preliminary report on the effect of the Omicron variant and concluded that it will produce a reduction in output and GDP.

The bank cut its forecast for full year 2022 GDP to 3.8%, down from 4.2% previously.

Although there has been a moderate improvement in supplies of raw materials and spare parts, this could be reversed if restrictions are increased in other countries.

Goldman sees a rapid spread of the virus but believes that the vaccination will be effective, but there could be a clogging of health services from the unvaccinated contracting the illness. This may have a knock-on effect on the pace of people feeling safe to return to work.

Inflationary markets remain high which has led to the expectation that the Fed will begin to hike rates before the end of its support. Any changes announced at next week’s FOMC together with comments from the Chairman at his press conference are likely to create the backdrop for the dollar over year-end.

Yesterday, the dollar index started the week quietly as traders digested the weekend news. It rose to a high of 96.43 but closed at 96.28 just a single pip higher on the day.

Who is right about inflation? Powell or Lagarde? Both!

Christine Lagarde and Jerome Powell don’t necessarily disagree about the way they are delivering monetary policy to combat low growth and rising inflation. In fact, if their roles were reversed, each would be doing what the other is doing now.

Monetary policy is very much a case of horses for courses. Powell, while prioritizing the needs of the domestic economy, needs to be mindful of the wider effect that the FOMC’s decisions have on global growth. Lagarde, on the other hand, is mindful of the mistakes that have been made in the past where growth has been sacrificed on the altar of control of inflation.

The fact that those shackles have been broken has been her biggest achievement so far.

Given her far less bureaucratic outlook than her predecessors in the role, Lagarde was expected to be a conduit for change between the Central Bank and the EU Commission. So far, her contribution to change has been minimal, given the need to be fighting fires caused by the Pandemic.

Once the Pandemic can be considered at an end, and that may be at least a year away, Lagarde will have to begin work on reducing the size of the ECB’s balance sheet and putting forward suggestions for the reduction in bank’s bad loan portfolios across the region.

Any structural work in creating a more harmonious set of fiscal policies to work hand in glove with combined monetary policy will be pushed back and become the job of the next President.

Yesterday’s meeting of Eurozone Finance Ministers was upbeat about the continued recovery of the economy, but Ministers were careful not to step on the toes of their Central Bank Heads who, in most cases, are independent of Government.

Data released yesterday for investor sentiment in the region was badly affected by the rise in cases of Coronavirus and the lockdowns that will affect the economies of several states. It fell to a low of 13.5 in November from 18.3 in October and a market expedition of 15.9.

The euro trod water yesterday, reaching a high of 1.1317 and closing at 1.1282