Bank of England’s dovish vote concerns investors

The fallout from the Bank of England’s decision to leave interest rates unchanged at its meeting last Thursday continues.

Governor Andrew Bailey has been accused of misleading markets with his recent comments, to which his response has been weak. We expect to raise interest rates in the coming months, but no one said at which meeting we would start.

Bailey’s credibility has been badly affected, and it will take some time for him to be trusted again.

Bailey contends that the decision was based upon a consideration of the latest economic conditions. This led the members of the Monetary Policy Committee to decide by a majority of 7-2 to leave interest rates unchanged.

The failure to act at this point, as inflation continues to climb, will mean that when rates are increased, they may need to rise in a less gradual manner.

In an interview on Friday, Bailey defended his position by saying that it isn’t the Bank’s role to steer markets in advance of its actions, and any comment about the need to control inflation were conditional.

A major accountancy firm in the UK released a survey on Friday that shows that business output in the UK fell to its lowest level in six months as continued rises in the cost of fuel and bottleneck in supply chains hit home.

Supply is still struggling to cope with increasing demand, according to BDO, and this may have been a contributory factor in the Bank of England’s decision.

2022 is shaping up to be a difficult year, as shortages of spare parts and raw materials together with a lack of skilled workers is set to see a continued slowdown in the contribution of manufacturing to overall GDP.

The pound suffered badly following the Bank’s interest rate decision. It fell against both the dollar and euro.

It reached a low of 1.3424 but bounced back to close at 1.3498. Versus the single currency, it fell to a low of 1.1634, closing at 1.1667.

This week will see the release of preliminary data for Q3 GDP. There is no doubt that the economy slowed, but investors and traders will be concerned by how much following the Bank of England’s dovish decision last week.

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Boring Fed drives equities higher

Non-farm payrolls bounced back in October following weak data in the previous month. The headline number for new jobs was 551k, up from a revised 312k in September.

The rate of unemployment fell from 4.8% to 4.6% in what was a well-received report, however although the Fed’s decision to begin the taper of additional support for the economy now appears justified, the economy remains fragile.

Equity markets continue to make fresh highs, but the raise is limited to a few major stocks which now dominate the market. This gives a false impression of the overall strength of the economy, as staff shortages continue to be an issue.

This will lead to more volatile employment data in the coming months.

While bottlenecks in supply chains are slowly resolving themselves, the U.S. has, so far, been immune to rising fuel prices, but this will change in the coming months.

The S&P 500 has made new highs on 60 trading days so far this year, and has generated a return of 27%, according to the Financial Times. President Biden’s $1.2 trillion infrastructure spending bill was passed on Friday evening, and this will give the economy further support going forward.

Analysts believe that the economy is moving forward as hoped but could still be blown off course by one of a number of potential bumps in the road.

The dollar index reacted well to the data released on Friday, but it is still unable to breach significant resistance between 94.50 and 4.80. It reached a high of 94.62 on Friday but fell back to close at 94.21.

A board member at drug firm Pfizer, which has been at the forefront of producing the coronavirus vaccine, spoke on Friday of his expectation that the Pandemic will be over by January. He didn’t define what over means, but his words gave a predictable lift to markets.

This week will see the release of data for producer, consumer inflation, and it is expected that weekly jobless claims will continue their recent trajectory.

Inflation remains a major concern. CPI is expected to have steadied a little around 4%.

The Frugal five are on the warpath

Christine Lagarde has received support from the majority of members of the Governing Board of the ECB, despite a degree of hostility being pointed in her direction by certain sections of the press.

Her approval rating remains high among the public, particularly in countries like Spain and Italy. The economies of these countries are beginning to improve, despite the continuing effects of the Coronavirus pandemic.

The battle to justify the action of the Central Bank in placing economic growth above rising inflation continues and the countries that make up the frugal Five and are suffering most from rising inflation, look set to hit back.

While it seems unlikely that Germany the Netherlands, Belgium Finland, and Austria will be able to overturn the new inflation policy, they may counter their loss of power by attempting to reduce their contributions to bailout funds.

The loss of power that has been developing since Germany, in particular, forced several countries to adopt strict austerity packages at the height of the financial crisis has been remarkable.

Going forward, once the Pandemic has been defeated, the Eurozone is likely to go through another reinvention, one that focuses far more on equitable growth where the burdens are more equally shared.

For now, the economy is slowing noticeably, and again, Germany is at the forefront. The inability of political parties to form a coalition is having far-reaching effects on the economy, while the departure of the Bundesbank President is now imminent, with no replacement having yet been found.

Industrial production fell by 1.1% in September, versus a predicted 1% increase, retail sales fell by 0.3% versus an expected 0.3% increase while car and truck sales reversed a disastrous August rising by 2.1%. This sector is still in negative territory year-on-year.

The euro continues to hold up well against a stronger dollar, despite dire predictions of a fall to below 1.15

On Friday, it rallied to a high of 1.1573 having fallen to a low of 1.1513 and closed at 1.1567.