Chamber Market Commentary – Inflation may be steadying

Member News

GBP – Great British Pound
Wages growing, but still well below inflation
The number of people claiming unemployment benefit in the UK fell to 31.9K in January, but the number for December was revised up from 43.3k to 51.6k.

The actual number of people claiming benefits is not as important as the trend, which continues to show a degree of tightness in the labour market.

Wages are beginning to pick up but are still well below the rate of inflation. That will have pleased Bank of England Governor Andrew Bailey, but it is expected that demands for greater increases, at least in line with inflation, will begin to be demanded.

Annual pay hit 4.3% in January, but vacancies are still at a record high. Bonus payments in the finance, insurance and property sectors boosted wages.

The rate at which salaries are lagging inflation is now at its highest level since 2014.Real wages, salaries adjusted to consider inflation fell by 0.1%.

The wages paid in the Public Sector still lag well behind the private sector. Salaries paid to in the public sector grew by 2.8% in the year to January, and there are likely to be some significant demands made when negotiations begin.

Today will see the inflation rapport for January released. It is expected that year-on-year the rate of inflation may remain unchanged at 5.4%, although there is still scope for a minor increase. Month on month, inflation may have fallen, which will be good news for the Government, with some significant factors in the pipeline that will test the resolve of the Central Bank.

The prospect of further rate hikes is providing support for Sterling. If the pace or size of any further hikes is reduced, it could pull the rug from under the pound.

Yesterday, the pound remained in its recent range, although it did gain on the day, it reached a high of 1.3566 but fell back a little to close at 1.3536.

USD – United States Dollar
Republicans accused of cherry-picking candidates
The confirmation of Jerome Powell’s second term as Chairman of the Federal Reserve and the promotion of Lael Brainard to Deputy Chairman is being delayed by a dispute in Congress over the appointment of the new Fed Oversight Representative.

Republicans are not in favour of the appointment of Sarah Raskin since they have questions about her past involvement with fintech companies. They are being accused by Democrats of cherry-picking nominees.

It is ironic that Powell’s confirmation is being held up by Republicans since they heavily support him. Currently, he could be forgiven for feeling he has no friends at all in the Capitol outside the President and the Treasury Secretary.

The recovery from the Pandemic is still patchy, with some states recording significant growth, while others are not yet producing growth matching the level they were at pre-Pandemic.

With the debate over the size of the rate hike that the Fed will deliver next month still raging, it could be that those weaker economies may not see the level of growth that was seen pre-Pandemic for several months.

Data for retail sales will be released later today, with record inflation not yet causing consumers to retreat. Following a disappointing number in December where sales fell by 1.9% year-on-year, a rise of 2% is expected for January.

Bond yields have flattened dramatically over the past few weeks, this is a traditional indicator of a slowing economy. With the Fed about to start hiking rates, the FOMC will need to tread a little carefully to achieve any sort of balance between growth and inflation.

The dollar index lacks any kind of impetus right now. The fact that the Fed has provided advance guidance of its intention to hike rates has left traders with little to do but wait for the announcement.

It is still a couple of weeks before the February employment report and with no top tier data due for release in the near term, continued range trading will be the order of the day.

Yesterday, the dollar index fell to a low of 95.95, closing at 95.98.

EUR – Euro
Trade deficit hits 13 year high
The Entire EU will be feeling relieved at signs that Russia is perhaps beginning to de-escalate tensions around its border with Ukraine.

A large part of Northern Europe has not dealt with a trade deficit for decades, but yesterday, the Eurozone’s trade deficit tripled from Eur 1.5 billion to Eur 4.6 billion. The bloc is sucking in imports, while export markets are still sluggish.

The ability of the Eurozone to manufacture has been severely damaged by the global shortage of raw materials and spare parts, as well as the challenges created by bottlenecks in supply chains.

Preliminary data was released from Q4 GDP yesterday. It showed that the economy grew by 4.6% year-on-year, while quarter on quarter, growth was just 0.3%.

This was partly due to the onset of the Omicron Variant, and it is expected that more significant growth will be seen in the current quarter, although energy supplies still present a major concern.

The ECB voiced its worries yesterday about the effect of any Russian squeeze on gas supplies and the likely effect that they will have on GDP. Russia supplies around 35% of Eurozone gas. It is feared that if supply is reduced, it will affect every sector of the economy.

In a speech yesterday, ECB President Christine Lagarde spoke of her expectation that inflation will remain high for the rest of this year. She believes that risks to the economy are becoming more balanced.

While she sees bottlenecks continuing for some time, there are signs that the pressure is beginning to ease.

Overall, her remarks were nothing new, but she avoided any reference to the timing of any tightening of monetary policy. She feels pressured by the more hawkish Eurozone Central banks, but is determined to ensure that growth in the economy is robust before rates begin to rise.

Yesterday, the euro had a relatively positive day. It rose to a high of 1.1368, closing at 1.1358.

For more information and advice on mitigating risk that affect currency/market schedule a call with Christopher Smith.