Chamber Market Commentary – Johnson fails to convince markets

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GBP – Great British Pound
The economic fundamentals fail to add up
Boris Johnson made his first in person keynote speech to the Conservative Party Conference yesterday but failed to win over doubters who see his high wage, high productivity mantra as flawed.

TThe speech has been described as economically illiterate by some business groups, as he reaches for the unattainable.

The UK economy has historically promoted high employment and low productivity; this has suited the country as promoting an elevated level of employment has meant that the cake is shared around. Fewer people receiving a higher wage for increasing productivity is self-defeating.

Johnson continues to believe that the shortages of workers in the logistics sector is due to the beginning of the post-Brexit levelling up process that is now beginning in earnest.

His critics accuse the Prime Minister of fitting the facts into his narrative.

The speech is being described as typical Johnson, long on bluster, short on economic reality.

The Conservative Party faithful who attended the conference and are still basking in the glow of the stunning election victory would be worried by the reality of the Government’s record as well as its plans for the future were it to have either a smaller majority or were there to be an election looming.

As things stand, Johnson remains unassailable, both inside and outside his Party.

The wholesale gas price continues to rise, gas for immediate delivery rose by 7.1% and gas for delivery next month was up by 8.3%.

Fuel prices are going to be a major addition to inflation as winter approaches, and this will be a concern for the MPC as they look to continue to support an economy which looks to be running out of steam. Johnson’s speech did nothing to encourage investors who are concerned about the fundamental prospects for the economy in the medium-term.

The pound fell to a low of 1.3543 versus the dollar, although it did recover to close at 1.3581.

USD – United States Dollar
Powell and Yellen testify today
The political posturing over the debt ceiling continues, with financial bureaucrats becoming increasingly concerned that the nuclear button will be triggered accidentally.

Even the threat of a default is spooking debt markets, with increasingly strident scenarios being proffered to impress on Congress the seriousness of the situation.

The Senate Minority Leader, Republican Mitch McConnell, proposed a truce in order to allow Federal business to continue. He believes that a temporary increase would allow further debate, into a new expiry date of December.

Jerome Powell and Janet Yellen are due to testify before the Banking Committee and Financial Services Committee later today.

It is likely that Powell will be questioned over the possible ambiguity in the FOMC’s latest statement, as well as being asked for more clarity over the timing and size of a planned reduction in monetary support for the economy.

Both will be questioned on their individual agency’s response to the Coronavirus Pandemic. Powell will be cautious over the timing of the taper of asset purchases, understanding that the market will be hinging on his every word.

Harking all the way back to the Jackson Hole Symposium, Powell said that the taper would begin with a stop to fresh purchase by the end of 2021. He will be quizzed about whether that view has changed and if so, what factors have changed.

The private sector employment report was released yesterday. It is seen as an important precursor of the NFP for September, which will be published tomorrow. There is a quite high correlation between the two sets of data, so the fact that the ADP data rose by more than expected has brought a more optimistic view of tomorrow’s headline.

Private sector jobs rose by 568k. This comfortably beat the market’s estimate of 428k although the August data was revised down from 374k to 340k.

The dollar index rose on the back of heightened expectations for tomorrow’s result. It reached a high of 94.44, closing at 4.23 as leaders again took profit ahead of the 94.50 level.

EUR – Euro
Merkel supports Russian claims
The wholesale price of gas presumably falls among those transitory issues that the ECB cannot affect, so will therefore ignore it when it comes to concerns over inflation.

The Central Bank may find itself in a minority as concerns over rising wholesale price of Dutch Gas which is the benchmark.

The issue has now found itself onto the political agenda as several observers decided that since Russia is a major provider of gas that it must be having some shadowy influence over the rising price.

This is something that has been officially denied, but that hasn’t stopped the rumours.

Germany, which has an agreement with Russia over delivery of gas through a pipeline across the country, has become involved. Chancellor Merkel commented yesterday that Russia is fulfilling its obligations.

This comment was an aside to a speech Merkel was making about an increase in the number of EU nations, with six Balkan states looking to join the Union.

Portuguese Minister of Finance and ECB Board Member Mario Centeno joined the inflation debate yesterday, commenting that inflation is being driven by atypical events and that it will subside as the recovery from the pandemic continues.

Yesterday’s release of retail sales data showed that there was no change following a 3.1% rise in August.

Today, several members of the ECB will be making speeches, including Chief Economist Philip Lane. It is likely that they will only differ as driven by their individual nation’s view on the need for continued support for the economy, with the majority continuing to follow the mantra of transitory inflation.

The euro continues to target the 1.1500 level versus the dollar. It made a fresh low of 1.1529 yesterday, but recovered marginally to close at 1.1557.

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