Good morning,
Get ready for unpredictability
Sterling rebounded yesterday in a bid of short covering following an inflation number that exceeded market estimates. There is nothing new here, and this will contribute to a continuing volatility and unpredictability to sterling crosses.
The inflation picture is simple. As the pound falls, prices will rise; we are an island after all. While GDP has been revised lower by economists and the Bank of England since Brexit, inflation has naturally been revised higher on the basis of a weaker sterling. If our calls of GBPUSD coming lower to 1.22 by the end of the year are correct then inflation will spike above 2.5% next year but calendar effects should allow the Bank of England to keep its foot on the stimulus pedals especially if it is to believed that the inflation target is no longer as important as growth, jobs and financial stability.
Of course, the most important relationship is between inflation and wages and rising costs that are not mirrored by rising wages – something that could easily befall a nervous and uncertain jobs market – would be a large negative for an economy so intrinsically linked with personal consumption.
Jobs may hold up for a while
Today’s unemployment data is unlikely to show us the true cost of Brexit yet either. A slowing of the business cycle does not necessarily lead to job losses and if it does, these job losses are far from immediate. I would council that it is not the July jobs number that is most important but maybe the numbers due in November and December.
It is difficult to fire people in the UK and businesses are not going to kneejerk their workforce given we have very little clarity over the economic and political outlook for the UK corporate sector.
In our eyes it is the retail sales number due tomorrow that is most important. The UK’s recovery since the Global Financial Crisis has been one of consumption with savings ratios depressed and consumer credit expanding; there is little further to push this bubble however in a landscape where wages are likely to remain depressed and confidence low.
The unemployment data is due at 09.30.
Dudley keeps the dollar honest
Comments from New York Fed President Bill Dudley has re-energised the USD in the past 24hrs, bringing it back from the brink of the sub-100 level against the JPY. Dudley said in a TV interview that a rate hike by the Federal Reserve remained possible in the US in September, thereby boosting market sentiment that higher rates were coming. We are sticking with our belief that they will wait on until December but these comments are more of a basis to show that the US economy is still seeing strong employment, stable inflation and rising wages and that the emergency support for the US economy needs to end.
I do not expect that tonight’s Fed minutes are expected to add too much to this market move. Going into the meeting the majority of US data had been strong. Indeed Citibank’s economic surprise index that charts whether data has surprised to the high-side or the low-side has risen for 18 days straight – a record.
Low expectations of hikes until the end of the year (50.5% at the moment) will ensure that the FOMC maintain a disciplined message on needing to see additional economic strength, namely in labour and inflation markets, before hiking. They have very little need to worry about the dollar at the moment for sure.
The minutes are due at 7pm BST
Have a good day