Here are this mornings headlines:
We’re back to inflation, again. This morning, former Bank of England policy market Andrew Sentence was talking to the BBC about his own views on interest rates and where inflation might go and he’s of the opinion that rates need to start rising now in order for them to be gradually moved up to 1-2%. He thinks that the Bank of England are underestimating inflation, with it likely to peak between five and six percent, rather than the forecasted four. Sentence says that the energy price impact and also the reversal of some of the pandemic VAT cuts are going to have a bigger impact than we think, but if that we can start to get interest rates on the rise sooner it will be less of a shock to business than if we delayed and then had to go harder later. His view is that the Bank’s policy makers are striking the wrong tone by only voting in favour of winding down QE and that there should be more on the panel that are looking to move on rates – that said, the market has fully priced in a February rate hike and also calling a 50-50 chance of a hike in December, albeit that would probably only be 0.15%, which takes us to a 0.25% ‘starting point’ for the rate rise cycle. Interest rates spent 18 months at 0.75% before being slashed in the wake of the first lockdown, so getting back to here shouldn’t be too traumatic.
Energy prices are a big feed of inflation and whilst gas prices remain elevated businesses are talking to the government about what they can do to help. Business secretary Kwasi Kwarteng met with the Intensive Energy Users Group over the weekend and heard their views and concerns over just what damage sustained high prices might do to their businesses and to the British economy. This led to Mr Kwarteng suggesting that he was discussing things with the Treasury, which led the Treasury to contradict him and say that no talks on the matter had taken place! If a conversation hadn’t taken place, then it almost certainly will do over the first half of this week, with the business secretary tasking his civil servants to work with industry to paint a full picture of what the implications of leaving industry to go it alone might be. As painful for the Treasury as it may be, there is every chance they will need to shake the magic money tree again. Two weeks ago the government stepped in to support CF industries get one of its two fertilizer plants back online to continue supply of CO2, that deal is going to expire in the coming days and it’s not yet clear if they’ll write another cheque, however the fact that they’ve written one cheque sets a precedent, if they go ahead with another then other industries would rightly be able to claim that they are essential to the economy and that they too deserve support – can they please support glass makers, because the nation will need to be kept in wine to get through this winter!
Northern Ireland Protocol
The UK and EU are set to discuss the Northern Ireland protocol in the coming weeks, but it looks like the negotiations have started early, on Twitter! Irish foreign affairs minister Simon Coveney tweeted about the UK’s request to remove the European Court of Justice from the oversight of the protocol by saying “EU working seriously to resolve practical issues with implementation of protocol – so UKG creates new “red line” barrier to progress, that they know the EU can’t move on… are we surprised? Real Q: Does UKG actually want an agreed way forward or a further breakdown in relations?” – to which David Frost replied: “I prefer not to do negotiations by Twitter, but since @simoncoveney has begun the process… the issuance of governance & the CJEU is not new. We set out our concerns three months ago in our 21 July Command Paper. The problem is that too few people seem to have listened. We await proposals from @MariosSefcovic. We will look at them seriously & positively to whatever they say. We will discuss them seriously and intensively. But there needs to be significant change to the current situation if there is to be a positive outcome”. This is an argument we expect to grind on and if it does lead to the UK making good on its threat to trigger Article 16 then things will get very complicated for the government just at a time when things are already pretty bleak. The FT has some more.
The Czech elections over the weekend were pretty interesting: The incumbent PM Andrej Babis was polling to win a second term, but was caught up in the Pandora papers last weekend, which immediately hit him in the polls. He’s lost out on the majority to a two party coalition, but the twist in the tale is that the president, Milos Zeman, had previously said that he would give the right to form a government to the single party that scored the most votes, which is still Mr Babis as the other winners were a two party syndicate. Compounding the chaos, Mr Zeman has been rushed to intensive care. It’s not yet clear how this will all play out. The Guardian has a good rundown.
The US employment numbers last week left markets disappointed, with high expectations that the non-farm payrolls would be well clear of 500,000 whilst the actual print was just 194,000. The poor number led Fed member Daly to come out and say it’s too soon to say the job market is stalling, despite this being the second month in a row that expectations have been dashed. Most people are pointing to the delta variant and the only recent re-opening of schools as the reason the numbers haven’t bounced back, so perhaps more emphasis will be placed on next month’s data print, where those reasons will be less valid. The initial market reaction was to soften the dollar, as the perception is that the Fed can’t yet raise rates or dial back QE even if they feel the need to.
Meanwhile Janet Yellen is confident that the debt ceiling will be lifted once again before the 3rd December deadline, with it now being the case that Democrats will have to go it alone in getting the raise done. Republican leader Mitch McConnell has said that he’ll play no part in “any future effort to mitigate the consequences of Democratic mismanagement” which probably galvanises the Democrats into building a massive lift of the ceiling into their budget plans, which hopefully get across the line one day.
Looking at Today
Asia has got the market off to a flying start, with a rollercoaster in equities and oil up almost 1.5%, adding to the 4.5% rise we saw on Friday. Oil is now at a seven year high and is being pushed higher on a macro level because of global demand and also in China specifically because of floods in Shanxi, which has caused dams to collapse and coalmines to close, The South China Morning Post has more. The data calendar for the day is quiet and the US market is closed for Columbus Day. As we get into the week the data starts flowing thick and fast and we’d expect markets to move accordingly.
Have a great week