Here are this mornings headlines:
Bank of England
We heard from the Bank of England’s new chief economist, Huw Pill, yesterday who has cautioned that high inflation is going to last for longer than they had originally thought. Mr. Pill is still of the belief that they will prove to be transitory, but the duration and magnitude is proving greater than expected, with expectations that after a peak in price growth of more than 4% we’re not going to see it falling back towards their 2% target until the second half of next year. The market is now pricing in a 15 basis point hike this year, which would take us to 0.25%, though the new chief economist’s view is that even if rates do rise he expects them “to remain at relatively low levels for the coming years, even as the impact of the Covid-19 pandemic recedes” and believes the neutral rate – which is the rate that supports the economy when its at full employment, whilst stopping it bubbling over – is likely to be a lot lower in the future than it has ever been historically – so hopefully not back to nineties-esque double digits, or even the mid-single digits we saw in the noughties.
ECB & Inflation
By contrast, the ECB’s chief economist has dismissed concerns that inflation is becoming a problem, saying that there is still very strong evidence that it will be transitory and that it only becomes a problem when it is “immoderately above the inflation target” – to that he has an advantage, as the ECB has moved to a 2% average rate inflation target and because they’ve had low inflation for so long, they’re still below that for the time being, therefore even if inflation hangs around for a while longer, they probably won’t feel the need to press on and raise rates quite so quickly as others might. He acknowledged the impact of energy prices playing a big part in accelerating inflation, but also said that they will be a big headwind for the economy, which could well level out prices.
Staying in Europe: The leader of Germany’s Christian Democratic Union party and Angela Merkel’s would-be successor as chancellor has announced a party conference where he’s likely to resign. Armin Laschet has the unenviable task of following in Angela Merkel’s footsteps and trying to win the election for the CDU, which he failed to do. The SPD party has begun talks with the Greens and FDP parties to form a working coalition and, if successful, means that Olaf Scholz will be Germany’s next chancellor.
In the US: The debt ceiling has been raised, which averts a looming crisis. The ‘temporary’ rise of $480bn is only in place until December 3rd, which is frankly ridiculous! This may buy Joe Biden time to get his budget across the line and if he makes an allowance in that legislation to lift the debt ceiling significantly (or scrap it all together) then that’s all well and good, but if he doesn’t then we go through this all again. Amazingly the debt ceiling has been lifted more than 100 times since its introduction in 1939! Janet Yellen has pointed out that having such an unfit for purpose law in place is damaging to the US and causes ”politically dangerous conflicts that have caused Americans and global markets to question whether or now America is serious about paying its bills”.
In other news: Newcastle United Football Club has been sold by Mike Ashley to the Saudi sovereign wealth fund. The £305m deal sees the fund take an 80% stake in the club, whilst the Reuben brothers and Amanda Staveley split the remaining 20% – despite the overwhelming majority stake the “premier League has now received legally binding assurances that the Kingdom of Saudi Arabia will not control Newcastle United Football Club”, which we can’t believe for a minute. The criticism of the takeover is that it’s another “sportswashing” exercise for Saudi Arabi, who have an appalling human rights record. Fans of the club are pretty ecstatic at the end of Mike Ashley’s 14-year reign though and are now probably the club with the deepest pockets in the world.
Looking at Today
Today is a big day in that it’s non-farm payrolls day. The Fed are suffering the same inflation conundrum of other economies but have avoided talk of rate hikes because their employment goals aren’t being met – if we see a big number today, and the market expectation is for 500,000 jobs added, then that argument starts to look weaker and we could be in for a bit of risk off as interest rate rises might seem more probable. Outside of this, we’ll also be looking at the Bank of England’s quarterly bulletin to provide some riveting reading for a Friday afternoon.
Have a great weekend.