Good Morning,


Here are this mornings headlines:


Despite UK unemployment numbers remaining well above their pre-pandemic levels, there is a growing problem for companies finding staff and subsequently throwing money at the problem, which is in turn causing the fastest wage growth for 25 years. This is having a large inflationary effect and is throwing the Bank of England a bit of a curve ball, because they’re not too sure how transitory it will be and as such have adjusted their policy wording to leave the door open for interest rate rises sooner than most people were thinking (though probably not until mid-late next year if they can avoid it). Unemployment is currently running at 4.8%, versus 3.8% pre-pandemic, but the mass re-opening has led to an abundance of positions, as well as people reluctant to move from jobs that they do have meaning that there’s a lot more demand than supply. The hope is that this will even out over time, but there are concerns that the different landscape of a post-pandemic economy might mean that we have skills shortages or young people remaining in education for longer. If this is the case, this could then become an engrained issue and something that will force the Bank of England to act.


The BoE have also loosely set out their approach to winding in QE, by saying that once interest rates get to 0.5% they will stop reinvesting the proceeds of the government bonds that they hold when they mature. Thereafter, if rates continued to climb past 1% then they would look at actively selling the bonds that they hold, but only if it was warranted and posed no risk of financial market disruption. Andrew Bailey gave short thrift to criticism of QE that he got from the House of Lords by saying “every borrower benefits from QE and ‘every borrower’ includes the government”! The Bank won’t be drawn in on when all of this might happen, but the fact that they’re now talking about it gave the market it’s most hawkish monetary policy meeting since the pandemic and therefore plenty to think about.



Across the Pond: The COVID Delta variant is starting to pose a greater threat to the economic rebound in certain locations and analysts there are going back to looking at ‘high frequency indicators’ to try and get more real time information on what’s going on. Bank of America noted that there was a meaningful deceleration in credit and debit card transaction activity last week, whilst spending on air travel and entertainment has also declined in the last couple of weeks. Another indicator is the amount of restaurant bookings taken on the website Opentable, which has flattened out – though ironically in virus hotspots, bookings remain high.
The US Government is clearly worried that this is a continuing trend and the Washington Post is reporting that Joe Biden is looking into using federal regulatory power and threatening withholding federal funds from institutions to push more people into getting their vaccine – with the idea being that these businesses will press their employees into action if they risk losing government money.


China & Asia

The Delta variant is also causing havoc with supply chains and there are a lot of reports of factories in Southeast Asia having to temporarily shut down. This is causing shortages of components in other parts of the world which is in turn leading to other factories having to slow down or temporarily halt production. Toyota now say that they will only make 1% more vehicles this year than they did in 2020, having previously hoped for a c.10% increase in production – this means that in real terms their numbers are down 20% from 2019.

The Wall Street Journal is reporting that China is ‘just getting started’ with its crackdown on private businesses having a relatively free reign. The article points out research from Goldman Sachs that since November there have been more than 50 interventions by the government in a broad range of industries and companies. It also argues that China has the economic wiggle-room to be able to flex its muscles at the cost of some revenues because their export market has rebounded incredibly well and as such is setting them well ahead of their GDP growth targets – GDP grew 12.7% in the first six months of the year. Last year China claimed to have succeeded in eradicating extreme poverty and is now setting its sights on narrowing the rich-poor divide by ensuring that there is competition amongst businesses and better conditions for workers. All of this is coming at huge costs to company valuations and therefore investors into markets, with more than $1 trillion wiped off the value of the top six Chinese tech companies. Given this, there are mixed feelings about whether to diversify now, or whether short term pain leads to longer term upside and opportunities to invest in China in areas that are more aligned to the government’s strategic long-term priorities, such as semi-conductors and artificial intelligence. It’s a long read, but well worth it.


Have a great weekend


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