Woe Betide The Kingdom



SUMMARY If there is no change to the structural causes of current UK supply chain difficulties, we expect this to impact growth - leading to a weaker Sterling against the US Dollar - provided the US labour market remains strong and the Fed taper begins. We are neutral on Sterling/Euro.


UK SUPPLY CHAIN WOES

Supply constraints have been cited as a key factor in next wee's PMI data - with recruitment difficulties in particular noted as an issue despite a big monthly rise in employment. Also of note is the Bank of England’s monthly money supply report. Of most interest will be whether housing transactions slowed as the temporary stamp duty holiday was scaled back. The UK data calendar is light in a holiday shortened week. Business confidence reached a three-year high in May but since then it has seen little change as firms weigh up both their own situation and the broader economic outlook. However, there has been a further rise in employment intentions and firms also continue to signal that prices are likely to rise in response to cost pressures. The PMI Manufacturing (Wed) and Services (Fri) reports for August are both second readings that are not expected to be revised. The first estimates both fell compared to July with the slide in the Services headline measure to its lowest since February particularly surprising given the lifting of restrictions.



POWELL SENDS TAPERING SIGNAL

Markets fluctuated in relatively narrow ranges for most of this w eek as they waited to see whether today’s (27th Aug) speech by US Federal Reserve Chair Pow ell would offer any clues on the Fed’s intentions regarding its asset purchase programme. The big rises in risk assets over the past year and a half at a time of great uncertainty seems to be in no small part due to the asset purchases of central banks. Their actions have also helped the real economy weather the crisis. The Fed has been at the forefront of this with its asset holdings rising from around $4trn to more than $8trn in little more than 12 months (see chart). Consequently there is obviously a lot of interest in w hen central banks w ill start to turn off the taps. In recent weeks Fed policymakers have been hinting that this may now be close prompting speculation that Pow ell would offer more details today at the Fed’s Jackson Hole symposium and potentially tee up the Fed’s next policy meeting on 21st -22nd September. Much of Pow ell’s speech was similar to previous comments. In particular he again noted that the current rise in inflation was probably temporary, while acknowledging some upside risks. However, he did say that tapering w as likely to start this year an important signal that goes further than previous remarks. The initial market reaction has sent the US dollar and Treasury bond yields lower while equities have risen. That seems to be because he didn’t offer an explicit timetable for tapering, although that w as never very likely. Markets may also have been reassured by his signals that the Fed w ill proceed cautiously and that they have no intention of lowering the level of its asset holdings or indeed raising interest rates for some considerable time. Nevertheless this is still an important new step in the evolution of US monetary policy, which markets may eventually view less benignly.


FED NOW FOCUSING ON THE LABOUR MARKET REPORT Next Friday’s US labour market report is likely to be the key indicator of the week. It is always seen as an important bellwether of economic conditions and signals from the Fed that a further improvement in the US labour market w ill be a crucial determinant of w hen it will start to rundown its asset purchase programme make the upcoming report particularly important. Indeed a number of Fed policymakers have explicitly linked their support for an early tapering to the August report. While recent US economic data has seen some disappointments of late the labour market so far has continued to improve. July saw a monthly rise in employment of 943k, the biggest in 12 months, and over the past two months the rise has been close to 1.9 million. Employment is still well below pre-pandemic levels but with unfilled vacancies at around 10 million the issue doesn’t appear to be a lack of demand for workers. We expect the latest report to show another big jobs increase of 810k along with a further fall in the unemployment rate to 5.2%. That should be enough to convince markets that an announcement on tapering is in the near future. Furthermore, the wage data will be watched closely given reports that recruitment difficulties are forcing business to pay more. Also of interest in the US w ill be the August ISM surveys of business activity in manufacturing and services. Last month the manufacturing measure slipped to a six month low , while in contrast the services measure hit a new high. However, both surveys pointed to continuing issues with supply chain disruptions and recruitment that may be both increasing costs and restraining output. Given concerns that the economy’s rebound is losing momentum the latest figures will be watched for further indications of the extent to which these factors remain an issue.



EUROZONE INFLATION LIKELY TO BE UP AGAIN

The Eurozone will see a bevy of August consumer price inflation data including figures for the region as a w hole on Tuesday. July saw a big increase in annual headline inflation to 2.2% its highest level for almost nine years. August is expected to see a further rise with overall inflation forecast to move up to 2.6% and the ‘core’ measure to 1.3% from 0.7%. However, the European Central Bank will probably still conclude that this is mostly due to temporary factors. Consequently it remains likely that the ECB will lag other central banks in removing the present high degree of monetary policy stimulus.


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