Milkshake Madness & global pressure ahead of Jackson Hole
A quick look at some headlines gives us a broad backdrop to the stresses and strains in the real economy. Looking back to Central Banks comments in the last 6months, I bet they are still hoping that inflationary pressures ARE transitory, because the pressures are taking hold.
UK Output slump: “Growth in private sector output slides to 6mnth low in August amid staff and materials shortage”
UK Retail pressure: “Retail stock falls to 38-year low amid supply shortages”
McDonalds Milkshakes: “McDonald’s says it has pulled milkshakes from the menu in all 1,250 of its British restaurants because of supply problems stemming from a shortage of truck drivers”
McKinsey & Co: “Between January 2019 and August 2021 shipping container rates from China to Europe have seen a 6-fold increase”
The Economist summary covers these stresses in the context of QE tapering: “Today, an inflation surge has made a mockery of the Federal Reserve’s forecasts; a parliamentary committee has said that the Bank of England has a “dangerous addiction” to buying bonds; and everybody expects the ECB to undershoot, over a period of years, its shiny new “symmetric” inflation target of 2%, unveiled in July.”
Regarding Quantitative Easing - current forecasts show rich-world central banks balance-sheets will have reached a combined $28 TRILLION in size by the end of 2021 (2 fifths due to Coronavirus aid).
The world has seen a correlation between reacting to QE announcements and interest-rate announcements, which is why the Fed is cautious about how to communicate its winding-down of stimulus (expected in the coming months). If Central Banks can de-link QE announcements and interest rate expectations, they will be able to unwind QE without the market instantly reacting to higher expectations of interest rates. However, unless the USA and the UK can successfully de-link these 2, we are likely to see volatility over the coming months.
GBP/EUR remains in the middle of current ranges at 1.1700, but has been under pressure through last week
GBP/USD has fallen as USD strength has returned, at the lower end of ranges near 1.3700
EUR/USD at the lowest level of the last year looks vulnerable, with EUR weakness and USD strength keeping a lid on it at 1.1725
USD: The end of this week (Thursday) marks the start of the Jackson Hole Symposium where key comments from Fed Chair Powell might hint at a tapering of stimulus in the US. Economists will hang on every word for signals, with mixed expectations between an immediate signal, or a delay until Dec21. With unemployment now printing just 5.4%, the Fed may have the correct mix, allowing them to remove stimulus – effectively taking the foot off the accelerator, rather than slamming on the brakes.
EUR: Inflation data is key this week and next, and retail sales will be closely watched
GBP: No top-tier statistics are due in the next 10 days which leaves GBP on the side-lines, a victim to other currencies moves and open to all domestic headlines regarding Covid and Brexit. NO rest for the wicked!
AUD: Under real pressure due to lockdown measures and downbeat messages from the Central Bank after previous optimism – GBP/AUD near 1.9000 and AUD/AUD above 0.7200