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The path less travelled

Covid has been the leading story on news headlines, and that’s not likely to change soon, but vaccination rates are rising, and mortality rates have remained under control in developed markets. This combination of circumstances provides optimism for the current resurgence in global growth, but it doesn’t mean interest rates are likely to rise to combat growing inflation. It seems logical, and indeed many central bankers are advocating for tighter policy, so what's the obstacle, you may ask.

The first dynamic to understand is that economic activity is rising and employment numbers are rising, but it will take the best part of another year to reach pre-covid employment levels in the US. The second concept is to understand that most rising prices can be attributed to supply issues, like raw materials and energy price surges. These create increased costs to production or transportation costs that act as a hurdle to economic gains. In that sense, raising interest rates—which will increase the cost of borrowing and put a further dampener on economic activity—is unhelpful. 

The classic argument provided by inflation hawks is that savings are eroded by inflation, so raising interest rates—which also increases the deposit rate on savings—helps defend savers' purchasing power, particularly pensioners who no longer earn income. Of course, once one considers that ultra-easy monetary policy has inflated assets prices—the primary vehicle for savings isn’t a savings account—this argument is stripped of all validity. 

Bottom line: For what it's worth, we think the distortionary rise in asset prices must be checked, but raising interest rates is not the correct policy response. Instead, we favour the view espoused by Federal Reserve Open Market Committee member Governor Lael Brainard, who wants to address asset price bullets more directly through the perspective of regulatory tools. Scaling back quantitative easing might be another lever, since asset purchases have a more distortionary effect on asset prices, but it would still be a drag on economic activity. As ever, balancing the interests of the entire economy is the central bank’s objective but must work through a rather narrow mandate. Fortunately, preventing asset bubbles serves a broad public interest while addressing wealth inequality as a bonus. This is very much in line with the Biden administration's current thinking, given that they have recently revised competition policy to reduce the power of capital vs labour.

The week ahead


On a trade-weighted basis, the Pound had its best performing week since May 2021 last week, closing 0.56% higher as broader risk sentiment improved and the UK’s Covid cases continued to drift lower. While the data calendar is light this week, the big risk event for Sterling is the Bank of England’s policy announcement on Wednesday afternoon. UK inflation has printed above the central bank’s 2.0% target for two consecutive months now, but the tapering of stimulus is still expected to be a way off, particularly as last week’s economic growth release missed the mark by almost 50% of the estimate. On Wednesday, attention is likely to turn to the conflicting policy stances of Bank of England members and whether they begin to converge as hawks or doves.

  • On Monday, Markit’s final July Manufacturing PMI came in at 60.4, matching previous estimates.
  • The final UK July Services and Composite PMI readings will be released on Wednesday, with expectations for them to remain unchanged from previous estimates at 57.8 and 57.7, respectively. 


The economic data out of Europe continues to beat the mark, with inflation, labour market, and economic growth all beating estimates in last week’s releases. Recent data releases have helped lift EUR/USD back towards the 1.19 figure. Still, analysts expect monetary stimulus to remain accommodative and may even be boosted later in the year, as European Central Bank President Christine Lagarde recently reiterated that the ECB had learned its lessons from previous crises in removing stimulus too soon. In an interview last week, ECB board member Fabio Panetta claimed the risks of an incomplete economic recovery are high while the chances of the economy overheating and high inflation are still limited.

  • Monday’s final Markit Manufacturing PMI for the Eurozone in July came in slightly higher than previous estimates at 62.8 vs 62.6.
  • Markit’s Services and Composite PMIs for the Eurozone are released on Wednesday with final estimates for the July reading of 60.4 and 60.6 respectively and unchanged from previous estimates.
  • On Thursday, German Factory Orders for June are expected to show 2.0% growth, marking a rebound from May’s -3.7% reading.
  • Friday’s German Industrial Production release for June is also expected to show an improvement from a poor May reading of -0.3%, with an estimate of 0.5% growth.


Last week, the US Dollar index posted its worst performance in 12 weeks as growing Delta variant cases threaten the US economic recovery. Additionally, the Federal Reserve remains set on keeping monetary policy unchanged until ‘substantial further progress’ is made on employment and inflation. At last week’s Federal Reserve meeting, officials investigated how to go about tapering the $120bn-a-month asset purchase program, but no decision has yet been made on timings. As things stand, analysts expect tapering to begin at the end of the year or early next year. Until then, inflation and labour market numbers will be the key US data releases to watch for, and on Friday, we have July’s Non-Farm Payrolls release.

  • Monday’s ISM Manufacturing reading for July is expected to be 60.9, improving from 60.6 in June.
  • On Tuesday, June’s factory orders are expected to read 1.0% growth, down from 1.7% in May.
  • Wednesday’s ADP Employment Change figure is estimated to show 650k jobs were added in July, slightly down from June’s 692k reading.
  • Also, on Wednesday, ISM’s services PMI for July is forecast to improve to 60.5 from 60.1 in June.
  • Thursday’s Initial Jobless Claims is estimated to show 382k new people unemployed in the week to 24th July, down from 400k in the previous week.
  • Friday’s Non-Farm Payrolls data is expected to show 900k jobs added in July, up from 850k in June, while the Unemployment Rate is expected to tick lower from 5.9% to 5.7%.


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