The banking ouroboros
The Bank of England’s Monetary Policy Committee may have shot themselves in the foot by insisting that rate hikes proceed a winding down of their asset purchase program. This week, Bloomberg estimates that the UK Consumer Price Index will hit 2.9% for August, following a reading of 2.0% in July, and there’s no shortage of evidence that asset inflation continues unabated. At a time when UK employment is down about 1.5 million jobs—32.2 million versus a pre-Covid trend estimate of 33.7 million—the Office for National Statistics (ONS) House Price Report (published August 2021) shows this trend:
Sewing these data points together, the issue is that capital—lacking productive employment—is simply chasing asset prices, while record job vacancies are accumulating despite low unemployment rates as depicted below:
This implies unemployed workers are waiting for higher wages to be induced back into the market. Given that this slice of the population will be underrepresented in homeownership, the unrelenting rise in asset prices might be a rational catalyst for this behaviour. Of all policy measures, quantitative easing is the largest driver of this price surge, so linking the start of the rate hike cycle to emergency policy measures seems a bad idea when prices are exactly the problem.
Bottom line: Federal Reserve policymakers have taken several weeks to say it, but they are broadly aligned that a wind-down of QE is their nearest objective. The Jackson Hole Symposium report highlighted that wealth effects have driven lower interest rates, not demographic changes. That’s to say, central bank policies that distort asset prices are causing the banks to fail in their target of stable economic growth. Despite this underlying trend, the Bank of England has not signalled a willingness to address asset prices directly, which is likely to come back to bite them.
The week ahead
Sterling was mostly flat last week after MPs voted 319 to 248 in favour of a 1.25% rise in national insurance, which is expected to raise £12bn per year to help fund health and social care in the UK. Higher levels of taxation are likely in the future, with public sector borrowing estimated to eclipse £200bn by the end of the current tax year. Getting people back to work is the priority, as an estimated 1.6 million people are still on furlough with the scheme set to end on the 30th of September. Many are expected to return to their previous jobs, but a significant number won’t, which could lead to a fresh rise in unemployment going into the Autumn, according to some economists. The FTSE 100 is trading 0.40% higher this morning after falling around 2.00% last week.
- The UK Unemployment Rate figure will be published on Tuesday, with markets expecting a 10-basis point fall to 4.60% in July versus the June reading of 4.70%.
- Headline Consumer Price Index y/y is likely to increase to 2.90% in August compared to a 2.00% rise in July. Core CPI y/y is forecast to follow suit and rise to 2.80% from 1.80% for the same period.
- The House Price Index is predicted to show that house prices have risen yet again in July, albeit at a slower pace, with 12.40% expected following a June reading of 13.20%.
- Consumer spending looks set to see an uptick of 0.50% in August after a 2.50% contraction in July.
The European Central Bank announced the first stages of tapering its pandemic stimulus program last week. Although specific figures weren’t mentioned, most analysts believe a reduction from €80bn a month to €60-70bn is the target range. President Christine Lagarde has also indicated that Eurozone Gross Domestic Product should reach pre-pandemic levels before the end of the year, despite the sluggish start to the bloc's recovery. The projected GDP growth rate is likely to hit 5.0% this year before falling to 4.6% in 2022 and 2.1% in 2023. European markets have started the week strong so far, with the Dax 30 up 0.7% in early trading. The data calendar is fairly light this week for the Eurozone, the most notable event is Lagarde speaking this Thursday.
- German Bundesbank President Jens Weidmann is due to speak on Tuesday at a conference hosted by the People’s Bank of China and the Deutsche Bundesbank.
- Eurozone Industrial Production m/m is forecast to move 0.6% higher in July after a 0.3% decline in June.
- European Central Bank President Christine Lagarde will speak on Thursday, addressing the Euro and European economy.
- Final CPI and Core CPI y/y figures for August are expected to remain unchanged at 3.0% and 1.6%, respectively.
The US Dollar Index closed 0.4% higher last week as Covid concerns, economic recovery doubts, and inflationary pressures continue to underpin Dollar strength. Elsewhere, the S&P 500 managed its fifth straight bearish session on Friday, marking a 1.7% decline on the week in the longest run since March 2020. Such moves are in some way to be expected as the next Federal Reserve meeting on the 22nd of September edges closer. More hawkish comments have been surfacing over the last week as the head of the Philadelphia Fed, Patrick Harker, has clarified that markets are functioning well, and stimulus measures are no longer relevant. This echoed comments made by the head of the Cleveland Fed, Loretta Mester, who sees enough in the economy for tapering to begin.
- US CPI and Core CPI m/m are to be released on Tuesday with little change expected. CPI is forecast to come in at 0.4% in August versus 0.5% in July, while Core CPI is unchanged at 0.3% in the same months.
- Analysts are expecting Industrial Production m/m to back off in August, rising 0.4% compared to July’s 0.9% rise.
- Retail and Core Retail Sales m/m look to be marginally improved, reading -0.8% and -0.2% respectively in August, after printing at -1.1% and -0.4% in July.
- Preliminary University of Michigan Consumer Sentiment is forecast to be slightly higher this month at 71.9 compared to an August reading of 70.3.
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