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Last Friday’s US unemployment data paved the way for another hike in the Fed funds level this week. Non-farm payrolls rose by 228,000 in November, beating expectations of 200,000 and the unemployment rate remained at 4.1%. It would be surprising if the FOMC did not act at the end of its two-day meeting this Tuesday/Wednesday. Indeed, the market currently attaches a 98% probability of a rate hike, encouraged partly by President Trump’s proposed tax cuts and bonfire of red tape. Whatever one feels about the Donald, cutting taxes and chipping away at the regulatory burden usually generates the desired upward effect on economic growth.
In the UK, as consumers gear up for Christmas, we shall see inflation numbers tomorrow and labour market data on Wednesday. For months now, CPI (let alone RPI) has been rising faster than average earnings, meaning that real wages have been falling. Students of economics are told early on that the most important market of all is the labour market, and that general inflation is never likely to take off in the absence of wage inflation. So it is proving in the UK. At the higher end of the labour market, workers are, even after ten years, still apparently scarred by memories of the financial crisis and are less inclined than they would have been pre-crisis to risk a change of position in order to gain a higher salary. At the lower end, wages remain under pressure. A decline in the influence and membership of trades unions in the private sector, combined with an influx of migrant labour, has kept the lid on pay. Meanwhile, in the public sector, despite some recent small concessions to certain groups, austerity grinds on.
Added to this is the effect of online retailing, which requires far fewer staff to deliver the same value of goods to customers than a traditional high street model. This effect becomes ever more pronounced - and even prosperous high streets are increasingly struggling - with retailers of goods being replaced by restaurants, bars and coffee shops – indeed, anything that cannot be bought online. Charity shops also proliferate on account of their reduced business rates. Then there is the retail banking sector, with high street branches appealing to an ever-dwindling clientele and increasingly being sold off for other uses, including housing.
In the short term, all this means is that wages are unlikely to rise significantly. And, if that is the case, given the recent blip in inflation and the longer-running massive transfer of wealth from the asset-poor to the asset-rich as a consequence of ultra-loose monetary policy, for the good of the nation, inflation cannot peak too soon. Therein lies a political problem. If markets infer from Tuesday’s inflation numbers that inflation has, indeed, peaked, then the beneficial impact of an imminent end to the decline in real wages may be offset by an assumption that interest rates will rise even less than is currently thought spurring further asset price inflation and inequality. Thus the MPC is between a rock and a hard place. It will be hard to justify even ‘normalising’ interest rates if inflation starts falling from what is expected to be October’s peak. However, inaction will perpetuate the asset bubbles which are, at least in part, responsible for Jeremy Corbyn’s popularity.
Of course it is not the remit of the MPC to consider the political effects of its actions. It should focus exclusively on monetary policy. Any political fallout, such as an increase in inequality, is for the politicians to correct through fiscal policy. Unfortunately, Philip Hammond’s last budget failed to tackle this issue. John McDonnell’s first budget most certainly would but most would regard his cure as worse than the disease.
Sterling spent last week reacting to the confusing news emanating from the talks in Brussels. We rallied and fell off again twice: firstly on Monday as the DUP crashed May’s first ‘deal’ and, secondly, on Friday as the pound rallied on news that ‘sufficient progress’ had been made for talks to progress onto other issues such as trade, only to finish lower on the day as details of the agreement were digested. With GBP/USD trading at 1.3362 and GBP/EUR at 1.1330, it is fair to say that markets are sceptical that the next round of negotiations will be an unmitigated success.
Finally a word on Bitcoin. A couple of years ago, a client asked whether there was any mileage in the crypto-currency. Noting that a Bitcoin was at the time almost exactly the same price as an ounce of gold, I opined that I knew which one I would rather hold - and it was not the Bitcoin. I have made worse investment decisions, but cannot remember where or when. A bitcoin now trades at around USD 16,500 – 13 times the price of an ounce of gold – and the former’s price action has gone hyperbolic. This usually means that the asset in question will soon crash. However, the last upward section of a hyperbolic surge in price is very often the longest one of all. Therefore, while Bitcoin will come back down to earth, it could first go much higher, in the manner of seventeenth century tulip bulbs, one particular variety of which was apparently worth the same as an Amsterdam town house at the height of the mania. With such properties changing hands at upwards of EUR 2m, that leaves plenty of scope for further Bitcoin insanity.
This week’s important data start tomorrow with the aforementioned UK inflation numbers. CPI is expected to remain unchanged for November at 3.0%. Note that the consensus is that 3% is the top, therefore any figure above expectations will raise expectations for further rate hikes, as well as forcing Mark Carney to write an open letter to Philip Hammond explaining why CPI is more than 1% above target. RPI is also expected to remain unchanged – at 4% year on year. Wednesday sees UK unemployment – expected to be 4.2% for October, down from September’s 4.3%. Average earnings, also on Wednesday, are expected to have ticked up to 2.5% in the three months to October, compared to the same period last year – a move in the right direction after September’s 2.2% and somewhat reducing the pressure on consumers of negative real wage growth. On Thursday, the MPC will follow on the heels of the Wednesday’s FOMC meeting. Unlike in the US, no rate hike is expected in the UK. Thursday also sees the RICS house price balance, which is expected to be zero, suggesting agents are exactly split between those expecting house price rises and those forecasting falls (mostly in London). The ECB also meets on Thursday. The market sees just a 19% chance of an upward rate move, despite the Eurozone’s recent strong economic performance and, of all the news and data this week, a move from the ECB would probably offer the greatest chance of market upset.
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