The most recent piece of ‘news’ from a market pov was the UK’s governing party’s conference this past week.
There was a theme highlighted by the PM - post brexit Uk will be a higher pay higher skill economy. Bottom line is that there will be no cheap labour from overseas…
Speaking today to an employer in hospitality in England and his biggest problem right now is attracting staff - he has to offer higher wages.
This is exactly what the PM is speaking about - but higher wages comes at a price - well actually higher prices.
Today BOE’s Saunders warns that UK must expect higher int rates “significantly earlier” - reckons inflation soon over 4% caused by supply chain deficiencies post pandemic etc.
Here is the rub - all CB’s are saying that current inflationary pressures are transitory, supply issues will resolve - and that is probably true - but in the UK’s case there is the added factor of wage pressure caused by the new immigration policy.
GBP buying likely up ahead in the shorter term - although Saunders reckons the market has factored this thinking in on current price - I’m not so sure
One piece on CityAM caught my eye today - I’ll copy and paste since I’m giving credit:
Prime Minister Boris Johnson this week sought to play down the prospect that rising inflation could cancel out wage increases as he pins his long-term hopes on moving to a high-wage, high-skilled economy after Brexit.
But business leaders have been among those to warn that increasing wages without a boost to productivity levels could drive inflation and result in increased costs for consumers.
Lord Lamont told Today: “Wages going up because of increased productivity… is a good thing.
“Just pushing up wages by themselves, calling for them to go up, will not increase productivity itself and could become inflationary.”
Lamont is a former FM for UK and there is some sense in what he is saying - he figures that there is risk of UK inflation becoming ‘imbedded’. - also figures a rate rise now and a scale back on QE is needed
Another piece today by an ex Deputy PM and Tory Minister, (UK governing party) - he too is saying "We are heading towards a significant increase in inflation … this will lead to increases in interest rates" (Daily Express vis video link today)
Industry leaders (including today Miguel Patricio, ceo Heinz), have been warning that higher prices are up ahead - my own experience is the same - many suppliers raising prices.
This clamour re UK inflation and rates over the weekend would in normal circumstance cause GBP buying - but this week there is talk of a possible trade war EU/UK which may well dampen market enthusiasm - especially later in the week, lots of GBP volatility up ahead.
If you take it that covid caused, let’s say, a 50% reduction in economic productivity in the last 18 months, and now we’re going to recover to pre-covid levels of industrial production and consumption, that implies a 100% increase on where we fell to. Is there any way that could not be inflationary? By the same token, is there any way that could not be temporary?
The thinking generally is that as you say we are aiming for pre-covid levels and that therefore any consequent inflation would be transient.
In other G7 this argument is still being made, but where the UK differs was reflected very much in the PM’s speech - the govt wants higher pay, higher skill and higher productivity. One of their main tools is no low pay low skill immigration.
The obvious problem is that if there is no increase in productivity - if wages simply rise because employers cannot get labour then that’s a driver for inflation that will be embedded and not transient.
the ONS have just reported a record number of job vacancies.
Yesterday the BOE gov, Andrew Bailey told the Yorkshire Post that current UK inflation levels are " very concerning and it had to be managed to prevent it from becoming permanently embedded."
Clearly they are preparing people for an increase in their mortgage payments.
That could happen as you say. But I fully expect immigration rules to be more loosely applied (I wouldn’t dignify the UK government’s practice here with the title “policy”) and by next year we will see a record high total immigration. I am going to guess the leading sector driving immigrant employment will be the NHS.
Aye you could be right - the old saying of must do is a great master.
Up to now all ministers are singing from the same hymn sheet of higher skill immigration - it was with great reluctance they moved on truck driver visas and poultry workers on a very time limited basis.
Locally NI abattoirs are having problems recruiting butchers - the NI agricultural minister requested permission to take in butchers from South America and was refused even though he is a strong Tory supporter. The government’s argument is that if industry makes the job attractive enough they will be able to hire British workers - usually that means better pay and conditions.
Damian Hinds (home office) reported by ITN today as saying " private sector need to step up amid driver shortage"
That’s the thrust of the Govt argument - for now anyhow - I suppose the danger with higher prices is that it can create it’s own momentum and can be even more difficult to turn around with just the use of interest rates.
Actually I’m wondering about the data for vacancies. I wonder how accurate is the data provided to the ONS by employers on this. My line of thought -
Three supermarkets A, B and C in a district wish to recruit more staff. They want to fill every place and have a good standard of applicant. They absolutely don’t have time or budget to go through this exercise again.
Supermarket A announces that they will be recruiting 10 new staff.
Supermarket B announces that they will be recruiting 10 new staff.
Supermarket C announces that they will be recruiting 1000 new staff.
Its fairly obvious that all the job-seekers in the district will apply to Supermarket C. They won’t even bother with A and B. When C get their 10 posts filled they simply bin the remaining applications. Now they have achieved their objectives with 10 good quality employees in post. Objectives achieved.
But they have also got two bonus points - they have delayed their competitors A and B filling their posts and have effortlessly poached the best quality applicants in the district - business is a competition of course.
The survey asks a single question from approx 6k businesses - how many job vacancies did a business have in total (on a specified date) for which they were actively seeking recruits from outside their organisation. (gov uk)
The sample is across all industries and is legally required to be completed.
The quality of the survey is in the change in numbers - ons reporting this morning vacancies at 1.1m
I am not sure what you and @tommor are getting at with the inflation debate - is your opinion supposed to be a positive or negative for sterling?
Many in the Austrian camp think that covid stimulus is money printing and will lead to stagflation (or hyperinflation) - and negative for currencies.
On the flip side moderate or even high inflation leading to higher interest rates is (as you well know) a positive for a currency.
So which is it?
Yes I’m sure much of the inflation in Blighty is not due to productivity increases, but compared to other countries economic performance, maybe the UK is the least ugly in the ugly sisters beauty contest.
I’ve said for a while now that I think sterling is going to be one of the strongest currencies in the world going forward - my logic is remedial to say the least - mainly based on the theory of Singapore upon Thames - but i think inflation in the UK is going to be viewed as a positive not a negative.
Investors are desperate for yield and BOE are likely going to be one the first major central banks to raise rates
I’m long-term bullish for the GBP in comparison with everything barring the USD. Commodity currencies AUD and CAD might make bigger % moves and offer a little more drama but the GBP economy is inherently more resilient and will remain more consistent.
I don’t see inflation as the UK’s major risk and it follows I don’t think our interest rates will rise then stay particularly high.
Lol - my opinion is useless - in fx the central bank’s opinion is king (well it’s the opinion that the market looks at).
Productivity increase usually leads to price stabilization simply because it absorbs wages increases - the trick is to get both.
On UK inflation the BOE reckon over 4% before 10 weeks time - double their target. As always that’s priced in but what after that, does it come down to the 2% with a stated ( by the PM) Govt policy of higher wages - ‘Industry must step up to the mark’ was a comment by one of his ministers late last week - i.e. pay the wages and you will get the workers.
My experience is that it’s not so simple - if the skill set is not there then pointless paying more - and paying more without increased productivity leads to…inflation.
(most business’ single biggest cost is payroll - increase that cost can be offset by better productivity leading to better profit or alternatively increasing price)
UK is also facing extra hurdles now that it is out of EU - e.g. German imports down by 11% 1st 6 months this year - nothing to do with politics, it’s just easier to source goods with no customs delays - time is money.
Not that I live in the UK or understand it’s politics. But I’ve read quite a fair share of news articles with this message from the current govt. This isn’t very encouraging tbh. It implies that markets were inefficient till date. And for them to be inefficient there’d have to be some kind of mono/oligopoly or govt subsidy.
If all these impacted industries were in a fair and efficient market earlier then how are they supposed to raise prices? Atleast not without passing these costs to customers, lowered wages or, as already pointed out, increased productivity.
It’s actually a strange message tbh and driven by one mam - the current PM
Back during Brexit negotiations that same an commented " man expletive beginning with F business" - now many in business see this new policy as that phrase in action. Some company leaders who have been his supporters have publicly challenged this thinking:
In business this past over 41 years one thing I have learned - to think ahead - act as much as possible rather than react - then there is a greater chance that the business is ‘lucky’.
This is different from ‘worrying’ what is up ahead - politicians are not to be trusted so their words and intentions can be misleading - e.g. Lord Frost in a speech yesterday in Portugal claimed that the NI Protocol is ‘not working for NI’ yet NI’s largest export country is ROI and exports to that country are up by 77% in past 6 months using the protocol.
So yes I listen to what they have to say and do and then figure what they are likely to say and do and then judge accordingly.
e.g. will they permit a big row with EU before COP in Glasgow next month, would they countenance such a row taking centre stage - or will they wait - is Cummings right today when he says they agreed the protocol knowing they would def ditch it - I have to guess and hope to be lucky
Around 100 pips thus far all of which since Wed past - what happened Wed?
That’s what happened - the EU put forward their proposals on NI protocol and yesterday UK Govt ‘sources’ commented that they were pleasantly surprised and that talks beginning today would continue into Nov.
So no threat of tariffs or quotas UK/EU this side of COP - that’s politicians
Happens often if DE news good then Euro and Dax positive - but often in European afternoon the US influence can turn things around as has happened today - both Euro and Dax back to where they started.
Perfectly true observation - this the main reason why I stopped trading the FTSE100 - its actually two indices, its the LSE index in the morning, then a sector of the NYSE in the afternoon.
