Your weekly economic update from the team at FXD Capital
The European Central Bank pledged commitment to further monetary stimulus, intending to shepherd inflation “durably” towards its new framework of a pegged 2% target. However, the new strategy leads to the possibility of inflation running hot and exceeding the target while the body monitors ongoing conditions. So, inflation in the eurozone – sounds like a mirage, right?
For several months now, it has seemed like the eurozone is sitting comfortably under shelter while the UK and US face the elements of escalating inflation. Indeed, with consumer prices rising 1.9% in June and ECB inflation predictions coming in at a miserly 1.5% for 2022 and 2023 – the question is more so whether more stimulus arrives before the discussion turns to cutbacks?
ECB president Christine Lagarde stressed the importance of consensus between ECB members, a situation that did not materialise in this month’s pledge. The eurozone is notorious for being a different maelstrom of economies running hot and cold simultaneously, forever placing the ECB as a mediator looking for policy compromise, over leading from the front foot.
As vaccine rates start to catch up in Europe, economies open, and the southern part of the continent welcomes a relatively “normal” tourism season; it will be intriguing to see where prices stand come September. Already discussions point towards the Delta variant further kicking the can down the road of normalcy resuming, so it’s reasonable to think that inflation will now taper off as summer winds down.
The continual persistence of coronavirus mutant variants resulted in stocks taking a hit this week. As a result, European bourses saw their worst session of the year on Monday. With fear trumping inflation, commodities also took a bath and investors headed for the relative safety of US Treasuries.
Incidentally, the 10-year note is at its lowest rate in six months. It seems not that long ago that everyone was predicting runaway inflation? USD is also at its highest level (on an indexed basis) since April in anticipation of rate hikes coming sooner; as in, investors are loading up to pre-empt a carry trade. The spectre of rate hikes in the US hangs over emerging market nations; higher rates and a stronger dollar could start a domino effect of emerging market defaults.
Vaccines were seen as the golden panacea last year, and while they indeed are working (scientifically), the short term euphoria brought to financial markets is ebbing away. As some may remember, the world’s economy was on shaky ground at the end of 2019, and those fundamentals remain, despite 2020’s unique detour.
Oil prices plunged 7% on Monday after OPEC released the shackles on supply and agreed to add another 400,000 barrels into circulation between August and December. In addition, oil inventories are rising in the States, which may be another one of those foreboding signs of overheating. Finally, oil was another big story as part of the reflation trade, which has quickly dissipated over the past couple of months.
Retail sales rose 0.5% (+0.1% on consensus) between May and June, bolstered by Euro 2020’s effect on food and drink demand. The news also corresponds with increased consumer confidence figures, which all fits in with the exuberant view of pent up demand being unshackled.
June was the busiest month ever for Britain’s property market, with buyers racing to complete purchases before the full stamp duty holiday ended. As a result, sales were up 219% on June 2020’s figures and returned a 10% increase in valuations.
I am still waiting to hear a coherent argument for the broader benefit of stamp duty holidays on an economy. Aside from a benevolent tax cut, I struggle to see how such moves help increase the velocity of money and stimulate recurring business transactions.
New claims for unemployment benefits rose unexpectedly last week from record lows. Despite labour markets appearing buoyant and it described as a job-seekers market, jobless claims rose 51,000 to 419,000, despite predictions of a drop to 350,000. Data shows increases within the gig/self-employed economy, which may corroborate the claims that the surge in job numbers recently has been from the service sector flexing up back to full capacity, while underneath it, nothing else has changed.
Bank operating costs rose 10% YoY in Q2, a dramatic situation considering the anticipated savings from less travel and entertainment. The rise was due to investment in technology and talent, two words which are very much the ongoing war in finance right now. It also represents a more attack-minded approach from an industry that licked its wounds after the last recession.
With banks continually under pressure from compressed interest rate margins, the necessity of pivoting towards advisory or “economy-agnostic” fee structures becomes greater. Investment in technology and talent is an arms race to unlock such opportunities, and in the UK, in particular, the retail overtures from Goldman Sachs and JPMorgan must sound ominous for the incumbents.
All the best for the week ahead
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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