It’s a packed agenda this week. After US inflation jumped, we discuss why women are leading the rise in wage inflation. We also argue that Joe Biden should pick a woman to Chair the Fed if he wants to avoid a disaster in next year’s mid-term elections and a recession in 2023. And how Boris Johnson might save Christmas in the UK – and I’m not just talking turkeys. We’ll also examine whether the latest numbers out of China mean that growth is rebounding.
Let’s start with us inflation. It rose again and by more than expected in data released last week. The Federal Reserve’s credibility came under pressure as markets priced in the first hike in Fed funds in July next year with 2.5 hikes by end 2022. Before the data, ‘lift off’ was expected in September with less than 2 hikes. I still think the Fed should be raising rates right now and that they’ll be forced to act next spring.
Fed’s delay risks political disaster for Biden
And that brings us to my rather controversial statement that the delay by the Fed risks political disaster for President Biden and a US recession in 2023. The Fed argued earlier this year that rising inflation in the US was transitory and that the recovery in the labour market was so fragile that keeping their foot to the floor on the monetary accelerator was the right policy. That view is now clearly shown to be incorrect. Inflation is far higher than they expected and although US unemployment is still above pre-Covid levels, wage inflation has risen and vacancies are at record levels. By delaying lift off they risk having to raise interest rates rapidly in late 2022. Keeping the foot on the accelerator for too long means they may have to slam their foot on the brakes and swerve the economy into a recessionary ditch. Those signs might well be evident just before the US mid-term elections in November 2022.
A change in Chair for the Fed
Joe Biden is currently trying to decide whether to reappoint Jay Powell as Chair of the Federal Reserve or give the job to Lael Brainard. Lael is reckoned to be dovish but she is a distinguished economist who may be quicker to realise the errors of the current complacency at the Federal Reserve. Powell is a lawyer ….and just as I would not want an economist to defend me in a court of law, I don’t think a lawyer is best suited to defend the US economy.
Women’s wages stronger in the US
Meanwhile, the latest data on US wage inflation showed a glimmer of hope. Measuring wages is especially tricky at present. 20 million US workers lost their job in the pandemic last year, 15 million have found work again this year. As they tend to be low paid this distorts the averages. Regular readers will know that my favourite monthly measure of US wage inflation avoids this problem. And it’s been much stronger than the more familiar figures that come out with the employment report. The latest numbers came out on Friday and they show a small dip in the year-on-year series. The figures for women also dipped but they are much stronger.
I’m still trying to work out why, but another series shows that wages for job switchers are surging ahead. Firms are having to pay up to attract new workers and it’s only a matter of time before they have to boost the pay of existing staff. So inflation pressures will continue to build – less a glimmer of hope – more of a mirage.
Property sector a drag on Chinese economy for years
A quick word on the latest Chinese economic data. These show better-than-expected numbers for retail sales and industrial production. Car sales were especially strong, and we should see the same strength in US retail sales released this week. But the Chinese data were far from strong overall and the positive surprise reflected downbeat forecasts by economist. Data on the property sector were also released and these were weak. They will be a drag on the Chinese economy for years to come.
Boris reluctant to trigger Article 16 until new year
And why might Boris save Christmas? The UK government had been planning to trigger Article 16 to suspend the Northern Ireland protocol later this week. The EU would retaliate by threatening to tear up the free trade agreement with the UK and possibly disrupt trade in the run up to Christmas. Having capitulated to pressure from British turkey farmers and allowed temporary visas to be granted to workers from the EU, Boris seems to have also decided to leave triggering Article 16 until the new year. After all, he’s not exactly riding a wave of popularity at present.
What does all this mean for the markets?
I don’t think my forecast of a US recession in 2023 is relevant for risk assets at present so I remain bullish. The global economy continues to expand and the earnings outlook has improved. The recent lockdown restrictions announced in Europe and China do not have significant economic implications. More important are the anti-viral drugs that promise to lay the pandemic to rest as an issue for the developed world, at the macro level at any rate, next year.
No shortages for UK shelves, but a shortage of UK disposable income
And Boris’ delay on Article 16 probably won’t lead to stronger sterling …most people now realise that a big punch up between the UK and the EU is coming and the UK economy faces a difficult few months with household incomes squeezed by tax rises, benefit cuts and soaring energy bills. There’ll be turkeys and wine on the supermarket shelves this Christmas but many consumers in the UK will struggle to pay for them.
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