The Week That Will Be (10th October 2021)

1. Inflation
We get the latest inflation readings from the US and Germany on Wednesday and the big one from China on Thursday. For the latter it’s all about producer prices which have started to accelerate higher in the last two months. Anything above 10% and we are into price increases reaching two decade highs…

2. Jobs
…but this doesn’t necessarily translate into higher core CPI, nor, the real bête noire of inflation hawks, higher wages. Yes, there are record openings for jobs across the world and yes, there isn’t enough labour supply to fill them. Shutting borders hinders migration; soaring stock prices encourages early retirement; furlough schemes stall re-skilling; school closures prevent parents from working; and, unsurprisingly after such a massive psychological shock, people are reassessing what they want from life. Better to have a predictable shift as an hermetically sealed Amazon delivery driver than deal with rowdy virus-shedding publicans all night long as a bartender. It’s no wonder US payrolls growth is slowing.

This won’t be solved by offering higher wages. It will take years to find equilibrium in the labour market. Trying to pin a wage-price spiral on current dynamics is like navigating the ocean with an oven timer. You can measure something, but it won’t tell you anything useful about the economic cycle. Because we aren’t in a normal cycle. All the talk of recession and recovery is merely denial about the step-change overnight Trotskyite revolution that has taken place.

So ignore the jobs reports this week from the UK (Tuesday) and Australia (Thursday). The former is from August and still skewed by furlough while the latter reports on a period where most of the country was in lockdown.

Instead read this working paper from the ECB which reports on the consumption trends of five European countries after the first lockdown. Survey data shows that whilst fear of the virus was the main reason for reducing trips to shopping centres and hairdressers, a large minority of people stopped social consumption because “they realised they didn’t miss it”. One in five French and Germans explained this was why they didn’t go out to restaurants any more.

The reduction in the velocity of people has changed the economy permanently.

3. Germany
The ECB paper concludes with a warning for fiscal policy: that blanket support measures might prop up zombie companies and must be better targeted at “low-educated low-income households who are particularly hard hit by the crisis”.

The window of political possibility has shifted leftward due to the pandemic. Step forward the new German government which will be more economically radical than we have seen in decades, led by the SPD. This is why the FDP will struggle to join the coalition given their obsession with balanced budgets. Their secretary-general said today that they will not accept tax rises or loosening the debt brake. This demonstrates how their leader Christian Lindner won’t compromise enough to form part of the new left coalition; he was still saying last Wednesday that “the content overlaps with the [CDU/CSU] union are the largest”, as if he can use the empty threat of a CDU partnership to bargain concessions out of the SPD. Green Party co-leader Robert Habeck noted “This is not a done deal yet”, as the charade of the Lindner option must be acted out, before eventually turning to a weakened CDU as the eventual junior coalition partner.

4. The Fed
Clarida’s speech on Tuesday would usually be significant for the long-term direction of the Fed but his future hangs in the balance after becoming the third Fed member to be embroiled in conflict of interest issues. Kaplan and Rosengren are already leaving; Powell is fighting for re-election; and meanwhile Brainard is giving a speech to Oklahoma tribal leaders this week on financial inclusion.

The battle for the soul of the Fed is on. The Biden Administration is going to get a once in a lifetime opportunity to stack the board with its nominees. It’s not enough to consider the future direction of monetary policy without taking into account the politicisation of the FOMC.

The Rest of the Week Ahead…

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