Pandemic Guerilla

Key points

• Even if it may be a “blip” the disappointing figures for US job creation in August validates Powell’s prudence
• We take a good look at the global shortage in semi-conductors
• On Thursday the European Central Bank (ECB) will probably reduce a bit the pace of Pandemic Emergency Purchase Programme (PEPP) for the next 3 months but that’s not “tapering” Key points

In hindsight, Jay Powell is probably very happy to have been so elusive at Jackson Hole on the timeline for “tapering” after the disappointing US job numbers for August. It is not the first time this year that payroll data surprises to the downside without altering the positive underlying trend. Statistical accidents happen. It is however going to be tempting to read the job data in combination with other recent prints – such as the decline in consumer confidence – to make the case for a confirmed slowdown in the US economy.
While this data configuration makes it likely the Fed will remain non-committal on “tapering” at the September meeting, the key question is whether there is enough to derail the expected trajectory of a reduction in purchases at the end of this year. We think the bar for this is high. Instead of strong and stable growth which could be envisaged in a full return to a “Covid-free” world, what we may have to deal with is a form of “pandemic guerrilla”, putting up with flare-ups now and then, denting consumption and causing disruptions in the global value chain, but still consistent with decent economic growth in the absence of lockdowns (the “open warfare”). Enough to warrant maintaining accommodative monetary conditions for long, but not enough to justify the continuation of unconventional policies.
The global shortage of semi-conductors is one of the key sources of “disruption”. We look at this in some detail this week. Even before the pandemic any issue on global manufacturing supply was routinely solved by creating more capacity in China. Still, even in the face of grave global supply issues, it is doubtful Washington DC will allow Beijing to seriously threaten the current configuration of such a key industrial resource, which up to now has been firmly in the hands of the US and two of its closest allies, South Korea and Taiwan.   
To a lesser extent than in the US Euro area inflation is now rising fast, reflecting in particular these global disruptions. This is playing into the hands of the ECB hawks and is raising questions on an ECB tapering. While this week we expect the central bank to announce a small reduction in the pace of PEPP for the next three months, this would not qualify as “tapering” proper since it would not tell us anything about the final “landing zone” for the quantitative programmes. For this, we continue to think we’ll have to wait until December.