09 April 2021: Calls for support to be extended

Calls for support to be extended

9th April: Highlights

  • Now, the UK economy turns patchy
  • Powell hits the dollar hard
  • Pace of vaccinations worries Lagarde

Sunak to face calls for support from SMEs

Concerns are being raised that the amount of support that will be available to small and medium sized businesses once the country begins to return to normal will be insufficient to bridge the gap in cashflow that is likely to be seen as a chicken and egg situation develops.

Employees will expect to receive wages, suppliers will want to be paid, utilities, premises and a host of other expenses will need to be met without any cash reserves to tide over operations as sales begin again.

Access to finance through traditional means will not be easily available as banks make commercial decisions about the viability of businesses and expect either greater security which simply may not be available or charge rates of interest that reflect the perceived risk.

Either way, it is not going to be easy for businesses to obtain financial support to tide them over and the Chancellor is, again, going to be expected to bridge the gap.

With pressure on businesses as they reopen growing, it is likely that several sectors of the economy will suffer wholesale closures particularly in the hospitality sector.

Calls are being made for extensions to be made to guarantees and Government business loans to provide the necessary help.

The nature of the support will need to be studied as not all firms will want loans of a tenure between six and ten years as it is not capital support that is necessary but what would be traditionally seen as a short-term overdraft.

This will come as unemployment inevitably grows with a knock-on effect on tax revenue and benefit payments.

While the short-term picture for the economy is very positive, concerns about the period following the initial surge in activity. Inflation is likely to start to pick up, but the Bank of England will also be pressured to keep monetary policy loose.

The reopening of non-essential retail, hospitality and other services next week will see the beginning of the end of restrictions but how long the sense of freedom will last remains to be seen.

The pound continues to react to the path of the dollar despite overall support coming from the success of the rollout of vaccinations.

It traded in a narrow range yesterday falling to a low of 1.3718 and closing virtually unchanged at 1.3732.

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Jobless claims confound accepted logic

Jerome Powell spoke yesterday of the difference between a one-off rise in inflation that can be attributed to a particular event or economic anomaly versus a systemic rise in prices driven by a country’s economic cycle.

It is obvious that Powell and his colleagues at the FOMC believe that the rising level of inflation that is going to be seen as the economy returns to what will be normal, will be the former.

While the financial markets will understand this stance, it will make no difference where rising inflation comes from if the Central Bank is either hamstrung or does not have the tools to deal with the issue in the short to medium term.

It is perfectly reasonable for Powell to point to any significant rise in inflation as a once in a generation event given that the Fed has been struggling for many years to achieve the inflation target of 2% while promoting growth and employment.

The adage that 5% unemployment is as close to full employment as the U.S. economy is able to achieve has been debunked as the average having been below that level since the financial crisis.

Powell actually believes, according to a speech made yesterday at an IMF forum, that what is coming isn’t actually inflation. Inflation, he believes, is a constant rise in prices years after year. This is simply a product of tight supply that will dissipate as economic equilibrium returns.

Unfortunately for Mr. Powell, if it has feathers, waddles, and quacks it’s a duck, no matter what he prefers to call it.

Other members of the FOMC were also speaking yesterday in support of the Fed’s stance on monetary policy and support for the economy.

Neel Kashkari, the Minneapolis Fed President confirmed that the FOMC will remain reactive over inflation, most likely as it is extremely difficult to model the current situation, since it is without precedent.

He commented that the Fed won’t act pre-emptively to deal with rising inflation.

St. Louis Fed President James Bullard sees further blockbuster NFP data in coming months although yesterday’s jobless claims figures were again disappointing with initial claims remaining above 700k.

With the Central Bank continually feeling the need to reassure the markets, concerns are growing that the future may not be as clear cut and straightforward as it is being painted.

This is being reflected in uncertainty surrounding the dollar. The index fell again yesterday, reaching a low of 92.00 and closing at 92.06.

The failure of the support at 92.20 is a negative signal but long positions built over the past few weeks may have been flushed out now with traders prepared to be more reactive.

ECB officials continue to state the obvious

Over the past few weeks, officials at the ECB seem to have run out of pithy, supportive, or innovative things to say to support their shortcomings over the treatment of the Pandemic.

They have resorted instead to stating the obvious.

Comments like a total lockdown in France will affect the economy and it is best that the ECB remain accommodative for the next few months, have become commonplace.

This is possibly to cover the fact that there is no single voice that is able to say what actions are going to be taken to deal with yet another false dawn in the recovery from the Pandemic.

It is hard to be critical of any actions that take place since their effect will be an unknown given the rarity of the situation.

It is hard to say whether a programme of short, targeted lockdowns will be more effective than a blanket closure for an indefinite period of time.

ECB Chief Economist Philip Lane spoke yesterday of the Central Bank’s position on inflation. He echoed the words of Fed Chairman Jerome Powell in citing unique factors and said that the ECB must remain accommodative and not concentrate on dealing with a transitory issue.

Finnish representative on the ECB’s Governing Council Olli Rehn also spoke of the need for monetary policy to remain accommodative. He spoke of his view that the U.S. stimulus will spill over into the global recovery and that he sees the Eurozone recovery starting in H2 and continuing well into 2022.

It is not really about when the recovery will start but how strong it will be that will drive markets.

Christine Lagarde the ECB President also caught the stating the obvious bug yesterday, commenting that underlying price pressures are likely to increase somewhat this year.

She also believes that risks around the Eurozone economy are becoming more balanced. So far, the data that is being released doesn’t really back that prognosis.

The euro continues to benefit from a weakening dollar. Yesterday, it rose to a high of 1.1927, closing at 1.1913.

While breaking the 1.20 barrier would be tough, it is possible if the market decides that the accommodation provided by the Fed is likely to be increased and that pushes the dollar significantly lower.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”