11 March 2021: Sunak may need an Autumn budget

Sunak may need an Autumn budget

11th March: Highlights

  • Market still believes in the Pandemic boost
  • GDP predictions continue to rise along with inflation fears
  • Is the ECB relying on the Fed

Furlough payment become employment schemes

The dust has definitely settled on the Budget, but economic reality remains.

Concern that there is a significant crisis looming in the employment market is driving fears that the Chancellor may need to return to the House of Commons in the Autumn with another round of stimulus plans.

The length and breadth of the Pandemic that has reached into every nook and cranny of the U.K. economy has meant that the nature of the social recovery is likely to leave any economic recovery in its wake.

Chris Whitty’s comments earlier in the week that there will be another surge in infections as the economy reopens meant that alarm bells sounded again.

If you listen to the small print, what he said was fairly obvious.

22.8 million vaccinations have been delivered and most of those have been given to vulnerable people. However, that does not mean that infections will be brought under total control and there will still be infections, admissions to hospital and unfortunately deaths.

There is a middle ground between total lockdown and complete freedom which will need a degree of caution to be exercised as we go through the process of ending lockdown.

To a certain extent, the month or so before the review of reopening schools will commence is likely to be critical. Every step of this entire reaction to the Pandemic, good or bad, has been a leap into the unknown.

Of course, having an effective vaccine has driven social optimism, but the reality of the pending unemployment crisis won’t be felt until a measure of what the new normal means for industry manufacturing and services becomes clear.

As already mentioned, the dust has settled on the budget, but it will remain a suck it and see proposal. As with commerce, it is impossible to say what the outcome of the additional spending will be.

It is interesting to note that MPC members who are officials of the Bank of England appear more confident than independent members.

The next MPC meeting is on March 18th. The minutes could make very interesting reading.

Yesterday, the pound rose versus the dollar as the greenback corrected further.

It reached a high of 1.3934, closing at 1.3911. As with all G7 currencies, the dollar is holding the reins for now.

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The sheer size of the stimulus package that has recently passed through Congress may have taken economists and commentators by surprise.

The bandying around of numbers like $1.9 trillion, $1,400 for every qualifying household and a continued unemployment bonus of $300 a week have become commonplace.

To use a British sporting analogy, the first one-million-pound footballer was relatively quickly eclipsed by the first two-million-pound footballer (until the Pandemic), and now fifty-million-pound footballers are two a penny.

$1.9 trillion is a massive figure and yet the effect of the mainlining that amount straight into the economy’s bloodstream appears to have taken the market by surprise.

Although inflation data issued yesterday was lower than expectations, the pace with which that can turn around may be faster than could be imagined.

The more volatile measure of CPI which includes food and fuel fell from 1.4% to 1.3% year on year last month.

As already mentioned, who knows what the effect of continued stimulus could be. This scenario has never been seen before and the inflationary effect of giving the public a handful of cash and telling them to go out and spend it could be incendiary for the economy.

This is without doubt the biggest experiment in economics imaginable.

Books will be written about what the Fed did when the Pandemic hit and how it contributed to the economy, however it turns out.

It is a possibility that Jerome Powell will be the third leg of a triumvirate including Bernanke and Greenspan or it could end with Congress questioning how that could have confirmed the appointment of a lawyer into a role that clearly demanded an economist’s skills.

For now, the dollar is in a corrective phase. The index fell to a low of 91.79 yesterday, closing at 91.86

U.S. inflation concerns to push the dollar higher?

The ECB meeting that continues later today could go in several different directions. The most likely, since it is the most common, would be for Christine Lagarde to simply say that the economy is performing roughly in line with expectations, there is room for the PEPP to be expanded if deemed necessary and the fall in the currency will provide a welcome boost to exports.

She may go on to say that so far, inflation expectations are under control, and there is no immediate need for any action.

So, for the President of the ECB, a waiting game will remain official policy.

She will be guarded about the appointment of Mario Draghi as Italian Prime Minister and will try to find common ground between the haves and the have nots.

The subjects she will avoid are around rising borrowing costs which will make financing bank’s bad debt portfolios that much more difficult, the genuinely inflationary effect of a continuing weak euro and the spectre of another recession.

The effect of the vaccination programme is slowly improving despite the continued conflict with the UK about contractual obligations. However, the degree of self-interest being seen with regard to the rollout means that it will remain slower than it should be.

Lagarde has got the raison d’etre for the Central bank wrong before when commenting, almost as an aside that it is not the mission of the Central Bank to close spreads between sovereign borrowers.

She is in desperate need of a rallying cry to equal Draghi’s 2012’ I will do what it takes to save the euro and, believe me, it will be enough.

While the play may be the same, the actors have changed in the past nine years and so has the market’s confidence in the ability of the performance to scale previous heights.

The euro remains in the thrall of the dollar. It craves more dollar strength but if the FOMC remains dovish on inflation at its meeting next week the rally could begin again. It reached a high of 1.1924 yesterday closing a few pips lower at 1.2920.

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.”