Bailey sees light at the end of tunnel
12th March: Highlights
- Brexit still a major concern
- Stimulus a major boost to U.S. and global economies
- Lagarde, no Draghi, but next best ECB President
Independent MPC members likely to show their teeth
Bailey supports the steps taken by the Chancellor recently but acknowledges that inflation may be a consideration going forward. The initial rise in the rate of inflation may be technical as the collapse of fuel prices a year ago falls off the annual calculation.
Such an event won’t spur any action from the Bank which has, so far nor been as keen to discuss the inflationary effect of stimulus measures as either the Fed or ECB.
The Chancellor continues to face questions over the new measures he has put in place. He commented yesterday that the recovery will be investment driven and consumer led actions such as last year’s eat out to help out scheme will not be necessary.
There remains speculation that further measures will be needed in the Autumn to stimulate the employment market, but for now, Sunak is prepared to allow the economy to find its own level and be reactive to what is deemed necessary as the country returns to what will be the new normal.
Investment is going to be encouraged by the plans to pay companies £130 for every £100 they invest in plant and machinery in an attempt to redress underinvestment that has been blighted in recent years by uncertainty over Brexit. That investment will, of course, be tempered by the rise in Corporation Tax that will kick in in a couple of years.
For the next week or so, the market is going to be dominated by actions of the U.S. administration, and the Federal Reserve. Yesterday, the pound rallied in quiet trade reaching a high of 1.3995, cloning at 1.3992.
Although sentiment rising across entire economy
Analysts believe that the $1.9 trillion package of measures that amounts to an injection of cash direct to the heart of the country will see growth climb at a rate that is almost unsurpassed.
As has been said several times, the unprecedented measures that have been taken across the globe amount to a wide-ranging experiment. While economists can speculate about what the global economy will look like in three of five years, the proof will be in the pudding.
Treasury Secretary Janet Yellen said yesterday that the $1,400 stimulus cheques will start to arrive in households by this weekend and as a few States begin to lift lockdown, the spending spree can begin.
There are concerns among White House officials that a few States with Texas among them have lifted restrictions entirely. That situation will be closely monitored with any measures to combat any rise in infections taken at the Federal level.
The most significant danger to the pace of the recovery remains employment. Even though recent data has been more than encouraging, several bank analysts believe that there may be one final shock before the recovery can be considered solid.
Yesterday’s weekly jobless claims data saw another fall. Initial claims fell to 712K from a marginally upwardly revised 754K. Continuing claims remain over 4000k but provided the March NFP is as positive as February’s the economy looks set fair.
The dollar index corrected lower yesterday. It reached a low of 91.36, closing at 91.41.
Double dip an open secret
Monetary Policy was left unchanged while Lagarde said the Bank believes that risks are now more balanced. It is presumed that that comment was a tip of the hat to higher inflation.
She went on to say that incoming data is pointing to a contraction in GDP in the first quarter. That will have surprised no one although Central Bankers are not prone to acknowledging the likelihood of a recession preferring to let the data do the talking while talking of recovery.
Very little was expected from the ECB and Lagarde can at least say she attained that goal.
No one could have imagined the baptism of fire that Lagarde would receive when she took over the Presidency in November 2019. She has been ill-equipped to deal with what has unfolded. That having been said it is doubtful a technocrat such as Mario Draghi would have fared much better.
Her role was to be a more statesmanlike figure bringing the Central Bank and EU Commission closer as a prelude to a closer, more Federal Union.
The pandemic has delivered a significant, possibly fatal blow to that desire. By the time the EU is in a position to reconsider such an objective several major supporters may be little more than memories.
Lagarde barely mentioned the euro in her remarks other than to use the hackneyed expression that the Bank will continue to monitor exchange rates.
The euro rallied versus a correcting dollar yesterday. It rose to a high of 1.1990, closing at that level. As far as the currency is concerned, its effect on the economy is likely to be detrimental no matter what happens. A fall means higher inflation, a rise hits exports, while volatility makes planning impossible.
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.”