Johnson looking to spread then joy
Morning mid-market rates – The majors
12th May: Highlights
- Jobs, Jobs, Jobs, to follow Jabs, Jabs, Jabs according to Johnson
- Chorus of FOMC members favour waiting game on inflation
- Germany to lead the way again. This time over inflation
New Bills in Parliament to solidify entire economy
Going forward it will be business as usual for a party that has an eighty-seat majority.
Having announced measures that will almost certainly bring the lockdown to an end and downgrading the threat level from Coronavirus, Johnson faces two significant issues as he gets back to introducing measures that he promised in the Conservative manifesto more than eighteen months ago,
Making sure Brexit actually brings the social and economic benefits that were promised will be the first line of business, while quelling further calls for an independence referendum in Scotland will be the other.
With polls showing Scotland to be split almost in half concerning independence, the recent election shows quite clearly that the population want more power to be transferred from Westminster to Edinburgh but baulk at the idea of full independence.
Johnson is aware of this and if he were to allow a referendum which still remains highly improbable. He would have to insist on a minimum majority in favour, say 60%, in order for the result to be acted upon.
Johnson was in a buoyant mood following the Queen’s departure, batting away criticisms from the leader of the opposition. It seems that for the next three and a half years, and possibly longer, that Johnson will have pretty much a free rein.
An important promise was to devolve decision-making power, investment, and wealth away from the South East of the country. The victory in the Hartlepool by-election shows the country’s faith now Johnson needs to fulfil the promise.
His next challenge is to secure trade deals that were central to the Brexit campaign. There have been several comments to the press from business leaders regarding the nuts and bolts of Brexit.
It is clear that most multinational companies have come to terms with supply chain issues etc. but it is the SMEs, hit by the cash flow issues created by the Pandemic that will need support, guidance and understanding from a Government that promised to remove red tape and bureaucracy from the ability of business to trade globally.
The pound continues to be well supported but appears to be struggling to make more significant inroads. Versus the dollar, it rose to a high of 1.4166 yesterday, closing at 1.4143.
The inability to make continuous fresh highs may see weak longs bail out and look to return following any correction.
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Fed official lining up to play waiting game
This is being questioned as inflation as characterised by the consumer price index ex. food and fuel rising well above the treasury’s 2% target.
Federal Reserve Governor Lael Brainard, who is favourite to replace Jerome Powell when he leaves the Chairman’s position, commented that the outlook remains bright, but the Central Bank is far from achieving its goals.
Investors are content to continue to accept low interest rates for some considerable time but the concern over last week’s employment data has spooked many.
Brainard went on to say that inflation and full employment are goals that will remain the most important subjects of advance guidance. It is clear from those comments that Brainard, and probably Powell as well, believe the current level of guidance to be appropriate.
That view differs with the market which is not prepared to trust that there is a plan in place to deal with inflation. Some observers are forecasting that inflation could climb to 3.5% this year. While this is not hard to imagine, there will need to be comprehensive and transparent plans in place to deal with such an event.
Brainard also commented on the fact that the stock market could be overheating. She said it would be illogical to end the support that is in place for the wider economy because the market is rising.
What she fails to see from that comet is the damage that will be done to worker’s pensions should valuations become so overstretched that a major correction takes place.
Brainard’s FOMC colleague Mary Daly from San Francisco said that she sees bottlenecks forming in supply and the labour market that contribute to both the rise in inflation and last week’s employment report. She expects both to be alleviated as the economy fully reopens.
The dollar index continued to react to both a loss of risk appetite and concerns that the April NFP won’t be a one off.
It fell to a low of 89.98, closing at 90.17.
Recovery to be two paced in every way
Confidence data continues to show that all areas of the economy expect the country to bounce back.
However, this means jettisoning reference to the EU Commission over several areas where support for other members is vitally important. It may only be a matter of time before Germany is able to impress its own terms upon the rest of the members of the Eurozone and becomes the benign dictator many feared a corporation became closer.
Yesterday the ZEW institute released its study of the German economy. It showed that economic sentiment rose by substantially more than analysts had expected, while the current expectation also improved, although it is coming from a very low base.
Interestingly, sentiment for the rest of the EU also grew. This is Germans being asked about the rest of the Union, so they clearly believe that the input of German manufacturing and exports is going to drag the rest of the economy along in its wake.
Sometimes controversial Dutch Central Bank Head Klaas Knot spoke yesterday of his belief that the growth of pent-up demand will drive the economy to new highs once the vaccination programme reaches critical mass. The economy continues to suffer in real terms despite confidence rising with Q2 to see only marginal growth after a further contraction in Q1.
Knot believes that downside risks will gradually fade as the economy opens up and the ground on which the recovery is built is becoming firmer.
Such a level of bullishness from the Central Bank of one of the richer nations of the Union fails to scratch the surface of the issues being faced in the south and the level of debt being built up by several other members.
The euro continues to ride the wave of dollar weakness. Yesterday it rallied to a high of 1.2181 falling back to close at 1.2148. Of the major currencies it appears that the euro could see the most significant correction as and when the dollar turns around.
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.”