UK allows further reopening
18th May: Highlights
- Variant strikes fear over full reopening
- Powell’s Deputy concerned that progress not as solid as hoped
- Higher inflation lower growth equals disaster
But concerns remain over June concessions
The Indian variant is beginning to ring alarm bells for the full reopening of the economy next month.
The degree of uncertainty that the spread is bringing is casting a long shadow over the pace of growth.
A further lockdown, while unlikely, would spell disaster for the hospitality and leisure industries.
The reopening that took place in April showed that measures at that level are manageable but cannot provide sufficient cash flow for several businesses to survive let alone flourish.
The long-term prospects for the economy remain condensed into a very short and dangerous period.
Apart from the fears over Coronavirus, the country faces two major economic releases this week.
Later this morning the employment report will be released. This is not expected to bring a dramatic result but may be mildly positive for the pound.
The recent reopening’s will have seen further staff find jobs but given the length of the lockdown such roles are no longer sought after and are beginning to compete with the gig economy where the pay is a little better and the security little different.
On Wednesday, inflation data will be released. It is likely that YoY CPI will rise to around 1.4%. While this in itself will not raise concerns within the Bank of England, it will be, as usual, the trend that raises the alarm.
Overall, the economy is in a good place, but worries remain about several issues that may grow as summer becomes Autumn.
For now, the pound holds on to recent gains.
Yesterday, it rose to 1.4147, closing at 1.4144.
Was there even a single vote to tighten?
The two schools of thought each see a totally different path for the economy.
There is now evidence of rising inflation that cannot be disputed. The YoY data released last week has raised pressure on the Fed to at least begin to act.
That action can be almost as benign as providing some kind of advance guidance. It is simply insufficient to say that rate rises will follow tapering of the bond purchases when purchases remain at historically high levels.
The concern of the global marketplace is that the Treasury is relying too heavily on the Country’s pre-eminence as the global store of value.
If that source of funding were to suddenly become even more expensive, the effect on not just the recovery but the prospects for the economy longer term would fall considerably.
If inflation continues to surprise to the upside, the Fed is going to be in an almost impossible position.
A memorable quote from Fed Official Lael Brainard last week illustrated the dilemma perfectly.
Her question was simply why would the Fed raise rates to essentially cool the stock market at the expense of the man in the street?
Jerome Powell is going to be left with a tough decision, but at least we can be sure that he will make it for the right reasons and explain the process.
The minutes of the latest FOMC meeting will be released tomorrow evening. It would be extraordinary and just about destroy the Fed’s credibility if there had been serious talk about either tapering bond purchases or the timing of any rate hike.
The Fed is committed to continued support as the members of the FOMC are convinced that there will be bumps in the road. Inflation will be transitory and work to make the recovery wholly sustainable is far from complete.
The market faces a quandary over the direction of the dollar.
The latest rhetoric means the dollar should remain weak but there are those who see a hike in rates as inevitable and this is providing a degree of support.
Yesterday the index reached a low of 90.
Radical changes needed over three to five years
A bit like Boris Johnson vowing that every new Covid action will be irreversible, the same is true of the EU Commission and its ability to step back and decide as a group what it wants to be, will be an almost impossible decision.
With Italy strongly European but unable to find a way to work within the Union, Sweden lamenting Brexit and the French on the verge of electing a Eurosceptic President, just keeping a Union of any sort together may prove impossible.
For now, the spectre of rising inflation, rising debt, and falling growth is a major issue.
Over the past decade or so, the EU has become a test case for several economic theories. The most radical of these was supposed to be QE but that has become a standard tool for every Central bank.
|The ECB is under pressure to forgive Government Bonds it has purchased. Let’s see if that can happen and what the outcome would be.
Could it lead to a central treasury? The downside for many countries would be the limits placed upon their debt to GDP, but it may be a solution.
It is clear that the European economy needs major surgery, but can that be performed and leave the patient still alive?
Only time can tell.
Yesterday, the euro reached a high of 1.2168, closing at 1.2158.
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.”