Economy growing but Covid lurking
19th July: Highlights
- Pingdemic adds to economic confusion
- Will the Fed be forced to act by circumstances
- ECB wants to move away from global economic epicentre tag
500k pings in a week drives concern over workers
In a move that was perhaps symbolic of the Government’s recent handling of the crisis, the Health Secretary has been forced to self-isolate having been pinged by the test and trace app, which left the Prime Minister and Chancellor in something of a dilemma over where they needed to also self-isolate.
Their first instinct was that they didn’t need to remove themselves from public life, only to perform a 180 a couple of hours later.
While it appears somewhat farcical for the UK to be lowering its guard just as the number of infections reached its highest level for close to six months, this is a more complicated issue than it appears on the surface.
The question that is central to the argument is, if not now, when? The simplest answer would seem to be a week of two into the school summer holidays, but how much difference would that make? The biggest increase in infections has been in the 20–30-year age range.
This cohort has largely not been vaccinated, and it is clear that given the low level of fatalities despite the rising level of hospitalizations, the NHS is unlikely to be overwhelmed as it was last winter.
The lurking concern is that the level of infections will continue to rise, and caution will mean that irrespective of having been double jabbed, thousands of workers will be forced to self-isolate.
As far as the Government is concerned, that means very little change and is a risk worth taking. It also means that fiscal support can continue to be withdrawn which will, hopefully, balance the number of people who remain off work whether self-isolating or still furloughed.
The economy continues to perform adequately despite the confusion brought about by the rules over precautions.
Bank of England Governor Andrew Bailey, already under pressure as inflation climbs towards 2.5% will face further questions this week about his plans should inflation not prove to be as transitory as he expects. Given that Central Banks generally have confessed that they are in reactive mode, the question remains, what will make them react, since, for now they appear to be sidelined.
The pound remains well supported around the .38 level versus the dollar but runs into selling pressure above 1.39. Last week, it traded between 1.3909 and 1.3760 versus the dollar. Against the euro. It remains well-supported. It reached a high of 1.1759, but fell back to close at 1.1660
Powell to be forced into action by inflation growth
Employment remains a little patchy despite the latest data while inflation appears, to the naked eye, to be far from controlled. Since the Fed is remaining reactionary, Jerome Powell is likely to continue to be asked, when will the ration begin?
Powell continues to believe that the level of inflation, while remaining elevated for a few months, is likely to begin to subside naturally. Remaining elevated is yet another imponderable which makes the market both lose confidence and question just what action the Central bank is prepared to take.
Following the latest release of inflation data, there were the first signs that a few members of the FOMC are not singing from the same hymn book.
Some say that conditions are right to begin to pater monetary support immediately, while others continue to believe that at the end of the year will be the perfect time.
Powell remains concerned that the Coronavirus Pandemic is not yet over, and he is worried about the continuing discovery of variants. With both the UK and mainland Europe seeing cases increasing exponentially, he sees no reason that the U, S won’t also be affected.
President Biden is facing his first test that didn’t exist before he took over. Inflation is rampant, there is little better way to describe it.
He faces rising public concern, a limited ability to resolve the issue, particularly since the Fed Chairman and Treasury Secretary appear to be unconcerned, and were he to intervene in any way, most likely verbally, he will probably be wrong.
It is an uncomfortable position for a new(ish) President to find himself in, and he will in all probability be forced to simply trust Janet Yellen and Jerome Powell.
Weekly jobless claims came in exactly as expected last week, although the previous week’s claims were adjusted a little higher. It appears that the economy is beginning to cool just a little, as manufacturing indexes were mixed. The Philly Fed index was a lot lower than expected, while the New York Fed’s Empire State Index was well above the market’s average view.
The dollar index looks like it is gearing up to make a concerted effort to break and hold above 92.80., It has tried and failed to break that level a few times but each time, it makes a slightly higher low.
Last week, it reached a high of 92.82, closing at 92.71.
Eurozone in need of a single economy to survive
That is how many market participants are labelling this week’s meeting of the Central Bank’s Governing Council.
There have been several theories put forward by analysts about wheat is going to be announced by Christine Lagarde since she announced last week that there will be a major change in monetary policy, implemented following the end of the current round of asset purchase.
That is likely to take place next March.
Whatever is announced will have to be implemented in some format almost straight away, since next March will come within the range of the next stage of advance guidance.
It is odd to think that despite several of the heavy hitters on the Governing Council being extreme hawks when it comes to inflation policy that it has taken until now for the Central Bank to actually implement a hard and fast policy.
Maybe the hawks didn’t see inflation on the horizon before it decided to make an appearance.
The use of the term symmetrical, to describe inflation policy, will concern Jens Weidmann of the Bundesbank in particular. He grudgingly accepts that there must be a degree of inflation within the economy. He accepts it but that doesn’t mean he has to like it!
Symmetrical, in this instance, means that the ECB will be obliged to act when inflation is unusually low as it has been recently, particularly when official interest rates are also close to zero.
Clearly, they will also have to act when it is unusually high. It seems the bank has dispensation for the time being, as they too are being reactive.
The ECB has had a problem with credibility over the years, due in no small regard to the fact that the members of the Council have widely differing views. It seems that despite signing off the wording of the communiqué issues following the strategy meeting, there is a significant level of disagreement between the hawks and doves regarding implementation.
For that reason, it is hard to predict a path for the euro. Having said that, the Fed still appears to be the most likely Central Bank to begin tapering, for that reason a lower euro through H2 is considered more likely.
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.”