1 February 2021: Supply chains drive vaccine push

Supply chains drive vaccine push

1st February: Highlights

  • Negative rates now an unlikely addition to BoE’s weaponry
  • Employment data to illustrate urgency of further stimulus
  • EU unravelling over vaccine errors

Johnson wins first post Brexit skirmish

This week’s Bank of England Monetary Policy Committee meeting is unlikely to feature a rate cut into negative territory.

Such a radical move is not warranted currently since it could easily blow up in the face of the bank and exacerbate the economic recovery from the pandemic.

The UK’s post-Brexit trading position is gradually improving although a deal with the U.S. will probably take as long as several market professionals had warned.

There was news over the weekend that the UK is applying to join the Trans-Pacific trade group, consisting of 11 nations including Japan, Australia, Canada, and New Zealand. This would cement relations with several countries in the region although the UK already has trade deals with 7 of the members.

Having accepted the EU’s withdrawal of its threats over vaccine production and delivery, the UK is pressing ahead with its target of inoculating all at risk groups by the middle of this month.

The fact that the vaccination programme is proceeding at pace with close to ten million jabs being administered is likely to influence the actions of the Bank of England which has shown a preparedness and ability to act intra-meeting were that to become necessary.

While it remains likely that the UK economy will descend into recession this quarter, there is a growing optimism that the rebound will be strong.

It is ironic that the lockdown has given business time to learn on the job the pitfalls of the Brexit transition. This should also add to the boost to the economy that will bring more positivity.

The cloud on the horizon is unemployment which continues to rise towards its expected peak between 7.5% and 8%. Data released last week showed that unemployment in the UK rose to 5% although the claimant count fell significantly from a 38.1k in November, a figure that was revised lower from 64.3k, to 7k in December.

The real tests for business will come when the current lockdown restrictions are eased, and Government support begins to be withdrawn. That will hasten the point when the viability of businesses going forward will be truly tested.

Last week, the pound remained in a mild upwards channel against the dollar that has existed since the start of the year. It reached a high of 1.3758, closing at 1.3698.

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Employment data to be the week’s highlight

The Fed is likely to keep interest rates at current low levels until it is certain that the recovery is sustained. Its current level of support when added to the fiscal stimulus being injected will see employment levels start to improve.

This week’s employment data will set the tone for the rest of the quarter, but it will be April before a sustainable recovery begins in earnest.

President Biden has made a positive start to his term in office but that has mostly been undoing the more divisive and protectionist policies of his predecessor.

There will be a hangover of concern for this administration until the Senate hears the impeachment trial of Donald Trump which is scheduled to begin later this week or early next.

Trump has gained bogeyman status as he has retreated behind the walls of his Florida estate, to apparently plot for the 2022 midterms and hold discussions with the Republican hierarchy over the 2024 race.

Biden will do his best to banish thoughts of the past four years from voter’s minds with a programme of blue-collar support and stimulus for the economy that will benefit all.

The most visible change so far has been an order that face masks are worn on all Federal property.

There is a surge beginning in vaccinations that belies the most sluggish response that came previously. Two further vaccinations, AstraZeneca and Johnson & Johnson are likely to be approved promptly. That will also boost supply significantly.

The benefits are being espoused at every turn and this more dynamic approach has led to reports of likely 5% growth for the economy in 2021.

The most stringent lockdown regulations that were enacted in several States like California, and New York among others led to 140k jobs being lost in December. This week’s data for January will, as always, be eagerly awaited but perhaps this time, with even more poignancy.

Early indications are for around 100k new jobs to have been created in January. There is no expectation yet for December’s data to be revised but that may be seen as drawing a line under the previous administration’s term.

The dollar index foundered a little last week but managed to close above support at 90.20. It reached a low of 90.05 as risk aversion improved overall but closed at 90.23.

Von der Leyen may find it difficult not to resign

The European Commission and its President Ursula von der Leyen angered just about everyone it possibly could last week with its intransigence over purchase and distribution of Coronavirus Vaccine. Brussels appeared to behave like a spoiled child that was not getting its fair share of goodies that were being handed out and lashed out almost indiscriminately.

Starting with its high-handed behaviour in insisting that it controlled the purchase and distribution of doses of the vaccine and ending with a painful climbdown over a threat to invoke a clause in the Brexit agreement to create a border between the two parts of the island of Ireland, the Commission showed itself to be ineffectual and its President unable to deal with criticism.

The ultimate insult was that the UK found itself to be able to be magnanimous and offer support once its vaccination of its four major at risk groups had been completed.

No matter the damage done to its international standing, the Commission may have widened a rift that was already growing between its own bureaucracy and EU member nations.

With various elections scheduled over the next year or so, a rise in nationalism in domestic politics could easily be the medium-term result of this costly and ultimately very damaging episode.

Commission President von der Leyen was hard at work over the weekend, trying to mend bridges with vaccine producers, while member nations waited for news of when they will be in a position to receive sufficient doses to be able to ramp up their programmes to the level being seen in the UK.

Several sectors of the economy are on the verge of collapse and it would be the ultimate irony if the UK were able to lift lockdowns sufficiently for people to travel on holiday and EU member countries were unable to receive them due to continued restrictions.

Data for manufacturing output and Eurozone-wide unemployment are expected to be released later today, together with retail sales data for Germany.

The jobless figure is expected to rise to 8.6% from 8.3% previously but given the unreliability of the data the true figure could well be above 9%.

Manufacturing output has been a, relatively, bright spark surrounded by gloomy data and is again expected to stand out rising to 55.5 from 54.7.

German retail sales are a major concern with the lockdown restrictions remaining in place. It is likely they fell by 2.5% month on month.

The euro had a mixed week last week. It rose to a high of 1,2183 and closed at 1.2134. The current range appears to have a fairly solid top around 1.2240 but is also well supported around.1.2080.

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.”