22 December 2021: Johnson facing lockdown mutiny

Johnson facing lockdown mutiny

22nd December: Highlights

  • Rishi Rides Again
  • Omicron unlikely to disturb economy
  • Inflation close to uncontrollable

Cabinet wants more proof before agreeing lockdown

Chancellor of the Exchequer Rishi Sunak announced a package of measures yesterday that should provide relief to the hospitality sector.

Pubs, bars, and restaurants have suffered the double whammy of footfall being far lower than would be usual at this time of year due to concerns over Omicron, together with staff shortages as team members are forced to self-isolate for ten days if they come into contact with an infected person.

Meanwhile, as Plan B is initiated, the prime Minister is struggling to convince his Cabinet that a complete lockdown may become necessary. Schools, where the new variant was spreading quickly, are currently closed for the Christmas holiday, which should provide a natural firebreak. Furthermore, the cabinet needs to be convinced about the data.

Questions like; how many hospitalizations are people who haven’t been vaccinated? How many of those in ICU are considered to be serious cases? What are the projections for the NHS to become close to becoming overwhelmed, and how long is the current spike in cases expected to last?

Despite these concerns, Boris Johnson and his health minister are likely to act arbitrarily should they deem the situation close to becoming out of control.

Sunak will provide support totalling around one billion pounds to provide support to those establishments that are forced to close. They will also be able to claim back from Government the statutory sick pay they have to pay to those members of staff who are absent from work.

The level of support has already been criticized by the professional bodies, claiming it is insufficient. Around one third of establishments in the sector are estimated to be under threat of not being able to reopen should they be forced to close. The support is limited to £6k per venue plus the sick pay element.

The Minister now responsible for Brexit negotiations, Liz Truss, despite her credentials as a remainer, has started her tenure by calling upon Brussels to end the oversight of Northern Ireland being exercised by the European Court of Justice.

This is unlikely to be agreed as a single issue, given the fact that the province remains technically part of the EU.

The pound remains in a narrow range following last week’s Central Bank actions. Yesterday it traded between 1.3270 and 1.3198 and closed at the top of that range at 1.3268.

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Employment and activity will grow without support

The Federal Reserve has decided that the economy is now sufficiently self-supporting to be able to stand on its own two feet and is going to concentrate on bringing its fight to bring inflation down to a more acceptable level.

While it is clear that bottlenecks in supply of goods and raw materials are a significant factor in the rise in prices, there are signs that wages are beginning to be a concern.

Tomorrow will see the release of data of personal consumption expenditures for November, and these are expected to have risen by 4.5%, up from 4.1% in October.

Orders for durable goods, made up of big-ticket items like ships and aeroplanes, will also be published. These are expected to have risen by 1.5%, following a fall of 0.4% in October.

While this data is often volatile, it is an indicator of the long-term health of the economy.

Today will see a further release of GDP data for the third quarter. The data is typically revised following the release of an estimate or flash release, as companies profitability and turnover are now included.

It is expected that there will be no change from the initial release, which showed that the economy expanded by 2.1% in the period between July and September.

There has been a gradual increase in concerns over the rise of the Omicron variant of the Covid-19 virus, but so far it is believed that the economy will be able to deal with new infections provided they stay within current estimates.

The dollar index has settled into a range that should resin until the new year, provided there are no significant stocks.

The index traded in a narrow range yesterday, falling to a low of 96.33, it closed at 96.44 as positions continue to be squared heading into the last week of the year.

Hard to see ECB maintaining its goal

Individual Central Banks from within the Eurozone are beginning to revise upwards their projections for inflation. While they are fairly constant in their forecasts for how high inflation will reach before topping out, they differ about how long it will be before prices return close to the ECB’s target of 2%.

Fairly naturally, the Bundesbank is by far the most hawkish, believing that it will not see 2% before the end of 2024.

One of the Central Banks that would be expected to be more dovish about inflation. Portugal is surprisingly concerned about rising prices and has cautioned about complacency. It has been joined by Lithuania in this concern.

Mario Centeno the Head of the Banco de Portugal Mario Centeno appears to have taken on the voice of moderation among the less hawkish institutions. He warned recently about uncertainty around inflation, which makes planning for the withdrawal of support difficult.

With surging infection numbers across most member states, the supply bottlenecks could bring further strain access the economy.

Centeno showed himself to still be part of the group, including ECB President Lagarde, that believes that the major inflationary factors remain temporary.

While logistical factors are a contributory factor, it is energy prices that are the root cause.

While the single currency is expected to remain weak for the foreseeable future, it never pays to become too sanguine about Central Bank actions.

The longer the euro remains above support at 1.1180 versus the dollar, the more factors may come into play that create a solid base for a rise should the ECB turn even slightly more hawkish.

Yesterday, the euro traded in a very narrow range. It rose to a high of 1.1302 and closed at 1.1282.

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.”