Independent MPC members still favour significant shift

In spite of the high degree of confidence being delivered by the undoubted success of the Government’s vaccination programme, independent members of the Bank of England’s Monetary Policy Committee still believe that negative rates will be necessary later in the year.

There is a clear fracture between the independent members of the committee and the Bank of England’s Officials. It is widely expected that the UK will see a tsunami of demand in the first one or two quarters following the loosening of lockdown measures, but it is once the euphoria has died down that the concerns begin.

Unemployment remains a major concern. The Government’s focus during all three lockdowns has been more around support than stimulus and it is naive for Chancellor Rishi Sunak to believe that the withdrawal of restrictions will provide all the support the economy needs. The grow the economy back to health refrain sounds more and more like a Churchillian rallying cry and less like a policy statement.

Next week’s budget will probably extend the furlough for what will certainly be the last time, also provide house buyers the continued benefit of a stamp duty holiday but will then hopefully provide, not support, but stimulus to drive the economy forward.

Business rates, employment subsidies and grants for plant and machinery are at the forefront of the minds of employers’ federations like the CBI.

Retail sales collapsed in January as the lockdown really bit into the economy. It is probable that this will be a short-lived phenomenon as the air of consumer positivity grows.

The poor retail sales data, which is a rear-view mirror indicator, was surpassed by the leap in services output which is very much a leading indicator. Services PMI jumped from 39.5 in January to 49.7 in February. This provided support for Sterling which drove through the 1.40 level versus the dollar. It rose to 1.4036, closing at 1.4005.

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Biden needs to start to deliver

The time has come for President Biden to begin to put his words into action if he is not to squander the air of positivity which followed his election.

The figure of $1.9 trillion is now engraved on everyone’s minds across the entire country, whether they agree with such a huge stimulus package or not.

Now is the time to deliver if people are not to start questioning the President’s fitness and ability to do the job.

Biden made his first global address on Friday in which he declared that America is back. While it made a nice change from America first, those at home, used to a greater degree of support from a Democrat Administration, are beginning to get a little itchy.

As in the rest of the G7, whether they admit it or not, the biggest issue facing the developed world going forward is unemployment.

While the globalisation has crept in somewhat stealthily, the Pandemic has shone a light on the ability of the major economies to create jobs and a sea change may have arrived. This may not become obvious for a few years until the global economy has fully recovered.

In the short term, Biden absolutely needs to get his stimulus package not only through congress but delivered, along with a robust vaccination rollout.

The most significant takeaway from the minutes of the FOMC’s latest meeting is that the Fed remains fully supportive of the economy.

While that may have been news at the time when optimism over vaccine production was still at its height, now it is becoming more obvious that support will be needed for a longer than expected period to ensure that growth is both robust and self-supporting.

The dollar index failed to capitalize on recent optimism last week and remained in the lower quadrant of its recent range. It ended the week having challenged support at 90.20 and recovered marginally to close at 90.35.

Risk to currency strength argument faltering

Over the past few months, the dollar index has been seen as reactive to global risk appetite. This has meant that the single currency, as the largest constituent of the index has reacted in the opposite fashion. This has come to be seen as a correlation between the euro and riskier assets such as equity markets.

There has been a growing feeling recently that the dollar is beginning to react to the growing optimism over a recovery in the U.S. although that will be far from a smooth path.

This has again meant the opposite for the euro. It is beginning to become reactive to its own drivers and the level of pessimism generated by several factors, including the vaccine fiasco, poor delivery and take-up data and political upheaval in Italy to name just the headlines.

The underlying inability of either the EU Commission or the ECB to provide either sufficient support or deliver a fiscal stimulus package is beginning to eat away at confidence which was already fragile.

The fact that data is mixed is more relative to a clear two-tier recovery than any growing positivity.

A prime example is GDP data, the ECB is desperate to portray a degree of optimism that the economy will grow by a little over 5% this year but the majority of that will be in the wealthier regions while the likes of Italy, Spain and Greece cry out for a larger share of the stimulus cake,

France is likely to provide a perfect illustration of the situation across the entire region. It appears to have been the most affected by Brexit despite the aggressive and confident rhetoric of President Macron.

He is striving to show he is a strong and decisive leader despite trailing Marine le Pen in the polls. The economy is divided geographically with the wealthier north seeing the Pandemic slowly abating while the south still needs urgent support.

Macron is not prepared to go in to bat for his country as he risks upsetting Brussels’ bureaucrats who may become his colleagues sooner than he at first imagined.

The euro continues a low and uneven march south. Last week it fell to a low of 1.2023, but recovered, driven by the fall in the dollar index, to close at 1.2116, just four pips lower on the week.