23 June 2021: Output continues to rebound

Output continues to rebound

23rd June: Highlights

  • Sunak struggling to rein in Johnson
  • FOMC closes ranks
  • Consumer Confidence continues to rise

New BoE Economist warned of Brexit harms

The UK economy continues to rebound as more young people receive the Covid-19 Vaccination. The delay in the full reopening has had very little effect on the economy, while the race between the Delta variant and the number of vaccinations, is being won by the jab.

British factories are now seeing their strongest growth in forty years, but shortages of key parts and materials are likely to see price increases that push inflation close to 4%.

Another impressive statistic from a CBI survey published recently is that the growth in output appears to be spread across all areas of manufacturing and industry.

Of course, this needs to be considered in light of the fact that manufacturing now only makes up around 20% of total economic activity.

Services output which makes up the other 80% remains solid if not spectacular as the UK continues to see the effect of Brexit. It is impossible to comment with any degree of certainty on what the economy would look like today had it not been dragged to such a low point by the virus, only to be given vital life-support by the development of the vaccines.

As the entire global economy continues to come out of lockdown, Prime Minister Boris Johnson is expecting the UK to be at the forefront of innovation and scientific advances.

Johnson and his Chancellor Rishi Sunak face a series of conversations, as Johnson wishes to continue to invest in infrastructure and Sunak wishes to apply the brakes now that the outlook is improving.

The acid test for the continued improvement in the outlook will be the removal of the Government’s furlough scheme.

As we enter the third quarter of the year, there is likely to be a reality check as businesses that have been able to survive, even if that is in name only given, áthey are being supported by the Government, are forced to either support themselves or fold.

It is hard to understand that despite this degree of potential negativity, the employment market remains strong with businesses reporting difficulty in hiring.

Tomorrow’s Bank of England Monetary Policy Committee meeting will see the departure of Chief Economist Andrew Haldane and the introduction of his replacement.

Catherine Mann is an experienced City veteran. She has been cautious over the effect of both Brexit and the Government’s austerity policy in the recent past, which means she will probably be a more feet on the ground voice than Haldane who was more prone to hyperbole.

The outcome of tomorrow’s meeting is unlikely to be earth-shattering as the Governor may mention conversations about the beginning of tapering but given the possible hurdles for the economy that will begin next month, the beginning of the end for bond purchases is still some months away.

The pound climbed to a high of 1.3963 versus the dollar yesterday, but the upside still appears to be contained by major resistance at 1.4000.

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Powell’s cautious testimony leaves Greenback in the lurch

Fed. Chairman Jerome Powell, in testimony to a Senate Finance Subcommittee yesterday, acknowledged that the economy is rebounding well from the Pandemic as he steers a course between the nascent recovery and rising inflation.

He went on to say that he doesn’t believe that the virus has been defeated, and it still poses a risk to the recovery.

Powell believes that the widespread availability of the vaccine and more importantly high take-up levels, together with the injection of trillions of dollars in stimulus, have had the positive effect the Central Bank was expecting.

The Labour market has bounced back well from the depths it reached in the Spring of 2020, but there are still mixed messages with some fragility in the data while other sectors appear to be facing a shortage of workers.

It is something of a surprise to the FOMC that the data is not where they expected it to be.

Jobless claims continue to fall, but new jobs as reported by non-farm payrolls still have the ability to provide a negative shock.

Lower wage earners have been disproportionately affected by the economic downturn and are still to some degree dependent upon the support that has been provided.

Powell continues to believe that the rise in inflation, with CPI ex-food and autos reaching 3.8% last month, is transitory with no systemic reason for the increase.

The FOMC has clearly been surprised by the pace at which inflation has risen, but they expect it to fall back just as rapidly as bottlenecks in supply chains even out, and the gap between supply and demand shrinks.

The dollar index appears to have entered another consolidation phase, albeit at a higher level. Yesterday, it fell to a low of 91.64 and closed at 91.71.

Pace of recovery and different stimulus drive caution

The outcome of the meeting held at the weekend, at which members of the ECB Governing Council discussed strategy going forward as the economy emerges from the Pandemic, has not as yet been released.

However, ECB President Christine Lagarde has hinted that the Central Bank sees itself as being different from the Fed, facing different challenges and a different set of goals.

From that it is possible to decode that she sees that demands made by individual members of the Eurozone are both impossible to achieve and that it would be healthier for the long-term future of the region if the goals were slimmed down and became more common to all.

The half-way house that the Eurozone has existed under for more than twenty years has been both a cause of and a factor in the inability of the economy to reach potential.

Any improvement has been punctuated by major economic incidents, but at the heart of the issue is the lack of a consolidated fiscal Union to work hand in hand with the Monetary Union.

Until there is consistency across taxation and budgeting for the entire Union, the entire project will be two-paced.

While Lagarde has said clearly that the ECB cannot work as the Fed does, the issue remains that in the U.S. contributions to the Federal budget are more evenly spread while many decisions are taken at a local level, which has less to do with trust and more to do with practicality. No State will ask if we send this mush to Washington, what do we get in return.

There is a clear system in the Eurozone where individual nations are expected to play ball in order to be able to survive within the tight monetary conditions that exist, imposed by Brussels, but driven by Berlin.

The recovery will be completed in the region, probably by the end of 2022 feeling remains that the structural issues will exist far longer.

The euro is now pretty much driven by the dollar’s gyrations. Yesterday, it again mirrored the Greenback’s direction, rising to 1.1952 and closing at 1.1940.

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.”