24 November 2020: Business activity declines

Business activity declines

24th November: Highlights

  • Bailey sees no deal as more damaging than the Pandemic
  • Biden chooses Yellen to be Treasury Secretary
  • Decline in private sector activity worse than expected

Contraction less than analysts expectations

As Brexit talks resume again this week following a pause brought about by a Coronavirus scare, the pressure for a deal to be found appears equalised between both sides.

Andrew Bailey, the Governor of the Bank of England spoke yesterday of his concerns over no agreement being reached before the termination of the transition period on 31st December.

He believes that the chaos that has been wrought upon the entire population by the Coronavirus Pandemic could be dwarfed by the effect on business, and ultimately the economy, by no deal.

Were the country hit by both a Pandemic continuing well into the New Year and an agreement failing to be reached it could affect the country for decades. However, he went on to say that an agreement would help the country recover from the current crisis.

The adjustment of the economy to deal with trading with the EU under World Trade Organization rules would take far longer to be digested than an end to the Pandemic brought about by a successful vaccination programme.

Speaking earlier in the year, Bailey had said he believed that Covid would bring the greater impact but clarified those remarks to say he was only talking short term since the end of the Pandemic before the creation of vaccines was indeterminate.

Preliminary data, released yesterday, for manufacturing and services output showed that manufacturing, which accounts for just 20% of total output, actually rose from 53.7 to 55.2, while the far more significant services sector slipped into contraction falling from 51.4 to 45.8. While a significant drop this was better than analysts expected, given the lockdown which began in the first week of the month.

Tomorrow’s spending review will now be keenly anticipated, as will the study, also released tomorrow, by the ONS illustrating its view of the economy, and the country’s fiscal position going forward.

The pound saw a significant rally versus the dollar reaching a high of 1.3397. It was unable to sustain it and it fell back to close at 1.3321. The market’s reaction to the rally which set off several sell orders still gives the impression of a castle built on sand.

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Septuagenarian Cabinet unlikely to bring fresh ideas

President Biden’s proposed Cabinet contrasts to Donald Trump’s in so many ways it is impossible to count them all.

While Trump wanted a brash young(ish) team with radical thoughts and ideas, Biden seems intent on surrounding himself with a tried and tested team who have served before and have the experience to get the job done by negotiation and compromise rather than hectoring and threats.

Trump has now accepted that the transition to a Biden Administration must begin even though he has also vowed to continue to challenge his election defeat.

One such example is the proposal for Janet Yellen, 74, to be the Treasury Secretary.

Yellen who preceded Jerome Powell as Chair of the Federal Reserve and served as deputy chair before that was unceremoniously removed from her position at the beginning of the Trump Presidency.

Her background in Central Banking and public service will bode her well in an attempt to build a relationship with Powell who, it is expected, will remain at the Fed.

Such a formidable pairing will give the Biden administration a real opportunity to see a strong level of cooperation versus the combative relationship that developed between Powell and Mnuchin.

Markets reacted favourably to Yellen’s candidacy which will need to be confirmed by the Senate. The reaction was something of a surprise as it had been hoped that a more radical candidate may have been proposed.

It is to Biden’s credit that he appears to be gauging the pulse of the nation correctly in that a good President should be seen but not heard, surrounding himself with a solid team which he manages, rather than bullies.

Several business leaders, many of whom have supported the former President have called for Donald Trump to leave office as it is clear that his remaining in the White House serves no purpose either for himself or the Country.

The dollar index traded in a wide range yesterday, between 92.01 and 92.80 but settled down to close at 92.53 well within its recent range.

Any extension to lockdowns will see recession extend

As had been expected, the data that was released yesterday for preliminary private sector activity so far in November was uniformly bad.

While the Pandemic, the lockdowns, and the ever-present debt pile can be blamed, at the root of the issues facing the Union is the performance of the EU Commission, Parliament and Central Bank.

Whilst it is true that the economy was in recession even before Covid-19 hit, that is also an issue created by the rigidity of the regulations, an example of which was the debt to GDP ratio, which the Commission insisted on enforcing, no matter what.

It is now clear that certain nations should have been allowed to fail, leave the EU for a period and come back at a far less onerous level having had a chance to return to their own currencies, default and devalue.

Instead the Pandemic has brought further economic suffering even without the social and mental health issues that have also been created.

There is no doubt that the Eurozone is, if not weaker now than in 2008/10, it is very close.

Brexit talks continue and it seems that several EU officials haven’t received the memo about the parlous state of the economy and the union.

A deal between the two sides is the only way that disaster can be avoided on both sides of La Manche.

Yesterday’s activity data saw both manufacturing and services output decline. Services output collapsed to 41.3 from 46.9 while manufacturing remained in expansion territory but fell from 54.8 to 53.6. The composite fell to 45.1 from 50.

If the Sterling rally looks to be built on sand, then the same, at least, can be said of the path of the single currency. Yesterday. It traded between 1.1905 and 1.1800, closing lower on the day at 1.1841.

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.”