Covid number still falling
Morning mid-market rates – The majors
26th April: Highlights
- Retail sales were flying even before easing of lockdown
- Market expects Fed to give some clue to its plans for inflation
- Economy still on crutches according to Lagarde
Recovery on track for next stage of Roadmap
Deaths due to covid-19 are still falling as the success of the vaccination programme together with a well-managed plan to gradually reopen the economy mean that the country will return to the level of activity and growth it saw before March last year far faster than analysts had believed possible.,
Major investment bank Goldman Sachs believes in a report released recently that the UK economy will grow at a very healthy 7.8% this year. That tops their expectation for growth in the U.S. This is higher than a Reuters poll of analysts which averaged 5% and the IMF’s projection which is slightly more bullish at 5.3%.
Despite this optimism there are still fears that the reopening will see the release of pent-up demand that will fade as quickly as it arrived.
Data released last week saw retail sales begin to show significant growth even before the April 12th reopening of non-essential retail.
Retail sales grew by 5.3% in March, considerably better than the 2.2% seen in February Purchasing manager’s Indexes for manufacturing and services output also grew to levels not seen for a considerable time in April.
Preliminary data showed that manufacturing output reached 60.7 with services reaching 60.1. Both figures easily beat analysts’ expectations.
This week, there and no significant data releases in the UK so the pound will most likely remain driven by activity in the U.S.
Sacked senior advisor to Boris Johnson, Dominic Cummings has found the perfect opportunity to exact a degree of revenge on the prime Minister as he has entered the row over the amount of influence certain businessmen like Sir James Dyson and ex-politicians like former Prime Minister David Cameron exert over Johnson.
While the Conservative Party tries to play down the access Johnson provided to many major figures. Cummings will do his best to at least embarrass his former employer.
Despite the level of confidence that the UK economy is producing, the pound remains unable to break the 1.40 level versus the dollar. Last week it traded between 1.4009 and 1.3810, closing at 1.3873.
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Inflation needs to be addressed.
The rise in inflation will be driven by the level of stimulus being delivered by the Treasury, together with highly accommodative monetary policy.
Last week, Powell commented that an inflation rate above 2.5% wouldn’t be tolerated and markets should not expect the rate to remain above the Fed’s 2% target for any significant amount of time.
Powell went on to say that he is well aware of the joint remit the Fed has regarding maintaining growth while keeping inflation close to 2%. It has been some time since inflation was at or above 2% so there has been little or no pressure on interest rates.
All that is about to change according to doves and hawks as well as bulls and bears.
The doves believe that the longer accommodative policy remains in place, the more solid the recovery will be. The hawks are concerned about the lack of information coming from the Fed means that they do not have a robust plan to deal with rising prices.
The bulls are, without question, in the ascendancy with solid growth expectations now set in stone.
However, there are still questions being asked about the complete abandonment of the Administration’s strong dollar policy.
The U.S. has long been the unofficial policeman of the global economy threatening, but never using, its place as the world largest economy to punish those who artificially weaken their currency to gain an unfair trading advantage.
Now, it appears that the U.S. is joining the manipulators as the dollar’s current weakness contributes to its current growth expectations.
It is impossible to countenance the weakness of the dollar as being the natural result of a comparison between the Eurozone economy which is on its knees, and the U.S. where the markets expect to see Q1 growth of over 6% when data is released later this week.
The FOMC will doubtless have advance guidance as to the level of Q1 growth at its meeting and it will be interesting to note the effect that has on their deliberations.
Last week the dollar index tested and broke several supposed support levels.
It fell to a low of 90.81, closing at 90.82.
Von Der Leyen confident of both supply and delivery
In the U.S., the perhaps reckless level of activity being allowed in certain States has been a significant factor in its growth levels, although their own vaccination programme is now in full swing.
The Eurozone has had none of these advantages with several major members of the Union still languishing under lockdowns which severely restrict the coming holiday season which is the most significant provider of growth and activity of the entire Mediterranean coast.
Following last week’s ECB Governing Council meeting, President Christine Lagarde came close to admitting that the Central Bank has no further tools to affect the economy and will now simply have to wait and see.
This is a direct result of her and her colleagues inability to affect policy in individual members of the EU.
It is ironic that the Governing Council is made up of the Heads of the Central Banks from the various nations of the Eurozone.
Lagarde must feel like she is trying to herd cats as each member of the Council goes off at a tangent representing their own nation’s views.
At her press conference last Thursday, Lagarde confirmed that talk about tapering the PEPP hasn’t started yet. What she failed to mention that any talk of tapering was either voted down or shouted down.
The ECB expects a firm rebound in the economy but realizes that that remains driven by the lifting of restrictions. In the short term the balance of risks is undoubtedly to the downside, but as the reopening begins and the recovery begins, risks will become more balanced.
Economic data continues to surprise to the upside when looked at on a month-by-month basis, but the improvements are small and still not reaching the level of a year ago.
The euro continues to defy gravity. Last week it reached a high of 1.2099, closing at 1.2096. It would still be a brave man who would try to go short of the single currency with some talking about a rally towards 1.2280 before the current trend reverses.
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.”