Stronger recovery has its own issues
28th May: Highlights
- Cummings fallout left on Hancock
- U.S. recovery is on track
- Economic recovery is now looking robust
Bigger and better needs higher productivity
Rising cases of Covid-19, 75% of which are thought to be the Indian Variant, are being closely monitored by Government scientists.
The Prime Minister commented yesterday that England may have to wait for the full lifting of restrictions, although he went on to say that he saw nothing in the data that suggests a delay will be necessary.
The fallout from Dominic Cummings’ comments to a Parliamentary Committee this week appears to have fallen almost totally on the shoulders of Health Minister Nick Hancock.
Hancock has been criticized before during the pandemic for his performance at news conferences but Cummings accusations of lying and incompetence strike right at the heart of the Government’s handling of the crisis.
So far, Boris Johnson has backed Hancock 100%, but should further accusations emerge, Hancock may be forced to fall on his sword.
Over the period of the UK’s membership of the European Union, even though it did resist joining monetary union, productivity fell drastically and as the country emerges from lockdown, there is an opportunity to reverse that trend.
Part of the issue is global, part based upon the financial crisis but a fundamental fall in the skill levels of workers coupled with falling investment where businesses strive to hang on to what they have in terms of market share has seen innovation be replaced by pragmatism.
This week has seen the market take a breather due mainly to the lack of new data showing how well the recovery is progressing. A consolidation has taken place.
This is likely to be shaken up as next week’s data includes the U.S. employment report that will drive up volatility.
With a holiday on Monday, the week will start slowly but data for services and construction will be released, and they are each leading indicators for the ongoing recovery.
Yesterday, the pound clung to its recent range versus the dollar. It reached a high of 1.4219 closing at 1.4209.
Economy on track to break above pre-Covid level
There were several factors for this including the change of President as well as the expectation that the Biden Administration would inject stimulus across the entire economy rather than the targeted interventions of President Trump.
Despite the dollar’s steady decline, one surprise in the data was that stronger consumer activity, which makes up 75% of overall activity, was offset by data for exports which was far weaker than predicted.
The prediction for Q2 growth is close to 10% as the stimulus that was delivered gave the entire economy a lift. Concerns remain that this may not be quite as strong as predicted since concerns, particularly over employment, are growing despite lockdowns being lifted across large swathes of the country.
Regional Fed Presidents who support the overall monetary policy agreed at the FOMC still see patchy demand in certain areas of the country.
When the conversations at the next meeting turn as it appears they have to, to tapering bond purchases, there may be disagreement as support will still be needed in a few areas.
History shows that the strongest recoveries in the U.S. naturally follow the toughest recessions. The economy is likely to grow at around 7.5% this year.
This will be the strongest since 1984 when the country was again receiving from a major recession.
The difference this time is that the recession was extremely short-lived and the reasons for the recession were event driven rather than structural.
The entire global economy has been faced with the same issue, but their actions at the start of the Pandemic coupled with how they have not only supported but stimulated their economies.
The dollar index continues to wait for the Fed to act. Next week’s Memorial Day holiday will presage a busier week as the market gears up for the NFP on Friday.
Early indications are worldly different for obvious reasons. The average for now is for around 600k new jobs to have been created. Investors will also be looking for a significant upwards revision to the disappointing April figures.
Yesterday, the dollar index plumbed its recent lows, falling to 89.89 and closing at 90.00
The ECB never doubted its policy of non-action
The recovery in the economy is now looking robust as vaccination numbers grow and PMI’s also look to be improving.
There are still major hurdles to be cleared particularly around assistance for those tourist led economies that will face a fourth consecutive winter, but overall confidence is on the up.
There can be no return to business as usual and some fundamental lessons need to be learned especially by the EU Commission as reaction to several events over the past ten years has been far from optimal.
The decision-making processes need to be streamlined to allow for far quicker response times to growing issues.
The problem has been highlighted by the Pandemic but reactions to several other crises including but not limited to the financial crises have been slow and indecisive.
The migrant crisis, terrorist attacks across the region and unclear foreign policy positions have been allowed to be far worse than they coil have been.
A strengthening of unity doesn’t have to involve closer, more Federal, conditions. The level of bureaucracy that has grown almost exponentially, coupled with slow decision-making processes need to be looked into as the entire Union becomes increasingly top-heavy.
The economy, while improving now has fresh issues to consider that have been exacerbated by the Pandemic but have their roots in a period prior to the outbreak.
Government debt and how it will be handled by the ECB, and the continuing issue of bank’s bad loan portfolios will not go away on their own.
The euro needs to be lower for the region to be able to add export growth to its recovery but for now as the dollar index bumps along the bottom, that is unlikely to be seen.,
Yesterday, it rose to a high of 1.2215, closing at 1.2195. Every time a top appears to be forming a further fall in the index sees it break through what appears to be strengthening resistance.
Next week may shake the tree, but in which direction, is unclear for now.
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.”