8 February 2021: Pent up demand to drive recovery

Pent up demand to drive recovery

8th February: Highlights

  • Chaos to order the UK is global vaccination leader
  • IMF Supports Biden’s stimulus package
  • Overly optimistic Lagarde predicts summer recovery

Hospitality, services, employment, and output to grow exponentially

When everything is at a record low the economy can only go one way. As Rodney Dangerfield says in the immortal Caddyshack, “Everyone’s Buying? Then sell! Everyone’s selling? Then buy!”

The first part is coming to an end, hopes are growing that the second part is going to see hospitality, services, employment, and output grow exponentially from pent-up demand when the various lockdowns are relaxed.

Chancellor Rishi Sunak has already acted, loosening the conditions on loans granted to small and medium sized businesses to enable them to survive the crisis.

£45 billion has been borrowed by around 1.4 million businesses and Sunak has agreed to extend the tenor, if requested, of those loans from six to ten years. This is a show of confidence in that sector of the market to both survive and prosper as this scheme will allow firms to pay as they grow.

Payment holidays and interest free periods will also be part of the scheme.

There is now tangible evidence that the rate of infections is slowing. That will be followed by a drop in hospitalizations and eventually fatalities. The vaccination programme coupled with the third lockdown is starting to have a significant effect.

Having locked down too slowly, allowed Covid-19 to enter care homes, then lifting restrictions too quickly via the eat out to help out scheme, the Government has hardly covered itself in glory. However, and this will be no comfort to those 100k+ families who have experienced loss, the vaccination programme is proving to be the most successful globally.

Economically, the faster the UK can complete the vaccination programme the more likely the country is to see a rapid recovery start in earnest around the beginning of H2.

Last week’s MPC meeting studiously avoided much talk of negative rates although the Bank promised to give six month’s notice to the financial community of any change in its intentions.

The pound ended the week on the back foot as poor U.S. data hit risk appetite. It ranged between 1.3757 and 1.3566 but recovered to close at 1.3738.


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December even weaker and January not much better

President Joe Biden received support for his programme of stimulus measures from the IMF over the weekend and will be keen to get the measures through congress in the coming weeks.

Fiscal and monetary support will need to work in unison if the economy is to recover as forecast with employment still the major imponderable.

Last week’s data for weekly jobless claims and the January employment report were disappointing. The pace of jobless claims is slowing, and the economy is starting to add jobs, but each at a rate that is underwhelming and points to a longer leading than was thought to be the case.

While lockdowns continue and vaccine rollout and take-up remains patchy, Biden is going to need to seriously consider a more targeted approach following his first stimulus package which will be far more general in its distribution.

The new President set out his initial foreign policy initiatives last week. While he reversed or toned down several of the initiatives created by President Trump, one area where he appears to agree is over China.

Biden described the Eastern Powerhouse as the US’s most serious competitor, while Janet Yellen, using language never seen while she was Fed Chair, referred to it as a horrendous perpetrator of human rights abuses and followed up her boss’s remarks about competition.

Both sides of this row blame the other and it will take a considerable effort on both sides for them to even live and work together.

While the U.S. continues to need Chinese investment in its debt issuance (no other nation has the reserves to even make a dent), China needs the U.S. market in which to sell its goods.

U.S. exports to China are something of a makeweight and China has, so far, not fulfilled its commitments, especially regarding agricultural equipment.

Chinese ability to feed its burgeoning population will need to be addressed in the coming years and it is going to have to increase domestic production several fold. This is where the US. sees an opportunity to deliver quality in a timely manner.

The dollar index continues to build a base. Although it didn’t make a great deal of upside headway last week, it seems to have begun to attract buyers

It reached a high of 91.58 but fell back to close higher on the week at 90.99.

Lagarde dons a pair of rose-coloured glasses

Market analysts see the fiasco that was perpetrated by the EU Commission last week over vaccine production, distribution, and delivery as the shape of things to come if a more Federal Union is created in which Brussels has more control over the domestic daily lives of its citizens prevails.

Over the weekend, Christine Lagarde the ECB President gave an interview which was published in several newspapers. The essence of her comments was nothing new, in that she used her new anecdote that the EU’s recovery had been delayed, not emailed.

The events of the past week point very clearly to the derailment of both the economic recovery of the region and a shift in the political landscape.

One quality that Mario Draghi has to be a politician is a sense of pragmatism. He showed this many times during his tenure as ECB President, and fears are growing that a pragmatist will be unable to see any future for Italy as a member of the EU.

Italy has never felt that its voice was ever heard in Brussels, receiving a vibe that given the effort that had been made to bail it out during the Financial Crisis that it should be grateful for what it receives.

The first post-crisis indication that Rome had lost standing was the failure of the EU Parliament to provide any support during the predicament created by the refugees flooding across the Mediterranean from Africa. Several nations broke ranks and refused to provide assistance.

It has continued during an almost perpetual battle over its debt to GDP ratio and now, the failure to deliver PEPP funding has led, indirectly, to the collapse of the Government.

This is hardly a rarity with a succession of firebrands having taken over since the departure of Silvio Berlusconi, but now a serious figure who demands and receives respect has entered the fray.

Mario Draghi will not face an easy task in pulling the country around since he will face both social and economic issues.

There is little doubt he will receive backing from most of the country as he will have mass appeal representing neither left nor right.

The wider EU as well as Italy face an interesting and possibly explosive year.

The euro tested its medium term low last week falling to 1.1952. Following the poor U.S. data on Friday, it managed to recover, closing a little lower on the week at 1.2049.

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.”