Haskell sees over-optimism growing
8th March: Highlights
- Long term economic recovery far from certain
- Fed still cautious despite very encouraging jobs data
- Eurozone data continues to confuse markets
Sunak sees big business as his taxation cash cow
This was not a Conservative budget by any means. Tax increases, no cuts to services, continuing support measures. It is no wonder Tory Grandees were spluttering in disbelief. Apart from the incredibly unfair treatment of the NHS, it was almost a Tony Blair style piece of work.
Short term, it is the Lifting of restriction that begins this morning with schools reopening that is providing optimism. Almost 22 million doses of the vaccine have been delivered. Rates of infection, hospital admissions and fatalities are all falling.
However, the country is still in lockdown and will be until after Easter. Once the reopening of the economy happens on April twelfth (assuming stage one goes as planned) that will be the point at which the effectiveness of the stage plan should be judged
The release of pent-up demand will see most measures of growth positively affected by how far Boris Johnson is going to allow the R-rate to rise before he calls time even before pubs are fully reopened.
Jonathan Haskell, an independent member of the MPC, commented on Friday that the risks for the economy continue to be skewed towards a negative outcome.
While this may be little more than a nod in the direction of negative rates, which he favours, it provided a degree of sobriety which was in danger of being engulfed.
The pound corrected considerably last week in the face of a strengthening dollar.
It fell to a low of 1.3778, closing at 1,3846, Shorter term charts show a degree of support at 1.3734/40, whereas versus the single currency, the pound remains reasonable buoyant, closing the week at 1.1620
Senate passes slightly watered-down stimulus package
If nothing else, Biden showed himself to be a reasonable President, willing to listen to the other side, since he was prepared to compromise with Republicans and taper the delivery of a $1,400 bonus to every household to only now being available to those that qualify through what amounts to a means test.
This will clearly delay a major part of the plan, but it will reduce the total outlay and possibly provide a little more positivity should it be needed in the future.
One major part of the support package was passed after yet more horse trading. The additional support for those claiming unemployment benefit was extended until September but the amount was reduced from $400 per week to $300.
There was also a marginally improvement to the level at which tax starts to be paid on the benefit.
There has been talk of a crisis in the employment market.
Any fears of a continued downturn were allayed on Friday as the headline in February’s NFP report was an outstanding +379k.
When I said on Friday that the risk was to the upside, I didn’t mean 200% higher!
It was interesting that several banks, as Friday morning wore on, significantly increased their estimates.
The January headline saw a substantial upwards revision and following improved jobless claims data on Thursday, the picture has improved significantly although no one appears to have told the FOMC.
Neel Kashkari, the President of the Minneapolis Federal Reserve spoke of his confidence that the Fed has several tools to deal with rising inflation. This infers that he is also confident that rates will remain low for the foreseeable future.
There has been a downgrade in the official estimate of Q1 GDP in the past week.
The estimate has fallen from 10% on March 1st to 8.4%. This is a very positive number, but the level of reduction suggests a growing lack of confidence.
The dollar had a stellar week in recent terms. It broke several resistance levels. Having said that any comment by Jerome Powell about continuing economic concerns or more support could see it all collapse.
The dollar index rose to a high of 92.20, closing at 91.95. This was its highest close since November 27th
Growth estimates better than expected
It is quite some time since it was possible to write anything positive about the Eurozone, its economy, or its escape from the clutches of the Pandemic.
Despite that, official data for GDP expectations for this year and next show that far from the economy struggling to regain the level that it was at until late 2023, that is now expected to happen by the end of next year.
That may not be anything to shout about given the fact that the Eurozone was teetering on the brink of recession even before Covid-19, but it gives both the ECB and EU Commission a base to build upon.
Political gridlock, a slow rollout and, it seems, take-up of the vaccine combine with high and increasing debt levels and unemployment.
There is a huge elephant in the room when it comes to Ecofin and the ECB.
That elephant is the level of support the wealthy North is prepared to provide to the struggling South.
While Germany has known ever since the Eurozone came into being that it would shoulder most of the financial burden of creation of a more unified Europe, other nations were and still are unconvinced of the benefit.
It is fortunate that the Governments of The Netherlands, Belgium and Finland are relatively moderate since they will generally support Germany. Austria will support Germany on the whole but still appears to have a degree of militancy and right leaning politicians.
The major concern in Brussels will be how France will react. While the current Government of Emmanuel Macron is certifiably Europhile, the same cannot be said of Macron’s challenger in next year’s Presidential election.
Marine le Pen threatens Frexit and is a close friend of several right-wing politicians in Italy. Any upheavals created by France in the next eighteen months could see the good intentions of Brussels, Germany and the ECB torn asunder.
Meanwhile, the euro suffered at the hands of the dollar index last week.
It fell to a low of 1.1893, closing at 1.1916. While this is a positive move for exports it remains to be seen how remaining below 1.20 will affect inflation.
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.”