…But who will pay for them

Boris Johnson channelled his inner Roosevelt yesterday as he announced a New Deal for the country which will see the playing field levelled as far as possible.

Having already invoked thoughts of Lady Thatcher and Sir Winston Churchill, Johnson looked across the Atlantic to find a way to galvanize the country to follow his lead in backing large infrastructure projects. He is planning to launch a New Deal that will evoke the ideas of the U.S. recovery from the great depression which was the last time the world found itself so close to the edge in peacetime.

The one shower on Johnson’s parade was the fact that the majority of what he announced is already on the table and when challenged he was quick to point out that this is just the tip of the iceberg since he is happy to see projects that are oven ready, to use his Brexit deal vernacular, should start even sooner than planned.

Most of what Johnson was not only already in the pipeline but was fairly faithful to his December Manifesto. The announcement was made non-coincidentally in a constituency that changed from Labour to Conservative for the first time in over a century at the last election.

Data for Q1 GDP was released yesterday, and the contraction was even more severe than had first been reported. While markets could be forgiven for feeling that this is small beer compared to what’s coming down the track, but the contraction was still 10% worse in Q1.

With the lockdown in a major Midlands City being reinforced, Brexit now definitely taking place in December the market didn’t fail to ask where the money is coming from for the New Deal. Johnson’s answer was to say that Chancellor Rishi Sunak will make a speech next week in which he puts more meat on the bones.

The pound seems to be in a downwards trap right now, unable to break free from the market’s bearish feelings about mounting issues.

It fell to a low of 1.2237 versus the dollar but managed to recover to close around 1.2382.

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Further stimulus in the balance

Fed Chairman Jerome Powell and Treasury Secretary Steve Mnuchin appeared together before Congress as the debate began into just how the fiscal Covid-19 response will be considered going forward.

The initial support which provided an additional $600 per week in extended unemployment benefits to those who lost their jobs as a direct result of the lockdown is up for review.

Mnuchin, who symbolically removed his mask in a show of solidarity with his Boss, President Trump, sees a significant turnaround in activity and growth in H2, while Powell continued to show a greater degree of caution and scepticism over the pace of the recovery. Mnuchin praised Trump’s drive in working with Congress on a bipartisan set of measures to counter the worst effects of the Pandemic.

The question remains what Trump’s position will be going forward, with rumours of the withdrawal of the additional payment and for it to be replaced with a back to work bonus.

Powell agrees that the easiest and most effective way to get the economy off its knees is to provide funds to individuals and encourage them to spend it. This support would reverberate through the economy although with a second spike looking more likely every day, any decision on the withdrawal of the support payment for the unemployed will prove to be premature.

Powell also believes that the May employment data and better than expected retail sales figures prove that the recovery is underway, but it is far too soon to be withdrawing support as it should be done in a gradual manner. Both agreed on targeted support looking at certain industries and sectors of the economy that have been the worst hit. The issue with that is that it is almost impossible to administer at a Federal level as the effects have been so diverse.

Today will see the release of activity for manufacturing. While it is likely to have improved on May’s 43.1, it is considered unlikely that it will have broken the 50 level that will denote expansion on a month to month basis. With employment data following close behind on Thursday, the dollar could see a surge if both datasets prove to be positive.

Yesterday, the dollar index traded in a 97.80/97.22 range, closing at 97.38, 10 pips lower on the day.

China on the list, the U.S. isn’t

When taking a look at the announcement that the EU will relax restrictions on travel to and from fifteen nations, it appears on the face of it that the absence of the U.S. where Coronavirus is still raging, and the inclusion of China where a spike in Beijing appears to have been contained appears perfectly logical.

However, when you look at the threat of tariffs on several products exported to the U.S. from the EU and compare that with the more cordial relationship that is being cultivated by Ursula von der Leyen with Chinese President Xi, it takes on a whole new complexion.

This is something that will not fail to be noticed by the U.S. Administration and their reaction could be significant.

Core inflation in the Eurozone fell from 0.9% in May to a preliminary 0.8% in June at the core while taking the entire basket into consideration it jumped from 0.1% to 0.3%. Despite the positivity in the market towards the Eurozone and the single currency at the moment, this is not data to get euro bulls too excited.

The frantic pace at which the ECB is pumping liquidity into the system will lead to its balance sheet ballooning to represent more than half of the Union’s GDP.

There remains the impasse between the Judges of the Constitutional Court in Germany and their colleagues in the European Court. It has been made clear by both sides that efforts being made by the ECB and Bundesbank to find a workaround will need ratification from the German legal system. The accusation that the ECB overstepped its mandate and Central Banks went along in order to be seen as being proactive, hangs in the air and casts a shadow over the pace at which the Pandemic Relief Fund can be agreed and put in place.

Yesterday, the single currency mirrored the dollar as it has done for the past few days. It traded between 1.1261 and 1.1191, closing barely changed at 1.1234.