BoE Deputy Governor sees room to act if necessary

David Ramsden, the Deputy Governor of the Bank of England commented yesterday that the Bank still has headroom over and above its current commitment to QE should the economy stumble in the coming months.

However, he is confident that the recovery is well under way and that there will be no further quarters of contraction before the economy returns to the levels seen in Q4 2019.

While Ramsden is not in possession of a crystal ball regarding a second wave of Covid-19, this is a show of confidence that the Bank together with the Treasury has the tools to deal with a slowdown having experience of what has happened so far to fall back on.

Later this morning, data for employment in the UK for July will be released. These numbers are gaining in significance since the volatility caused by the pandemic has risen.

It is feared that the number of unemployed in the UK could rise above three million by the end of the year but the job losses will be something of a slow-burn as businesses deal with reduced cash flow despite never before seen levels of support from the Government.

Analysts believe that the July data will show that 10k jobs were lost following a fall of 28.1k in the jobless count in June. The unemployment rate is expected to rise from 3.90% to 4.20%

Yesterday, the pound was in limbo versus the dollar. It traded between 1.3103 and 1.3019, closing at 1.3073.

Overnight, like-for-like retails sales data was released by the British Retail Consortium. This showed an increase of 4.3% year on year. This was lower than the previous 10.9% and market expectations for a rise of 7.6%.

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Executive order a ploy. Mnuchin to return to the table

The Federal Reserve, in an unprecedented step announced yesterday the amount of capital needed to be raised by banks to meet their requirements following a series of stress tests carried out recently.

The Fedhas never singled out banks one-by-one and told them of the minimum that needs to be raised.

The Central Bank is concerned that banks, investment banks in particular may take on too much risk or overstretch themselves in order to find a quick fix to falling profitability during and after the pandemic and wants to be sure they can cope while the economy recovers.

Two investment banks, Goldman Sachs and Morgan Stannley were given the most to do reflecting the Fed’s concern.

Steve Mnuchin, The Treasury Secretary intimated yesterday that there is a real possibility of a deal being announced in Congress to override the President’s recent executive order wherein he proposed a payment of $400 a week in additional unemployment benefit, but attached several conditions.

This clearly demonstrates that the executive order was a ploy designed to push congress in the direction the President demands making the reduced payment and incentive to those unemployed due to the pandemic to look for work.

Last week’s employment data has received a mixed response from traders who are still willing to believe that the pickup in the economy will start to pick up despite the continuing view that the unemployment rate will still be at or close to 10% at year end.

The dollar index paused yesterday as the market considered its next move. It traded between 93.70 and 93.30, closing at 93.62.

Eurozone crisis added to life’s certainties

There is a saying that nothing is certain in life except death and taxes. Perhaps it is time to add a third leg to that list by including the Eurozone’s ability to find a crisis to challenge its ability to exist where seemingly none is present.

The global economy runs in a cycle which typically lasts around seven years. Obviously over more recent years, volatility has risen significantly with the growth of globalization.

Economies have become closer linked and more interdependent, but nothing seems to be good for the Eurozone which stumbles from crisis to crisis seemingly unable to take the final step into Federality.

While such a move would probably see the number of members of the EU shrink it is the only possible way that the continually evolving group can survive in perpetuity.

Italian banks have taken the bull by the horns and decided that the agreement over the funding of the fallout from the pandemic by issuing common bonds clearly applies to them. Bank lending has skyrocketed following the agreement, despite there being no solid framework in place.

Th Italian banking system is built on such indecision but from a Eurozone perspective, being forced to deal with the issue almost retrospectively is not the Brussels way. As with most issues though, a fudge or temporary solution will be found until the treaty is signed which may not even happen before the next tsunami breaks over the EU.

The euro also had a range-driven day yesterday, trading between1.1801 and 1.1736, closing at 1.1738.