Recovery will make organizations less top heavy

The Chancellor of the Exchequer, Rishi Sunak, agrees with Bank of England Andrew Bailey over continued support for those affected by the pandemic and the success of the eat out to help out scheme.

As Germany extends its furlough scheme, Sunak believes that any extension of the similar scheme in the UK could be counterproductive. The theory is that the furlough was an emergency scheme and the economy cannot afford for the country to get used to the idea.

Employment is the single effect of the pandemic that unites every nation suffering a recession. Sunak will need to consider more permanent support for the economy as unemployment is expected to double over the course of the year and he must guard against the concern that the recession could turn into a depression.

There are parallels with quantitative easing. There was a general fear over the effect of QE when it was first introduced but it has now been accepted as a legitimate tool by all G7 Central Banks. No Government could afford to use a furlough as an appropriate response to a severe downturn unless the economy faced devastation without it.

There is a continuing degree of uncertainty about how retail activity is bouncing back but irrespective, the closure of major outlets for three months during lockdown while online sales continued, look like having a profound and lasting effect on long established shops.

Both Marks and Spencer and Debenhams have announced job losses due to the effect of the pandemic while the outlook for the entire sector is clouded in doubt.

The success of the eat out to help out scheme which has seen footfall increase generally, not just for hospitality outlets, is being offset by the rules regarding facemasks. Anecdotal evidence shows that face coverings are making the entire shopping experience less enjoyable and may be adding to the use of online shopping.

The pound continues to attract support despite the level of activity in the market being low. Yesterday, it reached its highest level since the start of the year as the dollar continues to fade. It touched 1.3250, before closing at 1.3239.

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Minutes likely to mirror Powell’s determination… but

Over the past three decades there has been a very important lesson learned by the market when considering its expectations for FOMC meetings and the subsequent release of their minutes three weeks later.

That is not to say that the release of the latest set of meetings is going to cause any major or lasting change on the market’s perception of Fed activity but to get into the habit of blandly expecting Jerome Powell and his colleagues to trot out platitudes about continued support may be dangerous.

The Fed is a very different animal to the Central Bank that presided over the LTCM crisis or the subprime fiasco, but it retains the ability to shock.

Having said all that, it is likely that the minutes released later will support the underlying economy even as stock markets return to highs seen before the pandemic. There is a danger of a two-speed recovery taking place as the Treasury Secretary calls upon Congress to rejoin talks over the Pandemic relief funding that remains a sticking point between the White House and the House Speaker.

For once, it is hard to disagree with the Administration despite its obvious desire to use the relief of those suffering hardship over job losses as a political weapon.

The Democrat led House while committed to providing support will not choose a path which has a finite ending or maximum level of financial outlay. Most would argue that on the surface the most important decision is to provide support now and argue semantics later.

The catalyst for the rise in stocks to all time high levels, completing a comeback from the March plunge was data for housing starts. Confidence in the construction sector is a factor in grass roots activity and starts rose by 22.6% in July having risen by 17.5% in June.

This evidence of recovery is also a reaction to a weaker dollar with overseas funds finding the greenback’s weakness as a further incentive to invest. Yesterday, the dollar index fell to a low of 92.12, closing at 92.31. This was the lowest close since May ‘18.

Draghi knows the difference between good and bad

Mario Draghi has been enjoying his retirement although one can imagine him itching to rejoin the fray as the Coronavirus Pandemic has threatened to undo his work in saving the euro.

While the pandemic produces a different set of issues for the Eurozone and its Central Bank, to Draghi’s mind a crisis is a crisis despite the probability that even his toolbox would have struggled to find the right instruments.

Christine Lagarde, the incoming ECB President has not enjoyed the smoothest of entries into her post. It was already becoming clear what the world faced when she took over last November. She is well aware that if the strict eight-year term for the ECB President were not in place Draghi would still be in situ and glad to still be there.

Yesterday, Sr. Draghi, deciding that his self-imposed exile should come to an end, spoke at a conference of his concerns over the region’s use of the enormous debt pile that continues to grow.

He spoke of good debt and bad debt. Bad debt he describes as frittering away the additional funding on vanity projects. Good debt is investment in infrastructure and the future. Projects that will benefit the young and provide a solid base. Today’s children, he said, will be the ones who have to suffer the burden of the debt so it should be used to their benefit.

According to ECB Council member and Vice-President, Luis de Guindos, the strong rebound in activity which has possibly led to the shortest recession on record is running out of scheme. He also spoke yesterday of his concerns.

The issue is that having thrown everything it can at the economic effect of the pandemic, what is left should a second spike bring another lockdown? He also spoke of his concerns for the banking sector and the new loan losses it will see that could tip some over the edge.

The euro continues to defy gravity driven most by dollar weakness. Yesterday, it rose to a high of 1.1965, closing at 1.1931. With the 1.20 level now well in its sights, talk of parity, which was common when the pandemic first struck, seems to be a fading nightmare.