Negative interest rates discussion to continue

The Office for Budget Responsibility, a Government funded body that provides economic forecasts has said that it expects unemployment to peak at between 10% and 13% in the next two years. The latest data shows the jobless rate to be at 4.1%. This not only bears out the Chancellor’s comment that not every job can be saved but shows the scale of the economic fallout the country faces from Covid-19.

The debate over negative interest rates continues. At the weekend MPC member Silvana Tenreyro commented that the work being done to study the effect of negative rates on the economy was encouraging.

However, yesterday, the Bank of England’s Deputy Governor David Ramsden advised against rushing into a further rate cut. In a speech he said that he believes that at present, negative rates would be less effective as a tool to stimulate the economy. He failed to elaborate on his reasons, leaving the debate to be had at the next MPC meeting in the balance.

The Government’s failure to deliver an effective track and trace system combined with concerns over the policy to close licensed premises at 10pm is still a worry and is leading to public behaviours last seen in March. The infection rate is running at around 5.25k per day and local lockdowns now affect a quarter of the population.

Even a partial lockdown will have a significant effect on the Q3 rate of GDP which is expected to show a return to growth following the Q2 contraction of just over 21%

Rumours of a more positive outcome to ongoing Brexit talks produced a tailwind for the pound yesterday. It rallied to a high of 1.2929 but fell back as there was no official comment and closed at 1.2834.

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Market ready to pronounce victor in first debate

The low-key start to the election campaign in the U.S. is expected to explode later today as the first debate between President Trump and his opponent Democrat Candidate Joe Biden takes place. It will start at 9pm Eastern time (2am UK).

The debate being held in Ohio will last 90 minutes and will be broken into six 15-minute segments where topics chosen by the moderator will be discussed. They are the candidate’s records, The Supreme Court, Coronavirus, Law and Order as it pertains to recent race riots and violence in cities, Election Integrity and The Economy.

Both Candidates will see an opportunity for themselves to attack the others record but the public will want to hear policy initiatives around those topics rather than negative mud-slinging exchanges.

As talks continue between Washington and Beijing over trade, and despite no announcements likely to be made before the election, speculation is growing about the ability of China to follow through on the threats made in the wake of several U.S. policy decisions and Trump’s stated post-election policy of limiting the U.S.’ reliance on Chinese imports.

Rumours persist that China has been weakened far more by Coronavirus than official data admits.

Trump’s is obviously a long-term plan and would take far longer to reach its goal than the President’s second term were he to win. However, there is always that concern casting a shadow over talks that China is planning a retaliatory move.

The dollar index took a breather from its recent rally yesterday. It climbed initially to a high of 94.64 before a bout of profit taking saw it close at 94.26 holding just above support at 94.20.

Data releases are unlikely to drive the currency before Friday, although there are speeches from Fed. Presidents from New York, Dallas, and Chicago as well as Federal Reserve Officials which are likely to focus on fiscal support for the economy

It is the Presidential debate that is likely to have most effect before the employment report is released.

ECB ready to adjust all instruments, but PEPP a success

ECB President Christine Lagarde confirmed yesterday that the Pandemic Emergency Purchase Plan is doing its job and the Bank stands ready to act by adjusting its instruments. There may have been something lost in translation as Lagarde gave testimony to the EU Committee on Economic and Monetary Affairs.

Elevated uncertainty and the incomplete recovery of the economy are at risk from the fresh outbreaks of Covid-19

Lagarde’s remarks were more significant for what wasn’t said that what was, which was entirely predictable.

The ECB appears to be bereft of policy ideas that run contrary to standard procedure in a downturn while itself appearing to be little more than a tool of the EU Commission.

Her continued disregard for the value of the currency which she seems to think is a consequence of economic activity (or the lack thereof) rather than a valid policy tool has given carte blanche to the market to do as it wishes in reaction to several drivers. Traders are fairly safe in the knowledge that the Central Bank is not going to verbally intervene to change its course.

The Eurozone finds itself in a deflationary spiral that Lagarde believes will continue for several months. This is one effect of negative rates and something that the Bank of England will do well to be well aware of.

The single currency was not affected by hearing more of what has been said before. It rose versus a weaker dollar to a high of 1.1680, closing at 1.1664.