UK to wait for equilibrium in jobs market

The unemployment rate rose to 5.1% in January. The increase was wholly expected and did nothing to take the shine off Sterling’s continuing rally.

The single lasting economic effect of the Pandemic in every developed nation will be unemployment as businesses of all sizes struggle to come to terms with the reality of a year in lockdown.

No one doubts that the crunch time for unemployment will be when the economy is opened up again and support is withdrawn.

Cash flow will be the major issue and it is unclear whether the Chancellor will extend the furlough scheme at all but if he does there will be two questions that need to be answered.

First, how long can he realistically afford to provide support and then, will he compromise by making the support more targeted?

The note of caution that surrounded the Prime Minister’s announcement of a roadmap out of the restrictions was continued by the Health Minister.

In comments made yesterday, Nick Hancock was clear that the timetable is dependent upon the compliance of every member of the public and the risks are heavily weighted towards an extension of restrictions should the conditions outlined by Boris Jonson not be met.

Economically, the most significant date in the four-stage plan is April 12th. That will see the most visible change with shops and certain areas of the service sector reopening.

In a classic version of good cop bad cop, Johnson said he was confident of the complete removal of restrictions by June 21st, while Hancock was far more cautious.

The pound continues to defy gravity although it is building sold foundations and traders are beginning to fear a significant correction less every day.

Yesterday it reached a high of 1.4116, closing just three pips from the top. The rally has continued overnight as the market reacted to a particularly dovish testimony from The Chairman of the Federal Reserve to Congress (see below).

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Fed wants stimulus package sooner rather than later

Jerome Powell, the guru of advanced guidance, went way beyond his usual remit yesterday, delivering a particularly dovish testimony to Congress.

Powell spoke of the recovery being uneven and incomplete. He confirmed that the Central Bank will continue to add liquidity through its bond purchasing programme for many months to come.

There was what appeared to be a degree of self-contradiction in his comments as he, on the one hand said that the FOMC feels that the risk for inflation is to the downside, then said that expectations of higher inflation leading to increasing long-term bond yields was justified.

Underpinning his remarks on inflation was a belief that the increases in demand and spending will not get out of control and will be within the margins of a more relaxed attitude to the 2% target.

He went on to say that large financial institutions have reacted well to the Pandemic and he is confident that the financial system remains resilient.

Speaking before the Senate Banking Committee, Powell’s dovish, yet ultimately bullish testimony had all the elements of his usual advance guidance to markets, but his efforts to say that the short to medium-term may be bumpy were perhaps more ham-fisted than analysts expected.

Powell finished by confirming that the Central bank will keep policy accommodative and gave no indication of when that may change.

Analysts at several major banks have confirmed that they see recent rises in consumer confidence as a major leading indicator of the robustness of the recovery.

The only note of caution remains around employment and next week’s employment report for February will be eagerly anticipated as will tomorrow’s weekly jobless claims data.

The dollar index retreated following Powell’s remarks. It fell to 89.94, but managed to claw its way back above the 90 level to close at 90.11

ECB between a rock and a hard place

It is doubtful that any other G7 Central bank envies the position Christine Lagarde finds herself in as President of the ECB.

She faces a series of challenges almost as severe as those faced by her predecessor but has patently fewer tools at her disposal to deal with the issues.

She does not yet have the standing of Mario Draghi to shock the markets into compliance with a simple rallying call and will need the support of the other EU institutions if the entire facade is not to crumble.

The more right-wing members of the UK press are already baying for blood with almost daily reports of how the only solution is a European Superstate that will ultimately lead to the EU’s demise as several nations choose independence over what they call German hegemony.

While the seriousness of the situation cannot be doubted, and the ECB finds itself trapped between the need for a mild increase in inflation and a weaker currency on one side and irrational fears of galloping price rises on the other.

It is ironic that the most significant danger, that of mass unemployment, appears to pass both the ECB and EU Commission by as it is not on their radar as EU-wide institutions.

While the ECB vows to continue to add liquidity almost ad infinitum, it is the distribution of the support and stimulus package that is most desperately needed.

Mario Draghi, the new Italian Prime Minister has set to work to repair some parts of the Italian economy and plug a few holes temporarily to be dealt with later.

The country faces a banking crisis with bad loans at post-war high levels and personal and business finances in tatters.

While Draghi may have to make unpopular decisions for the good of the country in the medium to long-term, his popularity is such that he is perhaps the only person that can be trusted to deliver.

His most difficult decision will be how to distribute the Eur 200 billion in support that will eventually be delivered by Brussels. It is well known that he favours stimulus and investment, while the public is crying out for more support.

The euro didn’t manage to rally on the back of a weaker dollar yesterday. It fell to a low of 1.2135 and closed virtually unchanged at 1,2147.