Vaccine optimism remains prime driver

The UK loosened its lockdown restrictions on people meeting up in public yesterday as a first step on the road to a complete reopening. While this was a relatively small step it showed that the country is on the path to recovery following the complete lockdown that was ordered at the turn of the year.

The success of the vaccination programme still feels like a myth with over 30 million people having received their first jab and close to 3 million receiving their second.

The Prime Minister confirmed last evening that the country remains on track to achieve its roadmap for easing restrictions gradually with most non-essential retail outlets and hospitality venues opening on April 12th.

There will be several restrictions that will remain in place until May 19th, while the scientific community remains concerned about new variants of the virus arriving in the UK.

It seems that the Government is determined to press on given the fact that all vulnerable groups have now been offered a first injection of the vaccine with take up being far better than had been expected.

The row that had blown up between the UK and EU about vaccine distribution appears to have calmed down with London confirming that as and when it has a surplus of vaccines, they will be shared with Brussel.

Independent Monetary Policy Committee member Gertjan Vlieghe spoke yesterday of his concern that the Central Bank may be seduced by a couple of quarters of above average growth and begin to put the brakes on.

He went on to say that until the economy is able to stand on its own feet, support should remain in place. This echoes the sentiment of other Central Bankers within G7.

Vlieghe is one of the independent members of the MPC who believes that a cut in interest rates into negative territory may be necessary. This is contrary to the view of the Governor and Chief Economist who are concerned that such a step may become irreversible leading to long term deflation as has been seen in Japan.

The pound was the best performing of the major currencies yesterday as the market took on board optimism over the reopening of the economy. It rose to a high of 1.3846 but fell back late in the day to close at 1.3762. Against the single currency, it reached 1.1757 but closed virtually unchanged at 1.1698.

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Forecasts may be underestimating actual growth

Last month, predictions for the Non-Farm Payroll data were woefully short of the actual number although several major banks changed their view at the last minute.

In February 379k new jobs were created while the estimate for March is looking at 500k+. Major U.S. bank J.P. Morgan is predicting 650k.

Should this be the actual result, the fact that it will be released on a public holiday in Europe, could see the dollar break several resistance points in what will be a thin market.

The effect of the stimulus that has been injected into the economy is yet to be seen but confidence is at record high levels.

The total dominance of the U.S. equity market by a handful of new age stocks is growing with the DJI seeing a record close yesterday but small cap stocks continuing to struggle.

In many circumstances, this would have all the makings of a bubble but with valuations based on future earnings for the likes of Google Facebook and Microsoft, investors remain confident that the sky’s the limit.

President Biden spoke last evening of his concern that there could be a setback in the vaccination programme as supplies run low. He also criticized some reckless behaviour as the opening up of the economy continues at a pace that would be difficult to reverse should infections begin to climb again.

The President will make what is being termed a major speech on the economy tomorrow evening, in which he is expected to announce further measures to ensure the continuation of the economic recovery. He is likely to announce a host of major infrastructure projects valued close to $3 trillion.

The dollar remains well supported with the index rallying to 92.96 yesterday, closing at 96.93. With traders positioning themselves for a stellar NFP, the risk is now to the downside.

Failures in preparation coming back to haunt Brussels

Confidence that the recovery is on the way in the eurozone has so far stopped a complete rout of the currency. Individual Governments are highly critical of Brussels’ handling of the vaccine distribution programme but so far, the reaction of the man in the street to being able to be vaccinated has been fairly sanguine.

With the third wave of the virus underway, it seems that economic support is going to need to remain in place for possibly another year at least.

The expectation is that the EU will have contracted by close to 1% in Q1.

Several nations are lowering their full year expectations based on Q2 being little better than Q1. The longer the lockdown bites into April, the tougher it will be for the tourism and hospitality sectors to recover.

The euro is set to see its biggest monthly drop since May 2018 in March. While it still has some support at these levels, the gradual chipping away at the single currency will be like Chinese water torture to the ECB as inflation begins to rise.

Inflation data for Germany will be released later this morning, with the headline likely to reach 2%. The rate for the entire Eurozone will be released tomorrow with another rise predicted although the headline will be well below the ECB’s 2% target.

Rising inflation in Germany may see the Bundesbank call for a levelling off in support from the European Central Bank just as the rest of the Union will need it.

While the next couple of days are expected to be fairly benign for the single currency, the U.S. employment report will be at the back of traders’ minds as they position themselves.

Yesterday, the euro traded in almost the same range as the previous day. It fell to a low of 1.1760, closing a few pips higher.