The end of a long winter

Non-essential retail, personal services like hairdressers, hospitality and gyms will reopen today in England as the benefit of the success of the UK’s vaccination programme sees a return to reality.

The country still has a long way to go to ensure that there is no need to reintroduce strict measures and there are several possible bumps in the road that need to be negotiated.

An image of a possible future for the UK has been seen during the Pandemic with Scotland, Wales, and Northern Ireland each making its own decisions over locking down and reopening. Elections to be held in the devolved administrations could see Scotland’s demand for a second referendum in independence gather pace.

Prime Minister Boris Johnson has managed to stay the course of his plans for the reopening and, so far, it has been successful with the majority of the population obeying the rules. Between today and May19th the real test of the roadmap will take place.

It is likely there will be a surge in economic activity, retail sales and consumer confidence as the country gradually gets back to normal.

Savings rates have obviously risen strongly during the lockdown and that trend may not be entirely reversed until there is a degree of certainty that the restrictions won’t return.

The economy is going to unquestionably see a strong return to growth this quarter, but the real test will be just how much businesses are prepared to invest having seen false dawns before.

The overwhelming likelihood is that this is the start of the country’s return to normal but will the new normal be able to survive a rise in unemployment, higher inflation, and the fact that the full effect of Brexit hasn’t really been seen.

For now, the sun will shine on open stores, pub gardens and the return of eating out.

The pound is in no-man’s land at the moment. It is considered too cheap to sell by some and too expensive to buy by others. For now, its fate remains firmly driven by events across the Atlantic with the dollar’s correction turning into a trend.

Last week, Sterling rose to a high of 1.3918, but was unable to hang onto gains and fell back to close at 1.3708.

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Inflation data to challenge Fed outlook

Last week was characterized by Jerome Powell and several of his FOMC colleagues making attempts to reassure the country that the Fed does indeed have its own roadmap for dealing with rising inflation.

One of the more insightful statements came from Powell’s deputy Richard Clarida who commented that contrary to how the Central Bank has operated in the past, for now it will be outcome driven not outlook driven.

That comment could be interpreted by markets to mean that advance guidance will be fairly worthless since the Fed cannot be certain about the trajectory inflation will take.

The market will get an early glimpse of the effect on inflation of the gradual reopening of the economy with data due for release this week,

The expectation is for the headline to rise to 1.6%. Anything above that may see a significant correction for equity markets, which have a series of new all-time highs recently and a return to recent highs for the dollar index.

The greenback has been unable to hang on to any gains made recently as the Fed has continued to downplay the need for any change in monetary policy to cope with a rise in inflation.

Powell and his colleagues have freely admitted that there will be an overshoot in the level of inflation above their 2% target but reassurance that this will be only a temporary reaction to the reopening of the economy and not a systemic event has been comforting.

Another of Powell’s Lieutenants, Dallas Fed President Robert Kaplan commented last week that despite plans being put in place, the Fed’s overall target for inflation remains at 2%.

Retail sales data will reveal an increase of around 9% when the numbers are released later this week. That will reverse a fall of 3% seen in February when consumers were awaiting the full effect of the Biden Plan to take effect.

The dollar index has been on something of a roller coaster ride. It has been unable to gain traction above 93 but remains well supported at lower levels.

Last week it traded up to 93.11 but fell back to close at 92.17.

No hurry! Stimulus plan likely ratified by summer

The EU Commission is well known to be a colossus of bureaucracy, and that label has led to it being seemingly unable to get out of first gear when the need arises.

Several comments were made last week regarding the adoption of the stimulus plans.

First, who knew that the plans hadn’t been approved yet?

Thierry Breton, The EU’s Internal Trade Commissioner commented that he expects the Union’s Eur 750 billion stimulus plans to be ratified this summer.

The casual way in which his comment was made perfectly illustrates the reason why several commentators believe that the Union will ultimately fail.

It took a German to inject a little urgency, when ECB Governing Board Member Isabel Schnabel commented that unless there is an early ratification of the treaty it could be an economic disaster for the bloc.

The sense that form takes precedence over effect is overwhelming and shows that Brussels is becoming further removed from reality.

One piece of good news is that the vaccination programme seems to have sped up despite remaining well behind several other nations of the developed world.

While the number of those who have not received a jab remains high, the danger remains that new strains of the virus which appear to be popping up globally could arrive in mainland Europe.

The continued lockdown measures that remain in place appear to be having the desired effect with the third wave despite being fairly virulent also being short lived.

It is still too early for lockdowns that remain in place in France and Italy to be lifted but the signs are encouraging,

Last week, the euro remained totally in the thrall of the dollar although it did correct a little versus Sterling.

It traded between 1.1927 and 1.1737 versus the dollar, closing at 1.1903, while against the pound it recovered to close at 1.1507.