No sign of inflation concerns

The Bank of England’s Monetary Policy Committee meets later this morning and is almost certain to leave both official interest rates and the level of Quantitative Easing unchanged.

In keeping with other G7 nations, the Central Bank wants to be certain that the recovery has solid foundations before it begins to taper bond purchases.

Concerns remain that the withdrawal of the Government’s stimulus measures will have a significant effect on the economy, employment in particular, and could drive the bank into the unprecedented step of introducing negative interest rates later in the year.

With Andrew Bailey having undertaken to provide UK banks with as much notice as he can, he now faces a delicate decision in how much advance guidance he can give to the wider market. He cannot tell one specific sector without informing everyone.

It is obvious that the recovery is solidifying with every new step on Boris Johnson’s roadmap to recovery. Coronavirus infections continue to fall with daily figures for fatalities now in single figures.

The lifting of restrictions that have so far taken place have been fairly tentative in nature. The major change will come in a couple of weeks’ time when changes are made to what can happen indoors.

It is highly likely that there will be a spike, but it is hoped the effect will be minimal. That will mean that all restrictions will be removed by the middle of next month. Chancellor Rishi Sunak will be in a position to consider how his stimulus measures will be withdrawn.

The most significant is the furlough scheme. It remains to be seen how many jobs will be lost as businesses that have become unviable during the Pandemic fail to reopen with the consequent effect on employees.

Unemployment is set to begin to rise again but while analysts each have an opinion, The Bank is likely to wait and see rather than make a knee jerk reaction.

Yesterday the pound managed a small rally but fell back to close at a similar level to the previous day. It reached a high of 1.3926, closing at 1.3902.

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Private sector jobs provide dollar with a boost

Fed Chairman Jerome Powell continues to rely on his colleagues on the FOMC to provide advance guidance on monetary policy. The new members of the committee, who started at the first meeting of the year have begun to voice their opinions.

San Francisco Fed Chair Mary Daly commented earlier in the week that she saw full year GDP at 6.5% while her colleague, new Fed Governor Michelle Bowman said in an interview yesterday that the Central bank may have underestimated the rate at which the effect of the stimulus is being felt and growth could be even higher.

While this level of guidance is clearly approved by the FOMC in general it could place Powell in an awkward position if the market backs him into a corner concerning rising inflation and the Bank’s reaction.

Bowman went on to say that the Fed’s median expectation for the unemployment rate is 4.5% but that could easily be beaten. She went on to say that the chance of a persistent inflation breakout remains minimal despite increases expected later in the year.

The ambiguity of the Fed’s comments is beginning to concern investors who are yet to be convinced that the Fed has the will or the tools to deal with a significant rise in prices.

Until supply and demand can be more evenly matched, inflation will be a consequence and there are several factors that the Fed will struggle to have a positive influence over. Supply chains are beginning to creak in most major economies as pent-up demand outstrips the ability of manufacturing to keep up.

While consumers are freed to spend as retail outlets reopen, logistical businesses remain either in partial lockdown or short of staff. This has led to continued demand that will see tomorrow’s NFP data possibly tough the one million mark.

The dollar index continues to threaten a topside break. Yesterday, it reached 91.43 in subdued trading but fell back to close at 91.26.

Downside move to be more than a correction?

The ECB remains unconcerned about rising inflation with Chief Economist Philip Lane commenting that he expects the headline rate to remain around 1% for the rest of this year.

That prediction presumably doesn’t factor in any currency weakness which, depending on its severity, could easily add at least 0.5%.

Without giving any solid reason, Lane also commented that he just doesn’t see a situation of persistently high inflation. Depending on the circumstances going forward, the market may need clarity on what he means by persistently.

Lane acknowledged that the latest round of asset purchase has been successful with a high take up. That could of course mean that activity remains subdued.

Already halfway through the second quarter, the recovery from the Pandemic remains patchy at best, despite improvements in the distribution of vaccines.

It has been accepted that the full benefit of the vaccine rollout won’t be seen until the summer at the earliest. This means that the current recession may not end until Q3.

German Chancellor Angela Merkel spoke yesterday of her expectation that the EU and America will agree a trade deal and that it is vital that global equilibrium returns.

The current situation is that the global economy is split in two with China and the U.S. unable to agree a path forward for their trading relationship. The level of mistrust between the two must be broken down.

Germany believes that it is not in their interest to have a world divided in two.

While the EU could perform a vital role in being a buffer between the two, it is currently too weak economically and diplomatically to perform such an act in any meaningful way.

The euro continues to flirt with the 1.20 level versus the dollar. It has support at the 1.1980 level but there is very little interest to take it back substantially above 1.20 given the proximity of tomorrow’s U.S. data.

Yesterday, it fell to a low of 1.1986, closing at 1.2004.