Government passes first serious election test

Prime Minister Boris Johnson announced the penultimate point on his Roadmap to Freedom yesterday. Restrictions on meeting inside, eating and drinking inside bars and restaurants and hugging will be lifted from next Monday.

The success of the vaccination programme means that the UK is now just a single step away from being free of restrictions.

Concerns are still being voiced about foreign travel particularly given the worsening situation in India. Johnson called for common sense to prevail as he spoke of his expectations that people would remember the dark times of last Autumn when it seemed that the spread of the Pandemic was close to being out of control.

Local elections held last week in the UK were the first significant test of the Government’s actions over both Brexit and the Pandemic. Apart from the mayoral election in London the Conservative Party achieved just about every goal it set itself.

A constituency in the industrial north of the country that had never been held by any Party other than the Socialists changed hands in a by-election confirming the path begun in the 2019 General Election.

The results have prompted a major rethink within the Labour Party as it became clear that the Prime Minister’s choice of wallpaper is a secondary consideration, and the manner in which the country is Governed is far more significant.

It is hardly a surprise to note that consumer spending rose above pre-Pandemic levels last month in data released yesterday. The data points to a strong acceleration in growth. Tomorrow’s release of GDP data will show that the economy grew in March and is expected to have seen an almost exponential increase in April.

The pound is beginning to reflect the fundamental performance of the economy although its rally yesterday had a lot to do with the surprisingly poor U.S. employment report for April that was released on Friday.

Sterling rose to a high of 1.4158, closing at 1.4118. This was its highest close since February 2018.

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How strong is growth without stimulus?

Friday’s April employment report will have brought significant concerns to the FOMC and its Chairman Jerome Powell. However, it will have at least quelled, for now, the continual bombardment of questions over the expected rise inflation.

There had been a degree of disappointment over a few data points in April, but most observers simply took that as the calm before the (positive) storm.

The revision lower of the March figure followed by a major fall in the April headline brought their own doubts. The purpose of the $1.9 trillion stimulus package released last month was supposed to kickstart the economy but now questions are being asked about how strong the recovery really is.

With several States reopening and declining further Federal aid, it is even more surprising that just 266k new jobs were added in April. The result may hasten a reconsideration of the herd mentality that arrives in the first week of every month where very little real analysis is performed.

With the March NFP figure being reduced from 916k to 770k it is entirely plausible, given the volatility being created by the acceleration of the vaccination rollout, that when the May data is released, April’s headline could see a significant upwards revision. However, it will still be a disappointment to those predicting over a million.

Questions remain about the Fed’s policies. Where people were asking about how the coming bout of inflation will be tackled with questions like why is the Fed clinging to an emergency set of policies when the emergency has passed? They are now asking if Biden will introduce further measures?

The Fed will always cling to its mantra regarding taking a single dataset out of context or the fact that the trend is the important matter but Friday’s numbers, no matter when Powell saw them, will have given him a jolt.

The dollar also reacted to the numbers negatively. With risk appetite across the entire market taking a hit, the dollar index fell to a low of 90.04 but recovered to actually end up above last week’s low at 90.30.

Calls for National debt owned by ECB to be forgiven

A few months ago, there was a call for the ECB to forgive those EU Government bonds it had purchased as part of its support for the economy. This was treated at the time with several tongue-in-cheek responses.

Now such an idea has resurfaced, and it is distinctly possible that those raising it will demand it receives proper consideration. It would certainly provide a statement concerning the unity of the Eurozone but would require the frugal five to make a major leap of faith.

When asked about such a plan, Christine Lagarde has simply cited the regulations that govern the Central Bank to quell the idea.

That is probably as weak an argument as she could make since desperate times call for desperate measures.

With France having leapt up the league table of the largest borrowers in terms of debt to GDP, it is not just the southern states that are considered to be more profligate which will promote the idea to keep it at the forefront of the minds of the EU Commission.

For those interested, it is article 123 of the treaty of the functioning of the ECB that expressly forbids the financing of a country’s budget by the Central Bank. That is exactly what forgiving the debt would do.

EU stimulus packages so far released have received a lukewarm reception in many quarters of the region. They are not designed in the same way as in the U.S.

Where President Biden’s stimulus was the economic equivalent of a shot of adrenaline direct to the heart, the Eurozone’s was more like a warm bath and a cup of tea!

The Eurozone economy will recover eventually and there may be some radical policies along the way, but it will remain conservative and endlessly study all proposals while accepting very few.

Investor confidence made a significant jump when preliminary numbers for May were released yesterday.

While it is impossible to decipher exactly what the numbers actually represent, the index rose from -13.1 in April to 21 this month while analysts had expected a rise to 14.

The euro benefitted from the dollar’s misstep yesterday. It rose to a high of 1.2178 but fell back to close at 1.2129.

Its price action does look like it will struggle to hang onto gains.

While it is a matter of conjecture, it would be interesting to know where it would have been now had the NFP been as strong as analysts predicted.