Reopening still on track despite concerns

It continues to be likely that the UK will remove all Coronavirus restrictions on June 21st.

This will be considered a risk no matter the data that the Government sees over the period between now and then.

The Prime Minister continues to say that he has not seen anything to persuade him to delay the removal of restrictions.

The data that has merged since the most recent lifting of restrictions has been encouraging but Johnson is now facing an impossible decision.

The scientists are being blamed by backbench Conservative MPs with blackmailing the Government while the backbenchers are being accused of putting the economy ahead of saving lives.

Meanwhile, the economy is improving which is driving fears about rising inflation.

The latest data for services output will be released later today. It is expected to be unchanged from last month.

This will be considered a positive outcome given the efforts being made within the Eurozone to drive growth in their own services output post-Brexit.

Earlier this week, the OECD radically increased its forecast for the UK economy’s performance over the remainder of the year. It forecasts that full year growth will rise to 7.2% this year and 5.5% in 2022.

This is in sharp contrast to the Organization’s earlier assessment that predicted that the economy would reach its pre-Covid level before the middle of next year.

The impending end of the Stamp Duty holiday for homebuyers appears to have driven would-be buyers into a frenzy. Data for mortgage approvals rose in April for the first time in six months.

The pound remains in a narrow range versus the dollar. The market continues to anticipate the outcome of the May Employment Report in the U.S., so until there is concrete data to go one, the current ranges will continue.

It traded between 1.4183 and 1.4111, closing at 1.4173.

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Ranges narrowing as markets waits for Fed

The dollar index is now almost entirely driven by the prospects of a tightening of Monetary Policy and as such is ignoring any factors that do not fall into that category.

Tomorrow’s May NFP will be preceded today by weekly jobless claims and private sector jobs data.

Recently, there has been very little correlation across the employment data, so while today’s numbers will be important in their own right, they will have little bearing on what we can expect from the NFP data when it is released tomorrow.

The main outcome from the employment report will be speculation about how it will be viewed by members of the FOMC who meet on 15/16 June.

The outcome from the Fed’s Beige Book which measures activity in the Bank’s twelve districts is that the economy grew moderately in the period between early April and late May. The irony of the rate of growth is that it has been held back in the main by two factors.

The first is logistics and the ability of manufacturers to have raw materials and spare parts where they are needed in the country, and the second is firm’s ability to hire skilled workers.

Unlike the recovery from other recessions, there is no sense of desperation from those who are unemployed to take the first job they are offered. The stimulus added to the economy and the various support packages have meant that workers can be pickier.

There is an inflation concern that comes from such an attitude. It means that firms have to make competitive offers of pay and benefits to win the race.

Mobility is also an issue. The willingness of workers to move States to find employment doesn’t currently apply, which is also adding to the labour shortage.

As already mentioned, the dollar index remains in a state of flux as it awaits either a move from the Fed, or a set of data that makes the Fed’s ability to sit on its hands impossible.

Yesterday, it attempted to rally above resistance at 90.20, reaching 90.24, but fell back to close at 89.90.

Euro usage is stagnant but remains second most used

Next week’s ECB meeting will be forced to consider how the Bank is going to deal with inflation that is now clearly going to be an issue down the road.

Inflation data has been released by several individual countries with Spain and Germany experiencing rises to levels that exceed the 2% target.

Italy was an exception that saw a marginal fall in prices but that is a technical and temporary reaction to the pace of its recovery.

Unemployment is beginning to fall, but Germany is experiencing a similar issue to what is being seen in the U.S. There is a pool of workers, but firms are seen as being in fierce competition to attract them and that doesn’t really fit with the state of the economy.

These unusual conditions are what is concerning the Bundesbank and drove its President to have an overly right-wing reaction in which he damned the most indebted nations by calling for tighter policy to head off inflation, no matter the consequences.

Former German Finance Minister Wolfgang Schäuble, writing in the Financial Times, showed himself to be at odds with the Bundesbank, quoting John Maynard Keynes who famously said in reaction to the need for short term fixes in times of economic crisis, that “in the long-term nothing matters since we will all be dead”.

Schäuble himself earned a reputation in his role as Finance Minister for frugality but he firmly believes in the ECB’s PEPP programme and considers that it should remain at its current level until the recovery has built firm foundations.

This means inflation and while that is the bete noir of the current German Government, it is a necessary condition of the situation both in the country and the wider EU.

The ECB has, to a certain extent, painted itself into a corner. By sitting and waiting and being outcome driven, rather than acting pre-emptively, it is leaving itself with fewer options at every meeting.

Either at next week’s meeting or the one held in late July before it shuts down for the holiday season the Bank is going to need to provide guidance to the market.

The euro obviously awaits such a decision but is also driven by its majority share, in the dollar index.

Yesterday, the single currency fell to a low of 1.2164, but as an almost mirror image of the dollar index as the index fell the euro rose to close at 1.2211.