Oil price, a double-edged sword

It was a sign that inflation was going to rise, as it has. We didn’t need a stick to beat the Central Bankers with, since they were telling us that inflation was on the rise. In fact, we got so excited that a higher oil price was a sure sign that the recovery was beginning, that a little inflation was not seen as a bad thing.

Now, analysts see inflation topping 4% later this year. Is that really going to be an issue?

Inflation at four per cent! Successive Chancellors in the eighties and nineties would have dreamed of that level of price rises.

Now, times have changed, and we live(d) in a low interest rate, low inflation world.

The three most prominent Central Banks, the Fed BoE and ECB, seem to be chasing each other to be the first to taper their bond purchases that are likely to be a prelude to a rise in short term interest rates.

Behind the self-congratulation about the global recovery (which isn’t really a global recovery, especially if you ask Brazil or India), there are several questions that still need to be considered, let alone answered.

In the UK, the economy is 80% service based, yet domestic services., particularly hospitality, are crying out for support.

Rishi Sunak isn’t out of the woods yet as regards his role as the most generous Chancellor ever.

He knows that trying to lift the furlough support is going to be a delicate matter that, if handled without care, could tip the entire economy into recession no matter the pace at which the economy is growing.

When you look at the TV and remember the restrictions that we all faced a year ago, remember that the economy was tumbling by its fastest rate in 300 years, and we haven’t yet climbed back to equilibrium.

So, when you are told that tax revenues will pay back public sector borrowing, as the economy becomes turbo-charged, that will be the time to hang on even tighter to your pension pot.

The pound is still facing up to a stronger dollar. Having been battered by the Fed’s comments on tapering, Sterling recovered yesterday, reaching a high of 1.3934 and closing within a whisker of that level.

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Testimony won’t give the markets another excuse

Even though regional Fed Presidents have been lining up to support the advance guidance given to the market last week, there is still a possibility that President Biden will upset Republicans even more by doling out yet another stimulus check.

While the previous checks may have helped workers, who felt they were swimming against the tide, they will now be able to buy a small boat in which to protect their families.

It seems like Biden is trying to drive home two spikes with a single hammer.

With the first, he is illustrating that the type of winner takes all sentiment promoted by his predecessor is not the American Way.

Having said that, handing out free cash isn’t either. Biden will have to tighten the country’s belt at some time but, it seems, that it won’t be until the economy is standing on its own two feet.

$422 billion was set aside for support and of that sum, $395 has been paid. The Republicans will be hoping that Biden is going to spend that other $27 billion wisely.

Successive Powell FOMC’s have seen members at pains to back up their chairman. This is a good development as it spreads the load. Three Regional Presidents spoke yesterday, and they appear to want to err towards starting the taper a little ahead of what Powell may want.

It is likely that their conversations will continue behind closed doors since Powell is unlikely to change the record when he appears before the Senate later today.

The minutes of the latest meeting are still two weeks away. Between now and then, the market is still going to want to push for a degree of certainty.

The dollar index gave back a portion of its post-FOMC gains yesterday. It fell to a low of 91.89 but is unlikely to give back too much more unless Powell performs a 180-degree retreat later.

ECB leaders deciding a new strategy

It seems that all the arguments and disagreements that have been bubbling beneath the surface recently have now been distilled into two, possibly three factions.

Two or three, depends on whether France can be considered a faction by itself.

The two main factions are along the lines of giving or taking. This is not new, but it does define the battle lines for when the big conversation takes place.

There have been no threats about what the Union could look like in five years.

Following a few years of Brexit (still not finished) and the outcome of the Pandemic, the next train to leave the station will be political.

Mario Draghi holds his own future in his hands, but he will need to choose between his federal aspirations for the entire region and his loyalties to his home country.

As the recovery takes shape, it is possible (and this has been said before) that his country’s economy is simply not compatible with the financial ideals of Brussels and Frankfurt, no matter how ideologically aligned they are.

Added to The Italian Dilemma, will be the French Presidential election. The results of the regional votes at the weekend proved one thing: that the French are not interested in anything other than being able to blame a single individual. The turnout at the weekend was painfully thin.

This will change next year when Macron takes on Le Pen. The electorate may hope for another charismatic character to remind them of the original Macron to emerge, but that could be a forlorn hope.

In the meantime, Germany will demand to be in control of inflation in return for keeping the entire EU boat afloat.

The euro still has the potential to fall further.

It reached 1.1921 yesterday as it staged something of a recovery against a weaker dollar, but this is unlikely to stretch much further.