Conservative lead amazes Cabinet

Cabinet Ministers have been quoted this week as being surprised at the fact the Conservative Party has been able to retain its lead in opinion polls despite the way in which the pandemic has been managed.

It shows that in the long run, despite day-to-day poor decision-making and some high-profile issues, voters in the UK believe that overall, the Government has done just about as well as it could, given the circumstances that surrounded the way in which the virus arrived in the UK and spread so rapidly.

However, it is now, a week after Freedom Day, that criticism is mounting. The number of people being pinged by the Government’s test and trace app has risen from 500k two weeks ago to 600k+ last week.

This is causing major economic issues in the country, with efforts to bring in exemptions to allow certain sectors of the economy to continue to function failing miserably.

Members of the Bank of England’s Monetary Policy Committee are forming fairly clear battle lines depending on when they believe that the Bank should begin to tighten monetary policy. Several of them are going public with the reasons they feel the Bank should stick or twist.

One of the hawks, Gertjan Vlieghe will speak this morning. He will most likely set out his reasons why he feels that support should gradually be withdrawn.

While it is considered hawkish to want to taper the Bank’s support for the economy sooner rather than later, that would be the easier and more easily understood option. The economy is performing well despite the recent hiccups, and inflation is above the Government’s target.

Given those facts, it is perhaps braver to hang on for as long as possible to allow the withdrawal of fiscal support to feed through before turning off the money tap.

Last week, the pound fell to a level against the dollar that hadn’t been seen since last February. It reached a low of 1.3572 but recovered to close marginally lower on the week at 1.3746.

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No policy change expected until 2022

The FOMC meets this week, and the conversation won’t be a lot different to what has taken place recently in London, Frankfurt and even Tokyo.

When will it be appropriate for monetary support to begin to be withdrawn? Every G7 nation is facing the same, although how they have reached this point and the outlook for their economies differs considerably.

In New York, the talk will be of raging inflation, which is expected to continue to rise, although that rate is expected to slow in the coming months.

This week will also see the release of preliminary data for Q2 GDP. That data is expected to be released on Thursday, but there is no doubt that it will be available to FOMC members at their meeting which will take place over two days, tomorrow and Wednesday, when Chairman Jerome Powell will announce the headlines of what has been discussed and agreed.

It is very likely that Jerome Powell will follow Christine Lagarde’s lead by sticking to the script that has been spoon-fed to the markets over the past few weeks/months.

It is clear that in general Central banks do not yet feel the time is right to start to withdraw support despite the effect it is having on inflation.

There are plenty of individual reasons that can be cited for rising inflation: the speed with which economies are opening up, the bottlenecks that have grown within supply chains and the rate at which jobs are being added are the usual suspects.

Nevertheless, a tapering of the monetary support flowing into individual economies will certainly slow inflation. The question is how much that will become too much too soon and cut off the recovery before it is completely solid.

That is why the FOMC members are paid the big bucks, since this will be the most significant decision that the Committee has taken in more than ten years and its ramifications will resound around the world.

Having broken through the 92.80 barrier, the dollar index now faces further resistance around 93.20 which is holding up any further progress.

Last week, the index reached a convenient high of 93.19, proving everyone’s theory correct. However, it didn’t correct far, closing at 92.89.

ECB won’t tighten too soon after last experience

Since its creation over twenty years ago, there have been very few occasions when the more dovish members of the ECB’s governing council have had both the ammunition and the will to be able to face up to the more hawkish members and allow inflation to exceed its target.

On reflection, it is just about the right decision for the Eurozone that it has become more flexible in its view of inflation given the way prices have been rising lately.

In the end, the treatment of inflation across the Union is going to be an issue for some time. and President Christine Lagarde is unlikely to feel that the discussions held last week will be the last.

Germany, in particular, is not interested in where inflation has come from or whether it is transitory. As far as it is concerned, inflation is above the Bank’s target and therefore needs to be dealt with.

However, the majority of members of the Eurozone do not see it that way and have voted for inflation to be handled very differently going forward.

Lagarde has spoken of the fact that there is zero ambiguity in the new symmetrical inflation policy. 2% is no longer a ceiling. It may be the target, but that applies whether inflation is above or below 2%

Following last week’s ECB meeting, it is clear that the Bank expected inflation to rise to a peak around 2.5% by the end of the year, then gradually fade. That fits in with the generally expected tapering of support that is likely to begin around the end of Q1.

Despite the outcome of the meeting last week, this is not the end of discussions surrounding inflation. That story is going to run and, with the hawks determined that rising inflation is not going to be allowed to remain high for any significant period.

Last week, the euro stood its ground and refused to be the dollar’s plaything. It fell to a low of 1.1751 but recovered to close at 1.1770.