Services data to face pressure of shortages

The third wave of Covid-19 to hit the UK, brought about by the Delta variant of the virus, appears to be on the decline as every form of vaccine that has been used appears to be effective against this strain.

While this is good news for the continued recovery of the economy, scientists are wary of another variant arriving to coincide with the winter flu season.

For this reason, analysts expect the Bank of England’s Monetary Policy Committee, which meets tomorrow, to keep support at its current level despite the possibility of one or two dissenters over the level of asset purchases in the current programme.

Overall, the expectation for the MPC meeting is for a neutral outcome, with just a shade more optimism about the continued recovery.

This meeting is scheduled to also publish the Bank’s economic forecasts so there will be a degree of expectation that the growth forecast will be increased or, at least, the most recent predictions will be confirmed.

The phasing out of the Government’s furlough scheme which is predicted to add 150k to unemployment will bring a note of caution to proceedings but with the economy performing well, it is expected that those jobs will be absorbed into the expected level of GDP.

One thing that Andrew Bailey and his colleagues can be confident about is that there will be no more lockdowns. The reopening of the economy on July 19th doesn’t appear to have had a significant effect on infections, although the data is clouded by the new strain that raised concerns for a brief period.

Those members of the MPC who will likely vote to reduce asset purchases are worried about the level of inflation and that it may become a permanent feature if not tackled soon.

Data for services output will be released today and although traders will most likely prefer to wait for tomorrow’s interest rate decision, the data will be notable for how the ability of the hospitality sector has been affected by its ability, or otherwise, to attract staff following lockdown.

The pound is receiving support from several quarters. Yesterday, it rose to a high of 1.3938, closing at 1.3915.

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Traders optimistic about NFP… but

The U.S. economy is humming along very nicely. Regional expectations for third quarter growth are improving almost weekly as the fears over a slowing of the recovery in this quarter begin to fade.

Over the Pandemic, the NFP data released on the first Friday of the month had been setting the scene for the rest of the month as traders searched for a degree of positivity that was not happening in the pre-vaccination period.

Now, with the economy performing well, traders have moved away from the dominance of the employment report, with it being replaced by both fed actions and rising inflation.

It is almost taken as read that the economy will be adding jobs and as long as the data is roughly in line with expectations, it won’t cause the stir it has in the past.

Analyst’s expectations for the July headline are for around 900k new jobs to have been created but as long as there isn’t a larger revision, either way, to the June figures, possibly up to a 10% deviation will be acceptable.

As with the UK, despite significant increases in infections in several Southern States, most notably Florida where there is a concentration of tourists, the possibility of any further lockdowns is remote.

Once the NFP report is out of the way, the market is likely to enter something of a lull since although inflation data will be published later in the month, there is no FOMC meeting to make any market moving comment until late in September.

The September FOMC which will be held on the 21st and 22nd will also deliver economic projections, so it can be guaranteed the period between Labour Day and the meeting will see an increase in volatility.

FOMC Chairman Jerome Powell wants a second term in office. While it is likely to be a far smoother passage under Biden than it would have been under the previous President, Powell is making sure that the Fed’s policies on support for the economy concur with the Democrat ethos of providing for the entire economy, not just Wall Street.

The dollar is in something of a state of flux. Driven mainly by expectations over Fed action, it is drifting lower without that support.

Yesterday, it traded down close to support, reaching 91.89, but as in the previous session it struggled back above 92 to close at 92.06

Services data likely to stall

The Eurozone remains something of an enigma. The authorities have turned failure into success as far as the vaccination programme is concerned, and the Central Bank is providing a high level of support for the economy.

Despite this, there are still doubts that the recovery will be strong enough to ward off another recession once everything returns to normal.

While inflation is higher than it has been for some time, the level of awareness is high and although it will be bringing concern to more hawkish members, overall, it is still well below what individual members were used to in the past.

The market’s concerns about the Eurozone are more abstract. There is an underlying concern that despite words to the contrary, once the ECB has withdrawn support, and that may not be until the end of 2022 as the PEPP is expected to be replaced with further support next March, that everything will return to normal.

There has been a lot of talk about the region being at a crossroads, but it seems to have been at that crossroads ever since Mario Draghi’s famous whatever it takes speech.

The Eurozone needs a fiscal agreement. That is becoming something of a holy grail due to the differing systems in place across its various members.

Ursula von der Leyen will have her work cut out once she reappears, having seemingly been absent for several months.

She needs to tighten up how the Union is governed, the entire process is unwieldy, costly, and top heavy. It needs to be streamlined, and a programme for positive and inclusive change considered.

Several nations still feel very badly done by over the Draconian measures introduced at the time of the financial crisis, social development has been responsible for divisions rather than unity and nations on the outer borders are beginning to look over their shoulders.

The divisions that have been created at the ECB over inflation policy are a natural progression and unlikely to be a longer-term concern, but Lagarde needs to be given time to see how they work and if any tweaks are necessary.

While the patient is still unwell, signs are that it will recover, maybe not fully since further surgery may be necessary.

Yesterday, the euro failed to take advantage of a weaker dollar.

It rose to a high of 1.1893 but was unable to sustain any momentum and fell back to close at 1.1864.