Growth to build on foundation of consumer spending

Having contracted by the largest amount in 300 years it is entirely plausible if not inevitable that the economy would rebound at its fastest rate in 70 years.

Andrew Bailey demanded that the markets not get carried away by a recovery which simply takes the country back to where it was in 2019.

The meeting of the Bank of England’s Monetary Policy Committee that was held yesterday raised its forecast for full year GDP to 7.25% and confirmed its belief that the economy would return to pre-Covid levels by the end of the year.

The increase in the forecast from 5% three months ago is based on the pace of growth in the retail sector in particular and is in spite of several well-known High Street Brands either reducing their bricks and mortar presence or disappearing entirely.

The degree of optimism surrounding the meeting also means that those who saw a cut in interest rates into negative territory this year have been defeated.

In keeping with other G7 Central Bankers, Bailey acknowledged that inflation will rise rapidly through the next few months but will decrease again as supply and demand are equalized and supply chains return to normal. Again, in keeping with the Fed in particular, the bank will wait until inflationary pressures are real before taking any action.

Outgoing Chief Economist Andrew Haldane used his final meeting to vote against the Bank’s asset purchases remaining at £895 billion.

He expressed his concern that inflation may rise at such a pace that it may be difficult to either control or bring back to below the Bank’s mandated target. He voted to taper purchases of assets to £845 billion.

The pounds reaction to the meeting was fairly muted. Although the outcome was on the hawkish side, the wait and see element left the markets a little underwhelmed.

Sterling rose to 1.3940 but fell back to close at 1.3890 as traders felt that there was insufficient momentum to see a challenge to the 1.40 level.

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Jobless claims below 500k for first time since Pandemic

Weekly jobless claims data that was released yesterday showed that the pace of layoffs is continuing to fall with the headline number coming out below 500k for the first time since the Pandemic began.

This has stirred the level of expectation for today’s employment report for April.

Speculation over the headline non-farm payrolls has reached fever pitch. Such is the optimism that even a number in excess of 900k could disappoint some.

The weekly jobless claims showed that the number of layoffs is now at its lowest level since the millennium.

That having been said, given the degree of stimulus that has been pumped directly into the economy by President Biden and the ultra-easy monetary policy adopted by the Federal Reserve it would be a major shock, and point to a significant systemic flaw, if the economy weren’t to be in a major recovery.

Add to this the increasing level of take-up of the Coronavirus vaccine, that has finally found a sufficient degree of acceptance, and everything is in place to justify almost daily upwards increases in forecasts for 2021 full year GDP.

Yesterday, Cleveland Fed President Loretta Meister agreed with her San Francisco colleague Mary Daly that growth could reach 7%. This was even an increase on Daly’s prediction of 6.5% that was only made two days ago.

Meister saw one concern; there is a growing disparity between domestic and commercial real estate across the entire country.

While sales of private dwellings are close to overheating, commercial real estate, both in terms of rental prices as well as volume of activity remains low.

Meister also saw significant slack remaining in the labour market. This is likely to remain until the economy is back to a broader recovery. Many firms believe the quantity of job applications remains high, but the quality remains low.

Yesterday, the dollar index retreated as it was unable to break through stubborn resistance.

It fell to a low of 90.87, closing just two pips higher at 90.89.

Good news for inflation, bad for exporters

The euro dispelled predictions that it would remain below 1.20 versus the dollar yesterday as it rose to a high of 1.2071. This will bring a degree of comfort to those members of the ECB’s General Council who were beginning to fret about rising inflation but may dent expectations for an export led recovery should it continue.

Data released yesterday for retail sales saw a 12% rise year on year. While impressive, this shouldn’t be taken out of context given what was happening to the economy a year ago.

However, it should also be noted that the data significantly surpassed analysts’ forecasts of a major increase but that it would be below 10%.

The area of the ECB that deals with banks and their level of risk to the economy commented yesterday on its concerns that up to 40% of banks are not complying with the Central Bank’s expectations on bad loans.

There is no doubt that were it not for Coronavirus, the ECB would be facing a crisis over the weakness of bank’s balance sheets. This may become an impediment to the recovery but will not be an issue until the economy is back on course for full recovery.

Andrea Enria, the Bank’s Senior Supervisor of Banks commented that while the bad debt issue is well known, there has been no consideration given to asset quality going forward.

A review could see a significant worsening of the position. This could have consequent issues for bank’s ability to lend to firms recovering their cash flow positions.

When this issue is added to the levels of debt to GDP ratios being seen currently the ECB is going to face an awkward time in grappling with several major issues.

The almost daily concerns emanating from the Union are at odds with a currency that is relatively strong. This points to how the market is trading at the moment.

It is hard to say when, or even if, the market will begin to trade with reference to economic fundamentals again but until it does, the levels of volatility and unpredictability will remain high.

Yesterday, the euro closed at 1.2065.