Johnson pleads for responsible behaviour

Shops, pubs, and leisure facilities reopened in England yesterday and it was clear to see the level of pent-up demand that was released. Ques for shops snaked around the block gyms were full before it was even daylight.

Prime Minister Boris Johnson pleaded with the public to act both sensibly and responsibly in order for the next stage of the roadmap to be achieved.

The savings rate in the UK has skyrocketed during a year of lockdowns and yesterday saw the pressure valve released.

In order for expected economic recovery to continue and for the country’s finances to have a chance to recover, there are three significant obstacles that need to be overcome.,

First, the settlement of the proposed agreement between the UK and EU over trade through Northern Ireland needs to be finalized. Then, scares over the safety of vaccines need to be managed to ensure that the success of the vaccination rollout continues and finally the questions about how the nations finances will be restored to some kind of order needs to be answered.

Chancellor of the Exchequer Rishi Sunak may face calls for further support should the recovery falter as employment and inflation both begin to rise. A split in the MPC over the need for a further easing of monetary policy also threatens to destabilize the recovery.

MPC members Sir Jon Cunliffe and Jonathan Haskell will make speeches over the next few days. Both are likely to acknowledge the threat to the economy of rising inflation but are expected to reassure markets that any rise will be a one off that will abate as the economy fully reopens.

Data released later today will show that industrial and manufacturing output remains weak but improving and that will serve to emphasize the importance of the services sector which continues to hold its own.

The pound remains hemmed into a tight range versus the dollar. It is stuck between 1.3780 and 1.3670 and as pressure builds, should one of those levels be broken it could drive a significant move, the issue facing traders and investors to how to discern the direction that may take. Yesterday, Sterling rose to a high of 1.3776, but fell back to close at 1.3740.

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Inflation data to set a standard

No matter what theme Jerome Powell chooses for speeches about the economy for now, the topic always seems to return to fears about a rise in inflation and what plans the Fed has to deal with it.

Usually very forthcoming, Powell has been guarded over exactly how the Central Bank is going to deal with the rise inflation that now appears to be on its way.

That reticence is making traders and investors anxious and has led to analysts and commentators speculating about two significant issues. First, how high can inflation rise before the Fed slams the brakes on. If they act precipitously what effect will that have on markets that continue to see record highs. The second concern is how long the temporary rise will be allowed to continue.

The overstretched nature of equity markets continues to see a handful of stocks drive ever higher valuations based upon future earnings streams. It will be of concern to the FOMC, and the entire market will be hoping for more than promises and calming words to come from the next FOMC meeting in a few weeks’ time.

Continued accommodative monetary policy and the stimulus delivered by the injection of $1.9 trillion into the economy will have an unprecedented effect on the economy but it remains pure speculation about just how high GDP will be in 2021 since the events of the past year have been unprecedented.

The time is fast approaching when the theories that have been presented will be put to the test.

The one major issue facing the economy is job creation. While the NFP data has been grabbing headlines, underlying issues remain. Sustaining new jobs at the level seen in March will be close to impossible. This is an area where the issue is systemic and SME businesses may require further, targeted support.

There is also speculation about the direction of the dollar. As accommodation remains the dollar will be pressured as has been seen recently but should there be even a hint of a need to tighten support the dollar could return to levels not seen for six months.

Yesterday, the index fell to a low of 92.01, closing at 92.10. It is building support at 92.00 but the topside appears well protected around 92.80.

Merkel is concerned about the growing infection rate

While other major economies plan for further reopening, the Eurozone remains mired in rising infection rates and concerns over delivery of vaccines.

There are several factors driving the inability of the Union to get the Pandemic under control. One is pure geography. With land borders with a large number of other nations each with their own issue with Coronavirus, a robust plan to close borders is impossible to manage.

Then, once any new variant crosses into the EU, halting its spread is just as difficult.

The entire nature of how the region is set up also leads to issues of control. There is no single body responsible for controlling the spread of the Pandemic and lockdowns are different in every nation depending on several different factors.

The various comments made recently about the stimulus package means that it will be several months before the much-needed support is available. It is also being considered that a portion of the funding will be used to reduce debt which continues to spiral in several countries.

Germany appears to be having difficulty coming to terms with the issues it is facing. On the one hand, vaccination rates continue to rise but so do infections. Angela Merkel commented yesterday that the level of infections remains far too high.

The French President appears to have become the focal point of unrest as France continues to be under a strict lockdown.

Emmanuel Macron has been suffering from a crisis of confidence over the past few months which contrasts starkly with the whole new wave he promised to bring to French politics when he was elected.

There is a growing difference throughout the EU between nations like France which lurch first one way then back leaving their economies foundering and nations the Netherlands where the system dictates there will always be a coalition but the size of each Party within that framework changes slightly.

This is a useful way of ensuring that the underlying politics of the nation remain generally stable.

The euro remains driven by the dollar. It appears unlikely for now that it will breach the 1.20 level versus the dollar but that is by no means certain.

Yesterday, it reached 1.1919, closing at 1.1910.