BoE Chief Economist announces departure

The partial lifting of restrictions in England has proved that despite the record volumes of online shopping that took place during the lockdown, there is still a place for bricks and mortar retail outlets.

Major stores are reporting record takings only seen at Christmas as they struggle to keep pace with demand. However, it is likely that the initial burst of action will level off in the next few weeks as pent-up demand is satisfied.

The number of people in larger stores is being carefully regulated but even a casual observation raises concerns about an upsurge in cases of Coronavirus.

The Government and scientists will be closely observing the data to confirm that the next stage of the road map can take place next month.

Speaking yesterday, the Prime Minister Boris Johnson was keen to emphasize that the significant falls in the number of infections, hospitalizations, and fatalities has been due more to the lockdown than the success of the vaccination rollout.

He asked that the public continue to exercise caution as they begin to enjoy the new freedoms.

Andrew Haldane, the Bank of England’s Chief Economist, and its most vociferous cheerleader for a strong rebound in the economy this year, has announced that he will be leaving his position after the Monetary Policy Committee meeting in June.

Haldane has spoken often of his confidence that the level of support and stimulus that has been injected into the economy so far should be sufficient to negate the need for negative interest rates.

He has voiced concern about the fundamental effect of negative rates on the way money markets operate in the UK.

His views have concurred with his colleagues at the Central bank and balance those of the independent members of the MPC who favour further support should the economic revival begin to falter in the Autumn.

The pound continues to trade in a fairly directionless manner. Yesterday it remained in its current rage versus the dollar. It traded between 1.3694 and 1.3768, closing at 1.3751.

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Low inflation from a year ago adds to YoY rise

Data released yesterday showed that inflation is beginning to pick up although year on year figures were slightly distorted by the fact that inflation was at record lows a year ago.

As that data drops off the scale, the true picture will still reveal a rise that may begin to concern those who need more than reassurances from the Fed that they have the situation under control or at least they have plans in place.

The most significant issues that have been raised by the market is just how high will the Fed allow inflation to reach and once it reaches a level that makes the FOMC uncomfortable, what tools will be available?

Jerome Powell is being tested in a manner that he has not faced before. He was able to beat off the personal attacks on him by the former President but now his credentials as Fed Chairman will need to come to the fore.

He passed the tests and traps set by Donald Trump and there is no reason to believe that surrounded by a highly competent group of Regional Fed Presidents and supported by Treasury Secretary Janet Yellen that he cannot fulfil the policy promises he has made.

Headline inflation rose by 1.6% in March. This is the CPI data stripped back to leave out volatile items and is the most reliable method of looking at the underlying trend.

The data was a little higher than market expectations and the FOMC will need to reinforce its message in the coming weeks and make a strong statement at its meeting on April 27/28 to provide the market with reassurance.

The rise in inflation was the highest in almost nine years as the vaccination rollout gathered pace giving consumers more confidence to venture out. The massive level of stimulus injected into the economy has also contributed to activity.

The dollar index remains under pressure and continues to threaten support. It has now broken what was considered strong support at 92.00 and is likely to test the next level at 91.80.

While the Fed remains dovish and supportive towards the economy the index will remain under pressure. Yesterday it made a fresh low of 91.79, closing at 91.83.

ZEW data misses targets

One of the more surprising facets of the Eurozone economy over the past few weeks/months has been the level of confidence being shown by both manufacturing and consumers, particularly in Germany.

It now appears that that confidence is beginning to wear thin.

Yesterday the influential Mannheim based ZEW Institute delivered its monthly outlook for the current situation and economic sentiment for Germany together with its estimates for economic sentiment across the entire Union.

Confidence has fallen substantially this month as the vaccine rollout continues to be patchy and sporadic despite some general improvement.

The new lockdowns that have taken place currently show no sign of being lifted in any meaningful way has also hit confidence particularly amongst consumers.

There remains a high level of belief that there will be a strong rebound in activity and growth this year. It is hard to know what that is based upon since until the current restrictions are eased and the level of vaccinations is significantly increased the entire economy will move towards stagnation.

The rise in inflation that was reported in the U.S. yesterday will concern several of the more affluent nations of Northern Europe as they move at snail’s pace towards ratification of their own stimulus package.

The effect of the stimulus will be less in the Eurozone as it will be distributed in a wholly different way. It appears that it will be used, in the main, to reduce the level of borrowing in countries like Italy and Greece where the debt to GDP ratio has skyrocketed in recent months.

In the U.S, the effect of the stimulus was like a shot of adrenaline direct to the heart while in the eurozone it will be more like a cosy blanket and a cup of tea.

The entire market now seems to have developed a sense of concern over the next significant move from G7 Central banks. Traders are prepared to wait until the picture becomes clearer before committing to a new direction for major currencies.

Yesterday, the euro broke through resistance at 1.1920 and made a high of 1.1955 closing at 1.1948.