A new lockdown will push pre-covid levels into the future

The UK is again in the midst of another potential Coronavirus crisis. The Prime Minister and Health Minister have both commented that the country faces a tidal wave of infections, while speculation grows that another lockdown may become necessary.

There has been criticism of the decision that was made in the Autumn to relax the restrictions of wearing masks on public transport and in shops.

This is eminently politically driven, since while it was likely that there would be another variant of the virus, at the time the decision was made, the delta variant was under control and those members of the public who had received two doses of the vaccine were well protected.

The country had its first death from the Omicron Variant yesterday, while Sajid Javid announced that the new variant accounts for 40% of new cases in the capital.

The outlook for the economy is again clouded by the prospect of further restrictions. While it remains unlikely for now, that there will be a huge spike in deaths, or even hospitalizations, those infected will have to be isolated and that is sure to have an effect on the economy.

Productivity is expected to fall, the advice to work from home, if possible, will hit City Centres again and should there be another lockdown the introduction of furlough payments will create another drain on the Government’s finances.

The Bank of England has declared that the UK’s biggest banks could withstand a significant downturn in the economy. This is the fifth year in succession that banks have passed the test, which models a tripling of unemployment and a sharp fall in the value of property.

Measures are being introduced that will mean that banks will be required to build a buffer in good times that will protect them if there were to be a major downturn in the economy.

With the Bank of England’s rate setting committee set to begin its final meeting of the year tomorrow, the outcome remains too close to call. Following last month’s vote, by a majority of 7-2 in favour of leaving interest rates unchanged, it is possible that the vote could be the same. No outcome is off the table, and analysts are split on what to expect.

The short-term fate of the pound rates on the decision, while the outcomes from the FOMC and ECB are easier to predict.

Yesterday, the pound fell to a low of 1.3207 versus the dollar, closing at 1.3213.

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The choice has been made

The fact that last week’s announcement that inflation continued to rise in November was treated with a fair amount of ease is a testament to the trust that the Central bank has created while dealing with the economic fallout from the Pandemic.

Now the time has come for the Fed to get real in its actions and do more than make soothing noises.

It is very clear that the Fed is going to need to raise interest rates to curb inflation, given that rising prices are not going to go away in the short and possibly medium term.

Fed Chairman Jerome Powell has moved on from retiring the term transitory, to questioning what constitutes short term and asking when does the medium term begin and end?

While the market is prepared to accept the questioning of the semantics of the situation, it now expects action from the FOMC at its meeting, which ends tomorrow evening UK time.

The very least that is expected is a doubling of the pace of withdrawal of asset purchases, while speculation is growing that Powell’s comments following the meeting will be his most hawkish since he came into the role.

The time has passed for the FOMC to wait and see this or that data release. A reactive stance has proven to be the most beneficial for the majority of this year, but a ramping up of the level of proactivity is now deemed to be necessary, if not vital.

There is no longer any question of whether to favour tackling inflation over promoting growth.

Divergence is going to be the key word going forward with the dollar set to continue to strengthen against most major economies. Several global banks have named the CAD and NOK as the only two that will be able to resist, given the hawkish stance being adopted by the Bank of Canada and Norges Bank.

The dollar continues to be well-supported, but until the outcome of this week’s meetings is known, resistance around the 96.50 level will remain. Yesterday, the dollar index reached a high of 96.44 and closed at 96.35.

Tough negotiations to begin this week

Christine Lagarde, the President of the European Central Bank, has become prone to announcing her views on the Eurozone economy and the actions to be taken as policy.

This is irking several Central Bank Heads who make up the committee that determines monetary policy. The third of this week’s Central Bank meetings is the most clear-cut. It will be a major shock if the ECB does anything other than stay with the status quo.

While the Fed discusses that value to be attached to the short and medium term, only one date is considered vital to ECB watchers.

That date is the end of March next year. That is when the current agreement on support for the economy expires.

The current level of support is now considered to be excessive by many both inside the Central bank and among those charged with interpreting its actions.

It is unlikely that Lagarde will accede to any call for the current level of support to be reduced, even in the face of high and rising inflation, so the conversation this week will move on to what she can get away with from March onwards.

The rise in cases of the Omicron Variant will have strengthened her hand, and she will play upon the uncertainty this has raised.

The various lockdowns that have been initiated across the Eurozone can be attributed in some cases as a blunt instrument used to ensure that the citizens of those nations are minded to get vaccinated.

Despite Ursula von der Leyen’s celebration of the success of the vaccination programme, in truth, it has far less successful than has been seen in many developed nations.

Given its umbrella role covering nineteen states, and close to half a billion people, the ECB cannot afford to be driven by the big picture when making monetary policy decisions anymore. The bold growth over inflation mantra is wearing thin in many nations, and a more balanced approach is now called for.

Yes, it is very clear that in the past a more bureaucratic ECB has acted too fast in withdrawing support driven by an inflation fearing Bundesbank, but the pendulum may now have swung too far in a dovish direction. This week may reveal just how 2022 will turn out, although nothing can yet be cast in stone.

Yesterday, the euro was again weaker against the dollar. It fell to a low of 1.1260 and closed at 1.1284.