Banks to be allied to extend more large mortgages?

The Bank of England is planning to add fuel to the mortgage fire as it discusses lifting restrictions on banks’ house loan rules.

The property market has been a mainstay of the UK economy for decades and was given a boost during the pandemic as Chancellor Rishi Sunak provided a stamp duty holiday to ensure that activity remained high during the various lockdowns.

That benefit has now been removed, so the Bank of England is looking at ways to increase activity in an attempt to support activity.

The Bank is expected to increase the volume of higher value loans that banks are able to provide.

It is simply being labelled as the Bank keeping up with the market, but underlying that reasoning is a plan to ensure that the property market remains at the forefront of the country’s economic activity.

The debate rages on regarding the Bank’s apparent U-turn over an increase in interest rates at its most recent meeting.

Data that has been published since the meeting that was held on November 4th has been inconclusive and while the NIESR report on a potential slowdown in long-term activity could be cited, it is unlikely that it would have had any real effect on short-term decision-making.

Silvana Tenreyro, who is now one of the longer-serving independent members of the MPC made most sense by insisting that her vote to keep interest rates on hold was driven by her belief that a tightening of monetary policy would have no effect on inflation that emanates from one sector of the economy.

The major concern is that tightening policy, at a time when activity is slowing, could be counterproductive.

After a week in which the pound made a new year’s low versus the dollar, this week sees the employment report for October released tomorrow. This may provide little relief to the currency.

It is expected that the headline claimant count will continue to fall, although no change is expected to the level of unemployment, which is expected to remain at 4.5%.

Inflation data will be released on Wednesday, with the core level of inflation expected to remain above 3%. Following last month’s rise to 3.1% the fear is that it could touch 3.5%, although this is not the most popular expectation. It remains that there will be a marginal rise, which could point to a levelling off.

Data for retail sales will round off what could be a busy week for Sterling. There is a daily negative level of expectation for activity in the consumer sector. The likelihood is that year-on-year retail sales will remain in negative territory, although there may be an improvement on last month’s fall of 2.6%.

Last week, the pound reached a low of 1.3353 and closed at 1.3421.

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President unable to decide between Powell and Brainard

The choice of who will be the Chairman of the Federal Reserve following the expiry of Jerome Powell’s first term next February has become unnecessarily protracted as the Democrat majority have made it into both a political football and a chance to expunge the final reminder in the Federal Government of the reign of President Donald Trump.

When looked at rationally, Powell has performed admirably during a crisis that rivals anything seen by the Central Bank in the past fifty years at least.

He deserves to be ranked alongside Alan Greenspan and Ben Bernanke given the way the Fed has steered the economy through very troubled waters, and he would be, were the Administration still be Republican.

However, the fact that a vindictive element within the Democrat membership of Congress is determined to hound him for office based upon the highly dubious charge that he has been less tough in his oversight of Wall Street than he should have been.

Lael Brainard has become the darling of the left, although to be fair she has been knocking on the door of a more senior role for some time.

Were she to be proposed, Democrats would have little difficulty in seconding her candidacy. This would see a major shift in the FOMC and could see a rift develop between the more business minded Regional Fed Presidents and the more regulatory driven Brainard.

One possible negative facing Powell could be the way inflation has spiked, while he has appeared a little too sanguine about rising prices for some people’s taste. While this is synonymous with his style, a show of concern may have been more acceptable.

This week, the major data releases are retail sales and industrial production tomorrow, housing starts on Wednesday and jobless claims on Thursday.

Last week, the dollar index broke conclusively above long-term resistance levels. It reached a high of 95.26 and closed at 95.09.

Much criticized economy plan bearing fruit

It is a truism within the financial markets that if its expectation of an event fails to occur, that expectation is often turned on its head for no apparent reason.

For some considerable time, it has been seen as only a matter of time until the euro enters freefall, given the divergence in monetary policy between the ECB and other G7 economies.

While the U.S., in particular, looks at beginning to tighten, the ECB is continuing to pump record levels of support into its economy in order to stave off a repeat of previous mistakes.

While it may be wrong to label the ECB as now being soft on inflation, a charge made several times by the departing Bundesbank President, Jens Weidmann, it is true to say that rising prices are not the Central bank’s primary concern.

There is now a school of thought that is beginning to emerge that the ECB’s methods are more likely to promote long-term stability, as long as inflation begins to abate in the first quarter of 2022.

In a large part of the Eurozone, inflation has increased, but not outside the bounds of what is seen as normal given the level of support that has been provided.

It is only in comparison with Germany and one or two other highly industrialized economies, that it is seen as an issue. Even in those nations, it can be clearly identified that its origins were in the supply side of the economy and the inability of supply to match demand.

It is now being considered that while the euro may not rally to more respectable levels in the short term, neither is it likely to sink without trace. There is definitely going to be a disparity in monetary policy and that will lead to the euro being subdued, but that will be limited to technical rather than policy reasons.

This week will see the release of data for trade released later today, Q3 GDP released tomorrow, with QoQ growth of 2.2% expected, and Inflation on Thursday. The week will be rounded off by a speech by ECB President Christine Lagarde on Friday.

Last week, the single currency suffered at the hands of a strengthening dollar. It fell to a low of 1.1432 and closed at 1.1446.