Government remains confident over June plans

The Roadmap for Recovery announced several months ago by Prime Minister Boris Johnson has hit a bump in the road with the spread of the Indian Variant in the U.K.

Last week provided a chilling reminder of the Government’s perceived dithering over the timing of lockdowns and other measures as the first and second waves began.

There is growing confusion about both the seriousness of the outbreaks together with the effectiveness of the vaccines that are currently being administered.

Words like hope, expect, and believe carry no weight without the endorsement of the scientific community.

When Johnson announced the Roadmap, he was determined that it would be irreversible, so tomorrow’s further lifting of restrictions will go ahead as planned.

The question remains regarding the full reopening that is scheduled to happen next month.

The outcome of that decision won’t now necessarily be made by reference to the success or otherwise of tomorrow’s reopening.

Further research regarding the spread of the new variant will concern Johnson until he is in receipt of firm data.

On a brighter note, the economy is recovering at a pace which will mean that the UK turns from being one of the worst affected economies in Europe to having the most successful recovery.

Boris Johnson announced a full and complete enquiry into the handling of the crisis which will take place next year. It is certain that several shortcomings will be exposed, while the arrival as if by magic of a vaccine cannot be expected to happen were another Pandemic to take place.

Several members of the MPC are speaking today and the full picture will begin to emerge about their views on the ability of the economy to stand on its own two feet once stimulus has been withdrawn.

Chancellor Rishi Sunak will hope that the significant growth achieved since the budget will allow him some leeway concerning the repayment of debt levels that have grown exponentially since the Pandemic began.

The question of negative interest rates may also be raised with the split between BoE Officials and independent members opening again.

Unemployment data will be released tomorrow with inflation on Wednesday.

Last week Sterling gained due to the hope of a full recovery coming sooner than later and stood firm against a recovering dollar. Given the speeches and data releases expected, a true path for the pound may emerge this week.

It made a high of 1.4166, closing at 1.4097.

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Tapering still unlikely until 2022

The minutes of the latest FOMC meeting will be released this week.

It is hoped they will give some clue as to the advance knowledge members had of the inflation data that was released last week.

The rhetoric emanating from Fed Officials like Lael Brainard, and Regional Fed Presidents like Mary Daly has been supportive of continued super loose monetary policy and this has been supported by the Treasury where Secretary Janet Yellen continues to drive forward spending plans.

The Administration continues to see the future being created in the present with stimulus driving all areas of the economy but in particular sustainable employment through skills development and changes to social benefit.

Last week’s rise in inflation, while not wholly unexpected, in the way the fall in new jobs was the previous week, still demanded the market sit up and demand an explanation of what the Fed intends to do.

Two things are well known. First, is that the Fed will taper bond purchases before it begins to hike interest rates and that tapering is not expected to begin this year.

That delay in tapering is confirmed in the latest poll by Reuters in which the majority of those polled didn’t see any reduction until Q1’22.

There was also further bearishness regarding employment. It is unlikely that the unemployment rate will fall back to pre-covid levels until well into next year with some respondents commenting that it may even be 2023.

Clearly the Fed, in the shape of Chairman Jerome Powell faces some tough decisions. The only benefit the FOMC has received from recent data releases is that investors will now have more idea of the task ahead.

Until recently it appeared to be fairly plain sailing for the Central Bank, benefitting from what has gone before.

Powell has been in no mood for slaps on the back! He continues to show steely stoicism to get it right, willing to make the tough calls with no reference to popularity or re-selection.

The dollar reacted positively to last week’s inflation data, but its gains were unsustainable since the reaction of the FOMC to the data is more important than the data itself.

It rose to a high of 90.91, closing just 10 pips higher on the week at 90.31.

Economy still building foundations

The Eurozone appears to have become what horse racing fans would call a reliable plodder.

Slow to start, often flattering to deceive and taking more than most to get into its stride.

Those three analogies have all been seen over the period of the Pandemic. While Italy, where the Pandemic was first seen, did a lot to curb the spread of the virus it was already beyond its defences when the rest of the EU began to take notice.

The determination of the EU to live by its four freedoms led to a delay in locking down national borders which was quite literally fatal.

Now, as the metaphorical horse race has entered its final stages, there is no question that the EU will achieve a podium position, but it is becoming more likely that it will finish creditably.

The insistence of several nations to use funding to provide support rather than stimulus will set the recovery back with the economy unable to gain the traction being seen in the U.S. and to a certain extent the UK.

Employment will also take quite some time to recover although in this regard freedom of movement will be something of a double-edged sword.

On the one hand countries like Germany may experience a skills shortage but not lack for unskilled labourers, while the nations which export workers will need a far greater level of support for longer.

An inquiry into the Pandemic will take place in the UK and it is absolutely vital that such a review takes place in Brussels in order that the half-baked semi-Federal response to a crisis which engulfed the whole region almost equally, receives a determined and robust response.

No matter how the recovery arrives and how long it takes, debt levels will need to be addressed. With the ECB still under pressure to forgive repayment of the bonds it has purchased; banks’ bad loans are still going to be an issue.

A radical change in the banking landscape with banks continuing to retreat back to their traditional markets is likely to be the most likely outcome.

The euro danced with the dollar last week as a willing partner, mirroring almost every step.

It fell to a low of 1.2050 but recovered to close at 102150 as the greenback ran out of steam.