Johnson soothes angry backbenchers

UK inflation fell to a five year low yesterday as the uptake from the Government’s eat out to help out scheme exceeded all expectations.

Many commentators are looking for the Government to provide further support for the hospitality industry which is still seeing outlets closing in major cities as working from home becomes the norm. Also, Holiday companies and the entire aviation industry is in serious trouble and craving support with activity not expected to return to normal until late 2023 at the earliest.

The Bank of England’s Monetary Policy Committee meets later today and is set to hold fire on any further boost to the economy until Chancellor Rishi Sunak firms up his fiscal planning.

Analysts believe that the Bank will act in November or December and the support will come via a further £100 billion of asset purchases.

With further action likely before the end of the year but with several other imponderables in play, the OECD revised its estimate for the contraction of the economy this year to 10%, Q4 is going to see a rise in volatility for the pound.

The fragile recovery of the economy following the record plunge in Q2 could still be completely blown off course. Prime Minister Boris Johnson was guarded in his view on the possibility of a second lockdown when questioned by MPs yesterday. He was, however, prepared to say that a second lockdown would be a disaster.

Criticisms of the Covid-19 testing regime are growing as the country reached close to 4,000 cases yesterday although there continues to be little correlation between infection rates and fatalities as there was in the early days of the first lockdown.

The concern is that while the majority of those infected come from the younger demographic, there is a definite rise in older people becoming infected as the spread continues in pandemic blackspots where regional lockdowns are taking place.

Yesterday, the pound benefitted from a bout of dollar weakness. It rose to a high of 1.3007 but was unable to sustain the rally and it fell back to close at 1.2943. Perhaps more significant was its rise versus the euro which also weakened yesterday. It reached a high of 1.0996, closing at 1.0979.

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Lessons learned helping to put support in the right place

For once, the FOMC meeting which ended last evening was fairly predictable in its outcome.

Rates will stay at historic lows until inflation is rising sufficiently strongly to exceed the 2% target and Chairman Jerome Powell confirmed the Fed’s belief that over the past 60 days, the recovery has exceeded expectations.

With various indicators including regional activity statistics showing that the recovery is far from uniform, Powell commented that there are areas of the economy that won’t recover until there is a vaccine in place.

Despite the improvement in activity mentioned by Powell, the Fed’s projections for the economy are unchanged. That means that the Bank doesn’t see a return to pre-pandemic levels until at least the end of next year.

With the election campaign in full swing, Powell appeared cautious in his comments to ensure that he cannot be accused of any form of bias. He appeared particularly reticent to discuss any new support.

The reason for this was fairly clear. The Fed is still waiting for the package of fiscal support to be agreed while wanting to ensure that he didn’t attribute blame for the impasse. He did however agree with one questioner who asked if further fiscal support is going to be needed.

In a fairly clear piece of electioneering, President Trump called upon his Party to approve a far higher level of support. He also dismissed warnings over the economy commenting that the recovery is going incredibly well.

While fiscal support remains just out of reach, the Fed has exhausted its powers now by confirming that it will do all it can to support growth and a full recovery from the effects of the pandemic.

The dollar index was fairly volatile yesterday. It traded between 93.60 and 93.10 as the market took comfort from Powell’s comments. Volatility is likely to increase as the election approaches. Although Biden is well ahead in the polls, there is an underlying feeling that Trump could still pull a rabbit from the hat.

Why let a decent crisis go to waste

Ursula von der Leyen, the President of the European Commission spoke yesterday of the need for a more united Europe as the region faces up to challenges going forward

Using the Covid-19 pandemic as a backdrop for change, Von der Leyen spoke of the need to take this opportunity to enact necessary reforms.

Elected on a platform of a more Federal Union, she appears to be starting to get into her stride following a cautious first year in charge that has seen the largest upheaval in the region for more than ten years.

The EU, in its various guises has lurched from crisis to crisis ever since monetary union was enacted more than twenty years ago and as a degree of control gets established, calls for greater unity and more cooperation are made. Then, it gets more comfortable and the difficult decisions are shelved for another day.

There is no real basis to expect it to be different this time other than the fact that the performers in the drama are different but von der Leyen does seem to have an agenda for reform.

Yesterday, she called for more urgency in the completion of the Banking and Finance Union and more progress in the creation of an EU-wide minimum wage. She demanded that fiscal support remain in place for some time to come and increased if necessary.

The Banking Union is planned to provide a more solid foundation for the recovery of the sector. Bank mergers have not materialised as expected with several banks retreating back behind national borders and limiting their activity.

Rather than trying to be all things to all men financially, banks, most notably Deutsche Bank have decided to retrench, concentrating on their core business.

The upsurge in cases of Covid-19 is leading to fears of a second lockdown. This would be at least as big a disaster for the EU as it would for other G7 nations.

Yesterday, the euro fell to a low of 1.1737, closing at 1.1755. The 1.20 level which looked within reach last week now looks as far away as ever.

A weaker currency will allow inflation to move back into positive territory as the Eurozone fell into deflation according to the latest data.