Employment and Inflation numbers to drive sentiment

This week will see the release of data for inflation and employment.

Despite the positivity that has been created by the latest release of the lockdown the number of people who lost their jobs is expected to rise by close to 100k taking the unemployment rate to 5.2%.

The data will be released tomorrow.

House price data has been released overnight and the Chancellor’s stamp duty holiday continues to drive the market higher.

Year on Year house prices across the UK rose by 5.1%. That is significantly higher than last month which saw a rise of 2.7%.

The reopening of several sectors of the economy has driven consumers to release a large part of the huge build-up of savings that took place over the past year. Bank of England Governor Andrew Bailey estimates that £150 billion was accumulated and is now returning to the economy.

Inflation data will be released on Wednesday and although significantly lower than the level seen in the U.S., UK inflation will soon show signs that it is beginning to rise.

The jury is still out on whether the Bank of England will need to provide more stimulus as the retail boom fades, so, although the MPC will be interested in the data, they will not as yet be concerned, that is of course unless there is a significant rise.

For now, the majority of retailers are discounting stock that they have been unable to shift, and that should also dampen any major price increases.

The FX market is still being completely dominated by events in the U.S., with traders hanging on every word and nuance emanating from the Federal Reserve.

The pound remains in range broadly between 1.3850 and 1.3670. Until there is a clearer picture of the Fed’s intentions it is unlikely to break out in either direction.

Last week it reached a high of 1.3844 as it mirrored the range from the previous week. It closed at 1.3832.

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Retail sales a flash in the pan?

The improving distribution of the vaccine and the higher than expected take up in several States has seen the economy continue to grow at a rate that will lead it to rise above the level it was pre-Pandemic sooner than had been anticipated until quite recently.

Estimates for GDP growth this year are being updated higher almost daily with the latest forecasts for Q1 and Q2 reaching 6.8% and 4.4% respectively.

The monumental increase in retail sales that was seen last week is clearly unsustainable and is an indication of the success of President Biden’s tactic of injecting cash to direct into consumers’ pockets or at least their bank accounts.

The major concern now is that people will begin to hang on to their own savings having spent to Government’s cheque until they are certain that the country has emerged from Covid-19.

This is clearly what members of the FOMC have alluded to when mentioning bumps in the road as the recovery takes hold. Jerome Powell commented recently that he won’t be 100% free of concern until every person in the world has been vaccinated.

Last week’s data for jobless claims saw a significant improvement and that will add to market concerns that the Fed will need to begin to taper support through monetary policy.

The FOMC will meet next week, and the outcome will be eagerly anticipated. Should Powell merely hint at the Central Bank’s plans to deal with rising inflation, there will be a growing feeling that he is winging it.

No Fed Chairman is going to get a free ride from the market without providing a degree of advance guidance as to what he plans to do as inflation inevitably breaches the 2% target.

The latest estimate is for inflation to remain at or close to 2.5% for up to a year but until the Fed’s plans are clearer any estimate is based on expectation.

The dollar index continues to suffer as the market reacts to the Fed’s dovish message.

It traded between 92.33 and 91.48. Major support is at 90.90 but that is unlikely to be tested ahead of the FOMC meeting, and only then if there is an increasingly dovish outlook.

Stronger euro to quell inflation fears

It is easy to poke fun at the ECB as it remains hamstrung between the EU Commission’s snail-like progress towards ratifying a stimulus package and the fears being voiced in several quarters regarding rising inflation.

The ECB appears to be taking its lead from The Federal Reserve and is clearly concerned about acting pre-emptively while the economy continues to be affected by rising cases of Covid-19 and the lockdowns that remain in place in several countries.

The most obvious takeaway from the entire Pandemic as it has decimated the Eurozone economy is the desperate need for a single voice to be responsible for fiscal policy but that will need a degree of cooperation that, if current negotiations are anything to go by, would take a miracle to achieve.

There is no doubt that the Union will recover from the Pandemic eventually but with countries like Spain seeing a significant area of their economy unable to reopen for some time, tourists will be looking at alternatives for this summer.

Italy and Greece are in a similar position and it is likely that tourists from the North will be relying on staycations again this summer.

The ECB meets this week and without trying to appear facetious, it is likely that Christine Lagarde will trot out the same hackneyed phrases she has used for what seems like six months at least. The Central Bank remains ready to act if the situation worsens, it is prepared to use all the tools at its disposal and those tools can be modified if necessary,

Apart from the ECB meeting, the Eurozone has a fairly light data sheet this week with activity and output data due for release on Friday the only significant release.

It is expected that the composite will have fallen slightly from 53.2 to 52.8 this is unlikely to drive the single currency out of its recent range.

Last week it traded between 1.1871 and 1.1994 as traders remain shy of testing the air above 1.20. It eventually closed at 1.1984.