Pandemic to continue longer than imagined

It is expected that the UK will remain under the new set of restrictions until March next year, as the population suffers from a case of deja-vu.

As new cases of the Omicron variant are becoming known, the efficiency of the Covid-19 vaccines is yet to be determined. It is expected to take between two and three weeks for the results of tests to be known, which means that it will be just a few days before Christmas before measures can be put in place if needed.

The Prime Minister, speaking at a press conference last evening, pledged to offer a booster jab to anyone who wants one by the end of next month.

There are genuine concerns within the hospitality sector that if they are placed under new restrictions that the effect will be devastating for the sector.

With the economy beginning to emerge from the ravages of the first lockdowns, any further restrictions would see the country lurch towards stagflation, as the Bank of England is already facing pressure to raise interest rates.

The criticism that the Monetary Policy Committee received for not hiking at its previous meeting now seems a little ridiculous, but not even the most dovish member of the committee could claim to have been concerned about the economic effect of a new variant.

There is hardly any data due to be released this week in the UK that will have any bearing on how the economy is performing other than services activity. This was strong at 58.6 last month and is expected to remain well into expansive territory.

The market remains undecided about the fate of the pound. While the apparent divergence between monetary policy in the UK is likely to continue to provide support versus the euro, The Central Bank is unlikely to be able to match the new hawkish tones emanating from the Fed.

Yesterday, it fell to a low of 13194 but rallied to end the day unchanged at 1.3301.

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Powell to urge FOMC to consider acceleration of taper

Fed Chairman Jerome Powell clearly feels emboldened by his reappointment in the role. Yesterday, he was more hawkish than he has been of late about the withdrawal of additional support for the economy.

There has been talk recently about several members of the FOMC voting to accelerate the pace of the taper of asset purchases. And Powell came out yesterday in support of such a move.

In testimony before a Senate panel, Powell suggested that now is a suitable time to retire the term transitory.

Powell argued that the term was open to interpretation. He almost scolded the market for being a little narrow in its view by believing that it meant a short-term, while the FOMC took it to be a reference to a situation that won’t become permanent.

Despite the semantics, it is clear that inflation is not going to disappear overnight as the economy faces genuine challenges over shortages of spare parts and raw materials as well as logistical challenges.

The November employment report that will be released on Friday is expected to confirm the continued tightening of the labour market. The last prediction is for 550k new jobs to have been created.

It is easy to make a case for the employment data to be pivotal to the Fed’s decision on policy at its upcoming meeting, but there are a number of other factors that will also be considered.

With inflation running at a thirty-year high according to October’s figures, it seems probable that the FOMC will speed up the taper just one month after having introduced the measure.

The dollar reacted positively to Powell’s testimony. There is likely to be a clear divergence of monetary policy that will drive the dollar, although pressures are building in the Eurozone for a more hawkish attitude, while the UK is caught between growth and inflation.

Yesterday, the dollar index rose to a high of 96.63 but fell back to close at 95.59. Technically, there is a significant amount of selling pressure on the approach to resistance at 96.60 and that will need to be cleared if the index is going to be able to continue its recent rally.

Lagarde to face pressure from hawks

The apparent serene progress of the ECB towards the end of its current round of support due to end in March now faces an abrupt change as its President faces pressure from both the more hawkish National Central Bank Heads and those who are on the fence in the discussion over growth versus inflation.

Christine Lagarde has been able to carry the doves with her, but that has been anuncomplicated process, as countries like Spain and Italy have both a history of dealing with high inflation that has been coupled with a genuine need for support as their economies emerge from the Pandemic.

However, inflation data released this week in Germany together with yesterday’s pan-Eurozone figures point to action being needed to curb rising prices.

There is no doubt that Lagarde will be questioned by the financial press over her definition of transitory, given the words of Jerome Powell yesterday.

Inflation rose to 4.9% in November, against a rise of 4.1% in October and a prediction of a fall to 3.7% from market analysts.

Jens Weidmann, the outgoing BUBA President has no intention of going quietly. He spoke yesterday of the needless arrogance of a Central Bank that is unable to change direction when faced with irrefutable evidence that its policy is wrong.

It would be impossible to see a change in direction for the ECB now, but there is a real possibility that the outcome of the next ECB meeting could herald a slight change in emphasis.

The feeling is that there is an area that could be reached, a third sector, which acknowledges the need for action on inflation but continues to promote support for the economy.

Lagarde may struggle to find such a path while her ego continues to scream in her ear that her chosen path is correct.

The euro was negatively affected by the likelihood of an acceleration of the withdrawal of support in the U.S.

It fell to a low of 1.1235 but saw a significant bounce to close at 1.1341.