Businesses urge ten-day rule to be scrapped

Businesses in the sectors of the economy most affected by restrictions caused by Covid-19 regulations are calling on the Government to cancel the ten-day rule under which those who come into contact with a person who tests positive for the virus.

This would ease pressure that is mounting as cases of the Omicron virus grow exponentially.

As cases of the virus close in on 100k per day, pressure is also growing lockdowns to be introduced, but with most schools having broken up for the Christmas holiday, that will create something of a natural firebreak.

The rate hike delivered by last week’s Bank of England meeting has been welcomed as a positive step to regularize the economy, but the Chancellor of the Exchequer is unlikely to be as generous as was seen in previous lockdowns if lockdowns and furlough measures become necessary.

The markets, having undergone the turmoil of three Central bank meetings last week, are likely to quiet down this week, although depleted liquidity may see moves created by any shock announcements magnified.

The effect on the Omicron virus is clearly serious with several hospitality premises being forced to close due to lack of staff, but the fact that there are vaccines available should help with fewer hospitalizations than last year when infection numbers were close to where they are now.

The Government’s one million jabs per day has been reached as the public accept that vaccination is the only genuine protection against having to isolate, whether for seven or ten days.

Following last week’s rate hike, the pound has found a degree of support. This Wednesday, data will be released for third quarter GDP. It is expected to be confirmed that the economy grew by 6.6% in the three months between July and September.

Sterling rose to 1.3374 versus the dollar last week but closed at 1.3235 a little lower overall. Against the single currency, it reached a high of 1.1830 but fell back a little to close at 1.1779.

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Acceleration decision pivoted on jobs expectations

The push that the FOMC needed to accelerate the rate at which it is withdrawing emergency support for the economy last week came from a far more bullish view of the employment situation than had previously been seen.

Federal Reserve officials are expecting the unemployment rate to fall below 4% at either the next release of the first of the New Year or the one following. This is expected to raise the participation rate to a more acceptable level and allow the Fed to consider a rate hike as soon as March.

Even a three-hike strategy for 2022 is not expected to be sufficient to restrict economic activity but it should lower inflation sufficiently. However, the Fed’s inflation target is unlikely to be reached before the end of next year.

Covid-19 infections across the entire country seem to be mostly under control, and vaccination rates remain high.

The improvement in employment data is expected to cool fears of a rise in wage-based inflation. Currently, inflation appears to be restricted to the supply side of the economy, but if wage demands begin to rise more quickly, the FOMC may need to act even more vigorously.

The more hawkish statement from Jerome Powell last week has confirmed the market’s positive view of his confirmation for a second term in office. Powell is still suspected by Democrats in Congress but is unlikely to be troubled by image as he continues to make the right calls on the economy.

Following the FOMC meeting, the dollar has drifted lower as traders begin to wide down activity towards the end of the year. It reached a low of 95.94 but recovered to close at 96.68.

This week, the Fed’s preferred measure of inflation, Personal Consumption Expenditures, will be released. They are expected to rise to 4.5% from 4.1%. Third quarter GDP figures will also be published. It is expected that the economy grew by 2.1% in Q3.

Every meeting at which she supports support will be tough

Christine Lagarde, the ECB President, won the latest skirmish in her battle to continue to support the economy despite inflation continuing to rise and coming close to becoming out of control.

Last week, the Bundesbank raised its inflation outlook, commenting that it didn’t expect prices to revert to the ECB’s target of 2% before the end of 2024.

While that is not the ECB’s official view and the Bundesbank would tend to lean towards a more hawkish estimate, that will still be concerning for the moderate hawks on the Governing Council who have, so far, supported Lagarde.

Having left the door to a rate hike slightly ajar in the comments last week following the ECB meeting, Lagarde will be happy to have managed to convince those present to continue one support measure when the main PEPP plan end in March.

This will mean that there won’t be an abrupt end to ECB bond purchases, which could throw the market into chaos. While it is a toss-up in most Central banks minds over whether inflation or support is the principal factor driving ECB policy, here are two spectres lurking that will need to be addressed at some point.

The first is the continued bloating of the Central Bank’s balance sheet and how it will be brought back to normal, and the continual deferment of commercial banks’ bad debts.

Neither issue appears to be being considered currently. While the frugal five will be ready and waiting to use them as a stick to beat the ECB with, should further dovish measures be introduced.

Most analysts see the euro as having begun its long march lower following last week’s Central Bank meetings, but the journey which begins with a single step needs to break support at around 1.1180 before the pace can be accelerated, and that is unlikely to take place before the New Year.

Last week, the euro fell to a low of 1.1221 and closed at 1.1236.