London may not see benefit of access to EU Markets

Prime Minister Boris Johnson was able to convince the EU Commission in talks yesterday that their stance over a possible export ban on Covid-19 vaccinations was in nobody’s best interests.

The tentative agreement means that the threat to supplies has been averted although it seems to be something of an uneasy truce.

It is fairly clear that the mass vaccination of the population is the only device that will enable nations to reopen their economies and allow activity to resume.

The UK is seeing a purple patch of economic data releases as confidence grows that Johnson’s timetable together with the success of the vaccination programme are both on course.

The next stage in the easing of restrictions will take place next week when the number of people who are able to meet in public will be increased.

Data for manufacturing output was released yesterday. It exceeded analysts’ expectations, rising to 57.9, while the data for the far larger services sector also beat predictions rising to 56.8. With both sectors well into expansion territory, the one area that may need additional support is hospitality.

It remains to be seen just how many pubs, restaurants and other venues will be in a position to reopen on April 12th and the spectre of a third wave the threat of which was acknowledged by the Prime Minister last week hangs over the sector.

Bank of England Chief Economist Andrew Haldane has been the most vociferous cheerleader for the coming surge in the economy.

Speaking yesterday he continued to provide anecdotal evidence of growing confidence that, even if the economy hits a soft patch as the first effects of pent-up demand fade, the underlying level of growth will retain a degree of strength.

Most evidence provided for the recovery is superficial for now, that means that the possible need for negative interest rates later in the year will remain until hard data proves that Haldane is right.

The pound appears the most likely of the major currencies to be able to resist the current wave of dollar strength. Yesterday, it fell to a low of 1.3674, closing at 1.36787. However, versus the single currency it continues to hold its ground. It remains in a tight range, showing support at 1.1540. Yesterday it closed at 1.1584.

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Fed to probably overshoot need for stimulus

Durable goods orders are considered to be a bellwether of future inflation as large ticket items like planes and ships predict activity well into the future.

It is a little counter-intuitive to use a piece of data that is issued monthly to predict activity well into the future, especially when it is subject to being skewed by a massive order one month that immediately disappears in the next month’s data.

Having said that, the use of the overall trend in durable goods orders shows a high correlation with future inflation and that means that discounting one-offs can prove to be a useful tool.

Data for durable goods order in February fell by 1.1%. This is yet another release that adds to what was a disappointing month for data overall. That can be attributed in the main to the level of expectation provided by the anticipation of Biden’s stimulus bill.

Most consumers preferred to await the lifting of lockdown in their State and a cheque from the Federal Government before making any significant purchases, while investors adopted a wait and see stance.

Fed Chairman Jerome Powell followed Janet Yellen, his colleague at the Treasury, in testifying before congress yesterday.

He remains consistent in his belief that the economy is set fair and reacting well to the stimulus and support the pair have put in place.

He has also shown his determination that the economy will come back stronger by committing to keep monetary policy accommodative until there can be no question that the pandemic has been beaten.

Powell’s colleagues on the FOMC continue to provide a chorus of support but they may be getting just a little jittery about the regional effects of the lifting of the lockdown in some states which is being illustrated by regional Fed activity reports.

Despite this FOMC members continue to support Powell’s overall assessment.

Yesterday, the dollar index continued its recent rally. It rose to a high of 92.61, closing at 92.59. The rally through, and close above, resistance at 92.40 bodes well for a continued rise.

Merkel to rescind quiet Easter order

German Chancellor Angela Merkel looks likely to rescind her order that Germany remain closed over Easter. This is a contradictory move given that health officials only a few days ago commented that they saw cases of Coronavirus rising exponentially.

Merkel is not known for either knee-jerk or ill-considered decisions so appearing to take such a risk is both out of character and slightly alarming.

In leaving the decision to the people at such an important time of year and when a third wave has brought new lockdowns elsewhere, Merkel is clearly concerned about the recovery.

The IFO institute, renowned for its reporting of German economic activity and growth yesterday slashed its prediction for growth in the country this year from 4.2% to 3.7%. It cited continued lockdowns across the entire Union as the main reason for its view.

While Merkel’s decision, which she insisted was hers alone without any pressure from regional Governments, shows how serious she feels the economic situation has become and she also commented that it was made for economic, not sentimental reasons.

Manufacturing output in the Union continues to improve but concerns remain about services. While manufacturing continues to expand, to a level of 62.4 in March, exceeding and expectation of 57.7, services remain in contraction. T

There was an improvement in services output from 46 to 48.8 but the data still disappointed analysts.

The euro has been driven lower by the current strength of the dollar. This will concern the ECB since it will add to inflation concerns of certain individual Central Banks but the positive effect on exports should add to gains in the export sector.

Yesterday, it fell to a low of 1.1809 not seen since last November, closing at 1.1813.