Furlough payment to be replaced by unemployment benefit

The UK’s controversial Universal Credit payment which lumps several benefits into one is likely to be increased for the rest of the year as unemployment is set to climb towards a high close to 8%.

The latest data showed that unemployment rose to 5.1% from 5%, but the real test will come as firms that relied on their staff being paid by the Government find cashflow impossible to manage and either close or drastically reduce their workforce.

The budget that will be delivered by the Chancellor next week will be a delicate balancing act between not just support and regaining control of the economy but also a matter of support being targeted while the level of borrowing is brought back to acceptable levels.

Unemployment will become the major issue globally as working methods that have been adapted to suit lockdown conditions become the norm.

As an example, HSBC is looking to reduce its bricks and mortar footprint by 40%. This is not just in the controversial area of branch closures but also a major review of the need for support staff to be housed in expensive office space. The knock-on effect of such a policy if repeated would be devastating for many supporting businesses and the hospitality sector both of which are struggling for survival.

The negotiations between the UK and EU over financial services is getting more fractious and the BoE Governor has accused Brussels of trying to usurp London by forcing the clearing of several euro denominated derivative products to be executed within its borders.

Andrew Bailey has said that the Bank will resist with all means at its disposal any attempt to move clearing operations and any such move would represent a serious escalation.

The recent surge by the pound versus the dollar took a breather late in the day as a correction overtook U.S. asset markets.

It fell to a low of 1.4000 closing just a few pips higher, and has continued to lose ground overnight, so far reaching 1.3943. The recent rally versus the euro has also ended abruptly with a fall to 1,1475 so far this morning.

Since overall U.S. economic policy is unlikely to perform an about turn, these moves seen later yesterday and overnight may be considered a healthy correction, but they serve as a reminder that financial markets are never a one way bet.

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U.S to be an Age of Expansion for as long as it takes

There are stories emerging from Washington that Congress is looking closely at the rise in minimum wage being considered by the Treasury as part of the $1.9 trillion stimulus package. This was supposed to be the cornerstone of President Biden’s economic recovery platform.

One of the more controversial parts of the stimulus plan that was in danger of passing under the radar, the raising of the minimum wage to $15 per hour.

The Senate Parliamentarian, the person who ensures that Congressional acts are performed within the standing rules, is expected to find that including such a measure that the Administration is intending to pass without Republican votes is unlawful.

President Biden is said to be disappointed by the likely ruling, commenting that no American in full time work should be living in poverty.

How Biden deals with his first setback may shape the future of his Presidency.

Late yesterday, asset markets saw a significant correction with the main equity indexes all closing appreciably lower. Yields on Government securities also fell. This is despite Fed Chairman Jerome Powell’s dovish comments and outlook in his testimony earlier in the week.

The Dow Jones index completely erased a significant rally from the day before, falling by more than 600 pips. While this is not what would be considered a collapse, it is a notable event illustrating that the markets are still fragile.

Several FOMC members continue to comment on Fed policy. Yesterday St Louis Fed President, James Bullard commented that it is too early for the FOMC to even consider a tapering of its bond purchases, let alone having a serious discussion.

The continued rise in commodity prices which is driving the so-called commodity currencies higher is a concerning precursor of a rise in global inflation. Those nations that are more heavily seen as industrial or manufacturing strongholds will be concerned at this turn of events since it will feed into producer price rises.

The weekly jobless claims data released yesterday saw a significant fall in claims from a downwardly revised 841k to 730k. This will mark an improvement in sentiment towards next week’s NFP data.

The dollar index remains in a downwards channel. Yesterday, it fell to a low of 89.68 but rallied strongly later in the day to close at 90.22.

Euro rise continues to hold inflation at bay

Over the past six months, ECB President Christine Lagarde has mentioned the euro in her press conferences almost as an aside.

She has often used the time worn phrase that she and members of the Governing council are keeping an eye on the currency but are not particularly concerned.

It may be that she felt that efforts being made by her colleagues at the EU Commission to encourage trade between members of the Union would ensure that a rise in the value of the euro would not be noticed. This after all is the cornerstone of the reason for closer ties.

That rise in intra-EU trade has not happened and led by Germany, foreign exports continue to be strong. This has led to concerns that the euro gaining strength will delay the recovery from the Pandemic. There is no doubt that the Eurozone will recover but the question will remain whether this can happen before the next tsunami hits.

There are several issues that remain to be considered, let alone solved, running in parallel with the recovery.

The bad loan mountain, the Italian banking crisis, immigration, the handling of financial transactions under Brexit and other complex issues need to be addressed. That is without any unknowns that may be lurking. The most worrying would be another nation flirting with departure.

The data released yesterday for sentiment and confidence each saw an improvement. This is encouraging but will need the efficiency of the vaccination programme to be significantly improved if they are to see a continued improvement.

Brussels is nowhere near being able to produce a similar roadmap to the UK showing a path out of lockdown with just 5% of the entire EU population having been vaccinated.

The euro had a volatile but ultimately fruitless day yesterday as it traded between 1.2243 and 1,2156, eventually closing just a few pips lower on the day at 1.2163.