New restrictions to push hospitality to new lows

The increasing concerns over a fresh national lockdown, the cost of Coronavirus so far and the far from certain departure from the EU are weighing heavily on the UK economy.

Having increased the support given the areas of the UK who are forced into Tier Three of the new regional lockdown measures, the Chancellor is being forced into considering the effect on those regions who have been raised into Tier Two, while facing questions over how the country is going to pay for the borrowing which has pushed the debt to GDP ratio up to around 100%.

On Friday, retail sales data was released which showed that spending has improved to reach a level above that of February when the country was on the verge of a lockdown.

However, on Thursday, Consumer Confidence data for this month showed that concerns over further regional lockdowns or even a blanket closure of businesses saw confidence fall from -25 in September to -31.

Manufacturing, which accounts for around 20% of UK GDP remains in positive territory despite falling a little this month. It fell from 54.1 to 53.3 while services which accounts for the bulk of the balance fell further from 56.1 to 52.3.

Activity in the hospitality sector, which is a major contributor to services output, is expected to plummet going forward as more pubs and bars are forced to seriously curtail their opening hours or in the case of those businesses in Tier Three close completely.

It is impossible to look at the UK economy in isolation as cases of Covoid-19 are rising exponentially in all G7 economies. However, since every nation reacts differently and their economies were in a different position when the virus first hit, the reaction to the second wave could be entirely different.

Last week the pound reacted favourably to news that Brexit talks would be restarted although there is no news of any significant breakthrough other than the vague comments from Emmanuel Macron regarding French fishing rights in UK waters.

Sterling rallied versus the dollar to a weekly high of 1.3176 but failed to cling to its gains and fell back to close at 1.3035.

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Manufacturing activity stronger but support still lacking

Improving employment data together with an improvement in economic output across the board led to an improvement in sentiment although it is uncertain whether it will continue in the current environment.

With the election in just over a week, discussions continued regarding a relief Bill between the Administration who are trying to keep Republicans in the House of Representatives onside and Democrats who form the majority in the House,

There have been several contrasting comments from various officials from both sides, either sounding convincing over an imminent deal or downbeat over an agreement being reached before the election or in some cases before the New Year.

The Federal Reserve supported by several Regional Feds. is convinced that the recovery will be both patchy and inconsistent until a new relief package is in place.

The election is likely to take centre stage this week with President Trump becoming ever more desperate to close the gap between his polling figures and those of Democrat Candidate Joe Biden.

It is becoming clear that with over 50 million votes already having been cast that the result may very well come down to the results in a few States.

Two such States are New Hampshire and Pennsylvania. Over the weekend, Trump was in New Hampshire, a State he narrowly lost in 2016, while Biden was trying to consolidate his narrow lead in Pennsylvania.

Economic data is becoming less and less significant in the current environment but there was a reasonable improvement last week.

With both new unemployment claims and existing claims improving and output remaining in expansion, risk appetite improved a little. This had a somewhat negative effect on the dollar index which gave back most of its recent advances. It reached a low of 92.47, closing at 92.74.

Macron considering backing down to help Brexit

There was a concern a few weeks ago, that Emmanuel Macron was about to be thrown under the bus by Brussels when Brexit talks came to a head. It seems that the fate of the French Commercial Fishing Fleet is not something seen by the EU Commission as make or break.

This stance is not shared by the UK Negotiating Team who have always realized that the significance of the UK’s fleet far outweighs its importance economically.

The euro remains far too strong for the ECB. Its effect on prices as the economy tries to exit deflation is becoming significant.

Despite recent data to the contrary, Germany remains the driver for the entire Eurozone economy. On Friday, data was released for output in Germany that far outstripped any other EU nation.

However, this could be considered a double-edged sword. On the one hand at least one nation is performing at or above trend. However, on the other, given German output, just how badly are the other major nations performing?

The ECB will meet this week and if they remain true to their usual behaviour they will certainly allude to the need for greater stimulus and possibly even an increase in their bond buying programme, but will, almost certainly defer a decision until they are presented with an irrefutable case.

With PMI’s falling to a four-month low and cases of coronavirus drawing a variety of responses, it is easy to imagine a double-dip recession either this quarter or in Q1 ‘21.

The euro’s current strength continues to be a thorn in the side of Christine Lagarde. It rose to a high of 1.1888 last week, closing at 1.1862. It is hard to imagine the 1.20 level being tested without something of a correction but with so many imponderables around the U.S. right now it would be impossible to bet against.