Alternatives needed as traditional methods close to limit

Bank of England MPC member Gertjan Vlieghe spoke yesterday of the need for the recovery from the Pandemic to be creative, as traditional policies have little room left to help. He went on to say that as longevity increases, the Government should consider raising the retirement age.

As workers come close to retirement they save more and spend less, and this depresses interest rates.

The Pandemic has brought about changes in working practices that could suit older workers. The most prominent of these is working from home.

Vlieghe ended by saying that he is not against negative interest rates as a policy choice, and next time monetary stimulus becomes necessary he would vote according to the situation at the time. Nevertheless, he believes that the Bank’s current monetary policy stance will remain in place for several quarters to come.

Data released yesterday showed that the effect of the final reopening of the economy had little effect on boosting activity as the country continues to battle with the Delta variant.

The number of infections has been falling, but the chaos caused by the pingdemic continues to affect output.

There was a spike in footfall in shops on Freedom Day itself, but that quickly fell back as concerns over infections remained.

Despite his background as something of a monetary hawk, Vlieghe, whose term as a member of the MPC ends next month, commented that the time is not yet right for a rise in interest rates. This leaves just two members who support tighter policy now.

Compared to pre-crisis levels. Although the economy continues to grow at its fastest pace in close to eighty years, it is still 4.5% below its December 2019 level, there are 300k fewer people in work and 1.3 million remain on furlough.

The pound is being driven by the market’s expectations for tomorrow’s rate decision in the U.S. It rallied to a high of 1.3833 almost completing the recovery from its fall over the past week. It finally closed at 1.3817.

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Rise of Covid Variant not being tackled

While the U.S. continues to recover from the worst of the original Pandemic, leading global investment bank Goldman Sachs slashed its forecast for growth in the second half of 2021, voicing concerns about the way the country is handling the rise of the Delta variant.

Consumer activity has been sluggish of late, particularly in the services sector, despite the rally in house prices and new home sales. In General, spending is cyclical in nature. As the recovery began, consumers tended to replace big ticket items like white goods, TV’s, and high-tech.

That kind of spending is not sufficiently sustainable to continue to drive the recovery and spending often turns to services like eating out, cinema, theatre, or concerts, but so far there is a reluctance to make that move.

Fears around the Delta Variant have dampened demand considerably,

Continuing strong numbers from U.S. firms as they declare second quarter results has sucked funds out of riskier markets and back to the U.S. This has led to a fall in risk appetite overall.

As the FOMC gathers for its regular rate setting meeting, traders and investors will be on the lookout for a change in the nuanced comments of Chairman Jerome Powell as he presents the Fed’s outlook for monetary policy at a press conference following the meeting.

Following the release of the Fed’s monetary statement at 19:00 UK time tomorrow, Powell will face the press.

There is no chance of a change in interest rates or the level of support from asset purchases, but it is hoped that Powell may firm up the timing of when the asset purchase plan may begin to be tapered.

Investors still expect the Fed to hold fire until the new year, and any perception that that could be brought forward will see the dollar rally strongly.

Yesterday, the dollar index fell back through support at 92.80. It reached a low of 92.53, closing 92.63. It seems for now that hopes of a sustained rally have been dashed, but that could all change tomorrow evening.

Be careful what you wish for Jens

The German Finance Ministry and Central bank face a difficult time over the next couple of months as the leading economy in the Eurozone begins to stutter.

Germany will remain the leader in the recovery of the Union from the pandemic, but that recovery may take longer than had first been imagined.

Data for economic activity in Germany showed a surprising fall this month when it was released yesterday.

This perfectly illustrated the need for stimulus to remain in place despite rising inflation.

There is unlikely to be much comment from Bundesbank President Jens Weidmann regarding the data since he will be damned either way.

It is hard to press on with a hawkish stance over monetary policy with the economy clearly not yet strong enough to stand on its own, yet Germany’s financial leaders will still believe in keeping inflation in check.

Inflation data will be released later this week, with the headline number for the entire Eurozone expected to reach 2%. While this has already been addressed by Christine Lagarde in recent speeches, it will still be a landmark event leading to calls for action for the ECB to ensure prices do not get out of control.

Preliminary data for Q2 GDP will also be released. The economy is expected to have grown by more than 12.5% in the period between April and June as the recovery from the Pandemic took hold and the vaccination programmes began to take hold.

A comparison of the economic performance of the UK and Eurozone economies as the recovery builds sees the UK well ahead for now. However, the industrial and manufacturing sectors in Europe have barely begun to recover as workers return from their Covid enforced absence and a catch-up is more than likely.

Yesterday, the euro reacted positively to the return of the dollar to familiar territory. It rallied to a high of 1.1807, closing at 1.1803.