Innovation is Sunak’s watchword

A year ago, not many of us had heard of Rishi Sunak, Boris Johnson was celebrating becoming Prime Minister and scouring his team for innovators.

He had no idea then just how much he would lean upon his most brightly shining star for new and innovative ideas.

As the lockdown enters its fifth month, help for many sectors of business has been hailed as a saving grace but there is still plenty of work to do.

Last week’s retail sales data was better than expected and that will have helped the Treasury’s coffers to fill but with a cut to VAT and the much-vaunted hospitality bonus will slow the flow by a significant amount.

One of the thoughts rushing through the mind of the Chancellor is an online sales tax. This may serve to solve two issues. First those online retailers who are avoiding the issues of High Street rents and business rates will see part of their profit be paid to the Government, while many of the biggest retailers, Amazon are a prime (!) example, have been heavily criticised for their tax regimes.

With VAT reductions helping bricks and mortar retailers, replacing some of that lost revenue and making online and high street retailing compete on a level playing field makes sense.

The pound continues to rally although it is clearly subject to the dollar’s performance. It is now well entrenched above 1.28 but there are several factors both direct and indirect that could bring the rally to a halt. Yesterday, it climbed to a high of 1.2902, closing at 1.2872.

Versus the single currency it continues to struggle as the euro continues to bask in the glory of the Pandemic Relief Fund. It fell to a low of 1.0930, closing at 1.0946. It is against the euro that the trend lower is more believable, since should the dollar turn around, it is the pound that is likely to lose ground faster since its foundations are less risky.

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Further help for retail sales but not so much for the jobless

While the market awaits the outcome of deliberation on what will be done at a Federal level to help those whose jobs have vanished due to Covid-19, the rumour mill has ground into action.

It is fairly certain that in order to support the economy by using a one -off measure, another cheque (check) for $1,200 will be posted out to ensure that retail spending which drives a large percentage (around 70%) of the entire economy, will remain buoyant.

However, what was considered to be a very generous $600 per week unemployment payment is likely to be cut, by as much as half, when the new actions are published.

If this were to be the case this would see personal income fall by $175 billion through to the end of the year ($420 billion annualized). The cut comes as Republican members of Congress feel that workers are not being incentivized to look for work.

That means that the July employment report will take on a more significant role, although with jobless claims on the rise, it is more likely that the jobs simply are not there yet.

The Fed is likely to act when its current meeting ends tomorrow evening with further liquidity pumped into the economy to help banks fund business loans with a Federal Guarantee to enable employers take on more workers which solves the issue of the cut to $300 per week.

The issue remains that helicopter money, the dropping of economic aid exactly where it is needed, is far more effective than funding business which, naturally, takes longer to have an effect.

With both traditional safe haven currencies, the JPY and CHF strengthening versus the dollar, it is clear that it is more than risk appetite that is driving the greenback.

The ballooning deficit, the time it will take to see positive growth and the uncertainty over the election are driving investors away.

Yesterday, the dollar index continued its recent fall, reaching 93.47 and closing at 93.60.

Second spike draws belt and braces measures

The UK which has been roundly criticised for its leisurely approach to the lockdown back in March, has reacted far more aggressively to the second spike which may or may not extend throughout Europe but has started in the Northern Spanish region of Catalonia.

The Spanish economy which is teetering on the edge of collapse and will be one of the major recipients of the Pandemic Relief Fund will face a catastrophe if it loses its summer which was just beginning to look like something approaching normal.

With the traditional Northern European vacation season to get under way this weekend, any further caution whether or not justified could be catastrophic.

Following how the pandemic which erupted in the Italian region of Lombardy and spread so quickly, it is hard to say how the rest of Europe will react.

Catalonia has seen close to 8.5k new infections over the past two weeks and if that continues to rise it is likely that the entire Union will have to react. While it is a relatively small area, the UK reaction has been to insist anyone returning from any Spanish destination (including the Balearics and Canaries) quarantines for two weeks.

On a more positive note, Germany’s services industry is expected to have performed the kind of rebound that the nation if not the entire EU was hoping for. Data which will be released this week is likely to show that although activity is still sluggish, it is showing signs of a return to growth.

With economic sentiment improving despite unemployment expected to rise from 7.4% to 7.7%, just what effect a second spike breaking out of being limited to Catalonia will have is almost impossible to imagine.

Yesterday, the euro continued its rally versus the dollar. The cost of imports will fall which will have a positive effect on inflation, despite prices being subdued in any event, but it will do nothing to promote intra-region trade which, it was hoped, would grow as the region came out of recession.

It rose to a high of 1.1781, closing at 1.1753.