Hancock finally succumbs to bad decision making

The UK has seen yet another political scandal claim the career of a Cabinet Member, as the Health Minister succumbed to evidence that he flouted social distancing measures while having an affair with a senior advisor.

It is ironic that of all the slurs aimed at Hancock by former Prime Ministerial advisor Dominic Cummings, that disregarding social distancing should finally strike home.

Hancock’s replacement would have been most people’s choice. A seasoned Minister, Sajid Javid has held two senior Cabinet posts, and was ready to return to the fold.

It is unlikely that Javid will bring any new innovations to the role. He is committed to ending the Pandemic safely as soon as possible.

The lifting of restrictions is still scheduled for July 23rd, although the recovery has barely been slowed by the delay..

Post-Covid, according to the Financial Times, the UK must prove itself to be innovative as the economy continues to be driven by services output.

In contrast to Germany, it is easier to drive innovation through a manufacturing economy. Being services based may allow output to increase in the short term, but it will quickly need to find alternative methods of delivery or develop new products.

As inflation grew by 3.1% last month, the Bank of England has joined the Central Banks, shrugging their shoulders, and calling it inevitable.

The level of trust that Central Banks have garnered over the period of the Pandemic has been impressive.

By acknowledging the issues that would be created by driving the recovery, Andrew Bailey has received a seal of approval from the City, although he is still quite some ways short of being unconditionally believed.

This week, GDP data will be released which shows that the economy is still trading at about 6% lower than it was a year ago. While this may be startling, it is unlikely to drive sterling to any significant degree, Analysts are confident that the economy will break above its pre-COVID level in the next quarter.

Last week, the pound continued to tread water against a mostly stronger dollar. It traded between 1.4000 and 13780. It closed at 1.3880.

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PCE a shade higher although below most estimates

The Fed’s favoured measure of inflation was released on Friday. PCE rose from 2.6% to 3.9%, although most analysts were expecting a read in excess of 4%.

There is a growing predilection amongst analysts that rising inflation will lead the Fed into action.

This is a fallacy. Inflation is well known, accepted, and is not going anywhere in the next six to nine months.

This has been completely acknowledged by all members of the FOMC and has led to investors looking in the wrong direction.

Rather than inflation concerns, it will be the level of overheating and a rising economy that will drive traders into a frenzy.

Jerome Powell is becoming a master of illusion having told anyone who will listen that inflation is going to be around for some time. He is hard at work working on supply chains and issues in the real economy that are driving inflation higher.

Powell commands a level of trust that has most economists eating out of his hand, and such is his popularity that very few people are prepared to vote against him.

He is surrounded, this year, by a very powerful group of Regional Fed Presidents who are not afraid of making their feelings known.

Powell has been able to get his inflation message across so well, that the word transitory is being used in many common positions. For example, certain NBA teams didn’t do so well this season as their form was transitory, or don’t expect too much from (insert your own team) this year as the squad is in transition.

The dollar index remains well-supported, although not able to break strong resistance at 92.30. Trade reached a high of 92.37 this week but fell back to close at 91.83.

In the coming week, the June employment report will be released. It is expected that the headline, new jobs created, will be around +600k

The market is accepting the data with a more relaxed tone now, as traders are looking at data through the Fed’s lens. But, until Powell provided more advance guidance, the dollar in unlikely to move outside its latest range.

Lagarde hopes to close one chapter before another starts

ECB President Christine Lagarde is determined that the issues she inherited when she took over from Mario Draghi should not hamper the recovery.

Lagarde is fully aware of what was happening under Draghi. And while she accepts that he was left with little option now that the Coronavirus Epidemic. Is beginning to fade, she will not want to see the job through.

Lagarde will be under pressure to taper the bond purchases that are being made to support the economy.

The German Finance Minister has already questioned the level of support still being provided, despite commenting that German growth will be above 4% this year. This points towards the Germans on the one hand benefitting from the support but decrying other nations who receive more.

Lagarde has a completely different view of Central banking than her more bureaucratic predecessors.

She believes in a Union that is both tightly-knit and fairly relaxed, depending on the subject at hand. It is vital that the region takes its place among the future global policymakers by being more fit to dictate policy due to its strong economy and not disregarded as a colony that cannot get its own house in order.

She is concerned that the Eurozone has been plagued by problems that are more due to the lack of a robust fiscal union than they are about trade.

It is clear that the Eurozone’s continuing issues are more to do with systemic issues that were disregarded at its conception.

Last week, the euro reached a high of 1.1975, closing at 1.1934. Despite the proximity of the 1.20 level versus the dollar, it is unlikely that level will be tested until there is more clarity from either the Fed or ECB.

This week, the single currency will be awaiting the June employment report from the U.S. but will first see data for consumer and industrial confidence, inflation, and EU-wide unemployment.