Bank of England will be forced to consider consequences

Bank of England Chief Economist Huw Pill spoke over the weekend of the effect a resurgence of the Coronavirus Pandemic will have on the decision-making process at the next MPC.

The rate setting committee will be faced with the dilemma of needing to hike rates to bring inflation back under control or allowing inflation to continue to rise unabated while it provides further support to the economy.

The new variant of the virus, labelled Omicron, has been found in several European nations following its emergence in South Africa.

In the UK, three cases of the new variant have been found as scientists grapple with gaming knowledge of its structure. The first thing the Government will want to know is how susceptible it is to the existing vaccine. AstraZeneca have already begun testing their drug to understand whether it needs to be tweaked quickly if necessary.

The Prime Minister and Health Secretary have announced that restrictions will be re-introduced from tomorrow, with the wearing of masks in shops and on public transport to become compulsory again from tomorrow.

With Christmas less than four weeks away, the shopping season is about to accelerate and there are fears of a repeat of last year’s restrictions, although Boris Jonson believes that any curbs won’t need to be a Draconian as they were last year.

There has been a view for some time that Brexit will harm the UK economy far more in the long-term than the Pandemic. It would depend to a large degree on how the country deals with this variant and others that may follow for that theory to be fully tested.

The UK’s relationship with the EU has fallen to another new low, with Brexit Minister David Frost again threatening to invoke Article sixteen of the Treaty, while France helped a conference over the weekend to discuss the migrant crisis and the UK’s invite was withdrawn.

President Macron justified his action, retaliating against a letter he received from the Prime Minister labelling the country as not serious about the growing crisis.

Last week, the pound continued to lose ground against a strengthening dollar. It fell to a low of 1.3278 but rallied a little to close at 1.3353.

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New variant and rising inflation could slow economy

While falling short of declaring that the Pandemic is at an end, President Biden was in a positive mood, making a speech where he spoke of America being back.

The data that was released last week certainly provided encouragement, as weekly jobless claims fell to their lowest level since 1969.

There may have been some distortion to the number from the Thanksgiving holiday and analysts will wait and see until this week’s claims data as well as the November employment report, which is due on Friday, before joining in the celebrations.

Biden’s Thanksgiving message for the country was about as upbeat as it was possible for it to be, considering the growing fear that the Omicron variant of Coronavirus will disrupt activity and see the country return to at least local lockdowns while inflation continues to be an issue.

Several Regional Federal Reserve Presidents as well as FOMC members have been suggesting for a couple of weeks that the committee may need to look at speeding up the taper of asset purchases.

This will make the pre-Christmas meeting, being held in a couple of weeks, of greater interest to markets that would normally be beginning to wind down for the year-end.

Atlanta Fed President Raphael Bostic was also in a positive frame of mind commenting that the fact that the country has survived the pandemic so far, its level of preparedness should allow it to cope with the new variant well, provided it behaves in the same manner as previous strains.

He went on to comment on his view that the taper should be sped up and concurred with the view that interest rates will need to be increased sooner rather than later.

Early predictions for this week’s employment report put the headline non-farm payrolls at around 600k new jobs being created.

There are some concerns that the October headline may be revised lower, but for now there is a feeling of positivity pervading the market.

The pace of the recent rise in the dollar index slowed a little. It reached 96.94 before falling back on profit taking to close at 95.99.

Lagarde has more tricks up her sleeve

ECB President Christine Lagarde remains confident that she will be able to convince members of the Central bank’s Governing Council to provide further support to the Eurozone economy once the current round of PEPP ends in March.

Speaking on Friday, Lagarde remained confident that the high in inflation may have been seen this month and if not, then it will be seen very soon.

Despite Lagarde’s claims to the opposite, there are still several banks that see the ECB needing to raise interest rates, although the conditions for such a move are still far from being fulfilled.

Consumer price inflation in the Eurozone grew at its fastest rate since records began in 17 in November.

Various nations have now reported cases of the Omicron variant, and measures are expected to be taken to prevent its spread.

Lockdowns were beginning in a few States before the arrival of the variant and while measures will be taken, they are unlikely, for now, to include a blanket lockdown.

Choosing to focus on the economy and the strains it is currently experiencing, allowing the new variant to take its own course, Lagarde spoke of the ECB being able to provide support long after the end of the first quarter of next she,

She believes that she has other methods available to ensure that the economy continues to grow, albeit at a pace that is slower, but more consistent, than other developed nations. She believes that it is likely that the ECB won’t be in a position to continue to make fresh purchases of assets early in the New Year, but that won’t mean the end of support.

The euro continues on its downward path as monetary policy continues to diverge. It fell to a low of 1.1186 but rallied to close in positive territory at 1.1323.