Economy damaged by new employment and trade rules

The true effect of Brexit on the UK economy has never really been felt. The Pandemic ran almost parallel with the UK’s departure from the Eu, so the slowdown in the economy was a combination of the two negatives.

Now, with the country on the verge of doing away with all restrictions in a little over two weeks’ time, analysts will be ankle to better judge the way in which trade and availability of workers has been affected.

The so-called sausage war between London and Brussels, where the import of British prepared meat products into Northern Ireland is banned, is a headline grabber, but behind that is the issues businesses face in grappling with the requirements of the EU on a daily basis.

As the Pandemic becomes less of an influence on daily life, despite it taking several months to return to normal, whatever that may be, just how much of the UK’s trading output has been affected will become evident.

The Prime Minister came as close as he has recently to confirming that July 19th is still the day that restrictions will be finally lifted, but there are growing concerns about rising infection rates in schools. Boris Johnson appears to be fairly sanguine about schools, although he did say in an interview that there may be some extra measures necessary going forward. He sees the advent of the summer holidays for schools as a natural firebreak, which, it is hoped, will allay fears about the spread in schools.

UK Industrial production, although significantly below that of the EU in absolute size, is running just below that of Brussels in terms of its recovery, although the bottom of the fall in production was also worse on mainland Europe.

UK trade is down between 5% and 24%, depending on who you ask, with the EU’s official statistical office being the most pessimistic.

With the effect of the removal of such supports as the stamp duty holiday and the tapering of the furlough support programme likely to take months to have their full effect, it may next year before the economy shows how much it has been affected.

Yesterday, the pound broke through short-term support versus the dollar. It fell to a low of 1.3752, closing at 1.3767. The dollar’s recent strength will be interesting to traders going into today’s data. The year’s low at 1.3452 is now a genuine target.

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FOMC facing questions after Kaplan comments

It seems that over the course of the Pandemic, and in particular over the past few months as the recovery has taken hold, that the question is asked; is this the pivotal release of non-farm payroll data that shows the economy is close to pre-Covid levels.

The Fed is beginning to give out mixed messages. The usual concerns over employment still being patchy, bottlenecks remaining an issue in raw materials and production of parts for larger industries still affected has been overlaid with FOMC members expectations that the tapering of support will begin before year-end.

Evidence suggests that it is a tactic the Fed has used in the past where it adds a degree of optimism, then slowly removes any negative or pessimistic views and is left with what it wanted to say in the first place.

There are still some mixed messages coming from the Fed. Philadelphia Fed President Patrick Harker followed his colleague from Dallas Robert Kaplan in voicing an expectation that the tapering of support would begin before the year-end.

Earlier in the week, there were comments that Q3 would see the highest rise in both GDP and inflation.

Yesterday’s data confirmed that employment is still headed in the right direction. Weekly jobless claims continue to fall, with the latest data showing 364k claims following an upwardly revised 415k the previous week. Continuing claims rose a little, but this is simply a seasonal adjustment and overall, the picture remains positive.

ISM data for manufacturing was also released yesterday. It showed that while output remained strong, it was marginally lower than last month at 60.6 compared to 61.2 in May.

Harker’s comments gave the dollar some tailwind as we await the NFP data. Yesterday, it rose to a high of 92.60, closing at 92.56.

Banking dividend veto to go by October

ECB President, Christine Lagarde, clearly has a very large remit to her role.

Yesterday, she was allowed to be the one who gave the news that banks have been waiting for for many months. The veto on banks headquartered in the EU will be rescinded from October.

This measure, introduced to allow banks to rebuild their balance sheets has, naturally, been unpopular, and the banking lobby in Brussels had become vociferous, even strident, in its calls for the regulation to be rescinded.

Inflation remains a concern for several Central banks in the region. Yesterday, the Bundesbank President Jens Weidman again displayed his inflation phobia by repeating the sentiment he voiced earlier in the week that he is sceptical about allowing an overshoot which may prove difficult to reverse.

He believes that the ECB should be clearer in its message that the current situation is unique, and it will begin to raise rates irrespective of individual state’s financing needs as soon as there is price stability.

This will be seen as Germany both exercising its financial muscle over the regions, and also lifting the curtain on its national paranoia over inflation.

Where most countries are able to see their financial and economic past as an issue for another time, Germany maintains its scars from the post-war period and wears them almost as a badge of honour.

Weidman’s words are something of a battle-cry for the next few months, where the needs of the states still suffering from the Pandemic may become paramount. Rather ironically, Italian Prime Minister Mario Draghi commented yesterday that he didn’t think inflation across the entire EU was particularly high.

As a bureaucrat at heart, Draghi prefers to live in the now while the more paranoid Weidman sees the ghost of inflation around every corner,

The euro continues to weaken versus the dollar. Yesterday, it fell to a low of 1.1837, closing at 1.1850.