Upgraded recovery forecast to push pound to new high

Official data shows that the UK recorded zero deaths from Covid-19 yesterday. This is the first time this has happened in 445 days. Despite it probably being due to the delay in reporting data over the bank Holiday weekend, it is being seen in the media as both a significant step in the recovery and a reason for the Government to press ahead with the full reopening in three weeks’ time.

Continuing the theme of positive news for the recovery, data yesterday showed that UK manufacturing output grew at its fastest rate in nearly 30 years and house prices rose by the largest margin in seven.

This drove the pound to its highest level in three years against the dollar.

The outlook for the pound remains mixed since most of the good news on the recovery, number of vaccinations and cases of Coronavirus is now priced in.

Any significant rise in inflation in this month’s data would be the final piece of data that could be positive for Sterling since it will drive the MPC to consider a tightening of monetary policy.

This would likely be first seen in a tapering of bond purchases, followed by a rise in interest rates.

The market will continue to react to any comment or data release that points to tighter monetary policy although in reality there is unlikely to be any change until the Autumn at the earliest and this would only apply to a tapering with a rate rise almost impossible to countenance this year.

Data for manufacturing output fell back slightly in May from66.1 to 65.9, but this is mainly due to issues with supply chains as the recovery gathers pace.

The pound rose to a high versus the dollar of 1.4248 yesterday but fell back to close at 1.4150.

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Shortage of raw materials brings supply delays

The U.S. economy is being held back by shortages of raw materials that are affecting output across both heavy industry and manufacturing.

Manufacturing output hit a level of 61.1 in May. Anything above 50 denotes an expansion in output, so despite tangled supply lines, the question is, how strong is demand in reality? And what can be done to create smoother supply to try to keep up with demand.

Any issue with supply pushes up input prices and drives future inflation concerns.

When added to the current rises in consumer prices, inflation remains a hot topic for not just the Fed, but also Central banks across the developed world.

As well as supply difficulties, manufacturers continue to complain about their ability to locate and assimilate new workers in their businesses.

This is despite the weekly jobless claims data continuing to fall. It will also sharpen the market’s focus on the NFP data that will be released on Friday.

The latest estimates put the headline number at an addition of 650k+ new jobs.

At around the same time as the jobless report is released, Fed Chairman Jerome Powell will be making a speech and the combination of the two could lead to a volatile end to the week.

All U.S. businesses are indicating that delivery times are being extended across the entire country which will bring concerns that it may affect the pace of the recovery.

The dollar index remains in a state of flux, awaiting positive detail from the Fed.

While any change in monetary policy, similarly to the UK, will remain on hold, investors would appreciate some advance guidance on the prospects for a tapering of bond purchases.

It fell to a low of 89.66 yesterday before recovering to close at 89.92.

Central bankers split into two camps

The split between the indebted nations and those charged with the task of keeping them afloat continues to widen across the eurozone.

The credence given to even the smallest rise in inflation is threatening to chop off the Southern States at the knees as they continue to struggle with the recovery.

The eurozone economy, at least the part that relies on the tourism and hospitality sectors, is recovering at a far slower rate than the rest of the Union despite vaccination levels being fairly consistent.

The comments made by Bundesbank President Jens Weidmann recently contained a chilling message about pressure being placed on the ECB to tighten policy no matter the consequences for countries like Italy and Spain.

It will be interesting to hear any riposte from Italian Prime Minister who, as ECB President, grappled with struggling economies and the support they require while trying to ensure that the single currency remained a viable proposition.

Given the ruthlessness of Germany when several nations were on the brink during the financial crisis, there is little doubt that Weidmann meant what he said.

Once the Eurozone economy is back on its feet, there are likely to be some very significant conversations to be had about the benefit to certain nations of being shackled to a monetary policy that does not reflect their own economies.

The old anthem of one size fits all will again be questioned, and the outcome will pit the political benefits of being part of such a sizable bloc against the pitfalls of dancing to the tune of Frankfurt.

Yesterday, the euro traded in a narrow range. It reached a low of 1.2212, closing at 1.2213.