Confusion Reigns

Just about every aspect of UK society is in confusion.

Whether it is the Government’s response to Covid-19, the public understanding of the rules, Brexit, the economy or negative rates It is becoming impossible to follow what is happening and each has a knock-on effect for the rest.

Track and trace and testing capacity are nowhere near where they should be with people having to travel hundreds of miles to get a test. Local lockdown rules have become so confused that even the Prime Minister is giving out wrong advice.

Last weekend, the message from MPC members was that a move to negative interest rates was likely since modelling of the effect had shown positive outcomes.

This week, both the Governor of the Bank of England and his Deputy have poured cold water on the idea. It could be that there is a split emerging between those who work day to day at the Bank and independent members of the committee.

The Bank’s Chief Economist continues to fly in the face of popular logic by showing optimism that the recovery will be between U and V-shaped despite evidence to the contrary.

There was a growing optimism that a deal between Westminster and Brussels was becoming more possible, then we hear that the EU is suing over the contents of the Internal Market Bill. The Government insists that the Bill is merely a back stop while there is some question about whether the EU can sue over something that is merely a threat.

Even data is mixed. Business investment improved but the final cut of Q2 GDP showed that the contraction between April and June was 19.8%.

The question remains, we all knew it would be horrendous and probably a record, but does that matter in the face of a recovery? Manufacturing output dipped slightly but that is a reaction to slowing pent up demand. Output remains in expansion territory.

The pound has had a week so far that has reflected the uncertainty. It almost reached 1.3000 versus the dollar yesterday, reaching 1.2978 but fell back to close at 1.2891.

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Year’s GDP lowers despite huge bounce

It was announced overnight that President Trump and his wife will self-isolate due to them both being in contact with an aide who has tested positive for the virus.

What that means for the next Presidential Debate is unclear. If that had to be postponed or even cancelled, would that provide further grounds for the result to be questioned and possibly challenged.

The Fed is providing the market with subtle hints that there may be further stimulation in the offing. The FOMC has not been shy to act between meetings if it is considered necessary and with the next scheduled meeting not until after the election on Nov.4 and 5 it could easily happen for the third time this year.

Fed. Chairman Jerome Powell has proved himself to be an able holder of the post, but his continued tenure will be in question if not doubt no matter who wins next month.

The speculation over GDP for the whole of 2020 is continuing as predictions remain of a lower than expected bounce in Q3. That is what has prompted the rumours of further Fed stimulus.

The most significant contributor to the negativity is the continued lack of an effective Federal Pandemic Support scheme.

This week’s release of jobless claims, this time up to and including September 25th, saw new claims fall from 873k the previous week to 837k while there was a significant fall in continuing claims of close to a million.

During the pandemic, there has been little correlation between jobless claims and the data for non-farm payrolls. That data will be released later today with the average expectation to be for around 850k new jobs to have been created, well down on August’s figure of 1,370k.

The unemployment rate is expected to fall to 8.2% confirming predictions that it would be well below 10% at the time of the election. Today’s is the final report before voting takes place.

The dollar index has been unable to sustain its recent rally and fell back yesterday, making a low of 93.52, closing at 93.72. The close below 93.80 may be significant although it has rallied back through that level overnight reaching 93.92 (0530 BST).

EU running before it can stand let alone walk

The ECB finally admitted yesterday that the recovery from the record Q2 contraction of the economy is slowing. As in every developed nation the reasons being put forward vary but carry a similar theme.

Employment data across the Eurozone has always been a little sketchy. This is due to differing reporting schedules and the reliability of the data from a few Eastern European States where there are several estimates of numbers of workers.

Rising jobless figures have undoubtedly slowed the potential for a quick recovery from the Pandemic.

Despite Christine Lagarde’s seeming confidence in the level of the PEPP and its distribution, further stimulus is likely to be needed as the winter arrives and a second wave grips the region although the infection rate varies between nations.

The ECB is on the verge of changing its treatment of inflation in a similar move to that recently undertaken by the Federal Reserve. There is an underlying fear of inflation, mostly applying to Germans who have a national fear of a return to the hyper-inflation seen after the war.

While there is no chance of that happening any potential move by the Central Bank will receive close scrutiny. With the pandemic returning and inflation benign at best it seems that the Central Bank is risking getting ahead of itself when it considers policy decisions that are at least six months away.

In reality, there is little hope of the recovery taking hold before Q2 ‘21 to such an extent that the ECB will need to consider monetary policy.

The euro remains fairly untroubled by the potential of a no deal Brexit deal which is expected to see Sterling significantly lower. It has been considered a UK issue from the start but the effect on the Eurozone economy could drag the euro lower too.