Prices unlikely to fall even with another lockdown

The growing number of cases of the new variant of Coronavirus proves that the country is still a long way from being able to declare an end to the Pandemic. The Government has introduced stricter regulations regarding the wearing of masks from today, while yesterday it announced a change to who is allowed to receive a booster vaccination.

The goal is for as many members of the population as possible to receive a dose of the booster vaccination as possible, in an attempt to ensure that the country is able to enjoy as close to a normal Christmas as possible.

The scientific community believes that it will take up to three weeks to gather sufficient data to understand how effective the vaccinations that are currently available against Omicron are. If there are tweaks necessary, it could take another 100n days for those to be made, so it is becoming vital that any restrictions that are introduced be adhered to.

The economy was starting to show a level of activity that had been threatened by rising inflation, although there was still a degree of uncertainty surrounding the growth versus inflation question.

All through the Pandemic, Central banks have had to learn to be more reactive since predicting first, the full economic effect of lockdowns, and then how strong the recovery would be once the economy began to open up.

The UK’s recovery has been severely hampered by the departure of foreign workers, often from key sectors, who chose to leave rather than go through the employment visa process.

It is now expected that the UK economy will finally grow back to the level it was at before the pandemic by next spring, although as a goal the level of that statistic has been devalued as inflation has taken hold.

The feeling of certainty concerning the Bank of England tightening policy at its next meeting has faded, as the market appears to have decided that it will make up its own mind about the action of the MPC. This is due to the fact that the Bank’s Governor got his advance guidance wrong prior to the most recent meeting.

While it is acceptable to be surprised by the actions of three independent MPC members, the market is entitled to expect Bailey to have a fairly strong idea of how his colleagues would be voting.

With inflation growing, and the effect of the new variant still unknown, the MPC’s actions on December 16th are now less certain.

The pound fell to a low of 1.3287 yesterday but managed to climb back above the 1.33 level to close at 1.3302. It is making marginally higher lows as the strength of the dollar remains a major factor. As support builds up and becomes more, we could be seeing a significant low developing.

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Brainard will crack the whip on Wall Street

As he embarks on his second term in office, Jerome Powell will have far greater definition to what his choices are going forward than he has had to date. While this would be considered a positive, being forced to choose between stifling nascent economic recovery or bringing inflation under control is the essence of what the key role of any Central Bank entails.

The Fed’s mission as handed down by the Administration is to promote full employment while ensuring that inflation remains at or close to 2% on a medium to long-term outlook.

While growing the economy in order to promote employment has meant that an unprecedented level of support has been necessary, it has led inflation to reach levels not seen in decades.

When prices began to grow, Powell was able to shrug and blame the effect of the reopening of the economy and supply difficulties distorting the inflation outlook. He has been forced to change his view in recent weeks.

Yesterday, he commented that higher inflation is likely to linger well into the New Year. In a pre-release of testament to the House banking Committee later today, Powell comments that he expected the current elevated level of inflation to recede, but it is likely to remain above target for a large part of 2022.

He went on to say that it is difficult to predict how severe supply constraints will be going forward.

His major concern, however, is the pace at which job creation and inflation are beginning to rise. The take-up of slack in the employment market will also lead to inflation being an issue.

This means that this Friday’s employment report, if its recent trend continues, will also have an effect on the FOMC’s thinking.

The dollar index retains its overall level of strength. Yesterday it rose to a high of 96.44 but fell back to close at 96.16. There are signs that a top is being created, which could lead to a significant correction.

As has been said before, any correction could see the index fall back to around the 94 level and still allow the uptrend to remain intact.

Lagarde believes the economy is in a better state to cope

The trend of the return of Central Banks to the forefront of economic policy has not missed the ECB.

While interest rates remained low for several quarters, Central bank influence had been waning for some time, but the levels of support that have been necessary in developed economies has seen their influence return.

The ECB has never been considered a trend-setter during its brief life, with successive Presidents being bureaucratic in outlook and pragmatic in their actions.

It was always felt that the arrival of a more politically astute candidate in Christine Lagarde may well shake things up a bit.

Her two years as President have seen yet another monumental upheaval that has needed to be dealt with. Her tenure has mapped the entire global effect of Coronavirus.

History will note the way she has managed to persuade the normally highly conservative rate setting committee of the Central bank to loosen the tight resin it had on any rise in inflation to allow the Eurozone to survive the Pandemic.

Prior to the first of the lockdowns, there was a feeling of being rabbits in the headlights across several nations of the region, but a combination of the eventual delivery of a vaccine and Lagarde’s determination have delivered the Eurozone to where it is today.

While she still needs to use all her powers of persuasion to convince the Council to renew support once the current round expires at the end of Q1, the consequences of the Pandemic, while serious, have not derailed the economy totally.

Yesterday’s data released were a mixed bag, they were sufficient to push the euro lower versus the dollar. Consumer confidence remains fragile, falling to 6.8 from 4.8 previously. The business climate rose very slightly, but this was offset by similar falls in industrial and manufacturing confidence.

In Germany, inflation rose to 5.5% year-on-year after a 4.5% rise in October. While this is sure to raise further complaints in the regions’ strongest economy, it is unlikely to change the overall picture.

The euro fell to a low of 1.1258 and failed to recover much ground, closing at 1.1279.