Calm after the vaccination storm to drive economy

The success of the UK’s vaccination programme has given the country an incredible opportunity to forge a new path despite the concerns that still remain about the long-term effect of Brexit.

While it would be unfair to say that this happened more by luck than judgement, the challenges that have been put before Boris Johnson and his Cabinet would have challenged anyone. The shortcomings of certain ministers have been more than made up for by the talents of scientists and diplomats who have charted a course through Covid-19 and Brexit.

Finding a Brexit deal that was even acceptable, let alone agreeable, to a belligerent EU was a significant breakthrough, particularly when you consider the times in 2019 when the country was subjected to a hung Parliament where the tail was certainly wagging the dog.

The size of Boris Johnson’s majority in the last election gave his Party a mandate to drive through Brexit and has meant that right or wrong, he was able to manage the Pandemic to the best of his, and the Cabinet’s, abilities. It is unimaginable the chaos that would have ensued had Parliament been in the same condition this winter.

The upshot of what may turn out to be anomalies when judged by history is that the UK finds itself in a strong position to deal with obtaining trade deals and joining the global community as an innovative and slimmed down economy.

History has shown that such gifts should not be wasted, and the economy will need careful management if the triple threats of inflation, unemployment and a possible third wave are not to undo the work that has already taken place.

Rishi Sunak, a novice Chancellor, has been handed an opportunity to cement his place as a potential Prime Minister but he will need to show how good he is at selling higher taxation to the country as he begins to consider repayment of the largest peacetime public borrowing in history.

The country is enjoying the fruits of a tough winter of lockdowns with optimism arriving as the restrictions are lifted, but there are several hurdles to be jumped before a rosy future can be considered.

The pound remains strong overall which helps counter inflation, but its rise will see UK exporters face another issue when selling within the EU. Versus the dollar, the pound is managing to hold on but in the short term the correction is likely to continue.

Yesterday it fell to a low of 1.3706, closing at 1.3740.

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Consumer confidence at one year high

The median forecast for this week’s NFP data for March is growing almost daily. JP Morgan’s prediction of 675k new jobs is now being seen as a reasonable estimate.

This is fairly typical of the furore that often surrounds this piece of data, whether the estimate is good or bad.

One thing it does do however, is skew the risk of an outlier. 350k or 400k new jobs would be a very respectable result given the tumultuous scenes around the election of President Biden and the fact that the giant stimulus package has only been in place for a very short period of time.

Optimism is building despite the continued fracture in U.S. political life. There is no better illustration of the open wounds that still exist than to see that Biden’s approval rating is, if anything, slightly lower since he has taken office.

Conspiracy theories are alive and well and remain in residence in Washington. There have been rumours that Biden is hiding away.

He has become the first President in forty years to not hold formal press conferences from the Oval Office. By this time in their Presidencies, Trump, George W. Bush, and Bill Clinton had held several.

It is of course possible that Bidens lack of exposure markedly suffers by comparison with his predecessors. Furthermore, Biden clearly feels no need to tell the country what a great job he is doing, the economic recovery is beginning to speak for itself.

Several Regional Fed Presidents have been queuing up to confirm the Central Bank’s current suck it and see attitude to the recovery.

In keeping with the rest of the G7, inflation and unemployment remain the two highest barriers that need to be negotiated. Employment appears to be gaining traction with the estimates about NFP, but weekly jobless claims are still volatile.

There is no reason to doubt Jerome Powell’s attitude to inflation but when it begins to rise it has to be hoped that he has more up his sleeve than simply moving the goalposts.

The dollar continues to make decent progress higher, and it can now be believed that its current strength is morphing from correction into trend.

Yesterday, the dollar index rose to a high of 93.35, closing at 93.28.

Italy to continue to suffer as borrowing balloons

The ECB must look across the English Channel and Atlantic with envious eyes as it sees the U.S. economy disappear over the horizon and the UK, despite Brussels best efforts to derail it, heading in the same direction.

If we put the vaccine anomaly that is driving the UK to one side and compare the U.S. and EU responses to the economic outcome of the Pandemic, Mario Draghi’s words as he was winding down his Presidency of the Central Bank come to mind.

He made a speech that may become almost as iconic as his whatever it takes rhetoric about saving the euro at the height of the financial crisis.

He said that the funds being given to nations to support them at the height of the Pandemic should be used to invest in the future. That will give the youth of today a basis to grow.

What has happened is that a large percentage of the funding has virtually disappeared down the drain as bailouts have taken precedence. Draghi’s own nation, Italy, has been among the culprits and he is now left with a country where the debt to GDP ratio is currently standing close to 160%, and set to rise further.

Compare the EU response to the U.S.

Yes, of course, the $1.9 trillion stimulus went to individual households, but they are being encouraged to spend that bonus to reinvigorate the economy just at a time when demand is already growing.

The EU also faces the twin evils of unemployment and inflation, but the employment issue almost escapes Brussels’ gaze as it comes under the fiscal umbrella, with no unified approach.

It is easy to see why inflation is beginning to grow and become an issue in the Union given the size of the QE taking place. This week, German inflation has reached 2% while for the entire region it is expected to reach 1.3% from 0.9% previously. That data will be released this morning.

The euro is looking very likely to fall to test medium term support at around 1.1620. This is obviously due in part to dollar strength but even if the dollar were also struggling, the euro would be still losing ground.