Mask rules could undermine confidence

It seems that the UK is at the end of the COVID-19 road.

Prime Minister Boris Johnson announced last evening that the rules over wearing face masks would be scrapped, along with most of the rules concerning indoor gatherings from July 19th.

The success of the nation’s vaccination programme is a cause for celebration as the NHS turns 73 years old.

He went on to say that cases of the virus are expected to rise to 50k this month, but with hospitalizations at 10% of what they were in December, the last time that infections were this high, the question is, if not now, then when?

The almost total reopening of the hospitality sector has mainly contributed to service sector jobs rising to seven-year highs. This is likely to fuel inflation but given the state of flux that the country finds itself in, that is unlikely to either rise to unmanageable levels or last a long time.

Services output rose to its second-highest level in eight years in June. This is the largest part of the economy, making up around 80% of GDP.

Bank of England Governor Andrew Bailey in a speech yesterday criticized those sniping at the Bank for not seeming to take inflation seriously.

Turning poacher from gamekeeper, Ex-Bank Chief Economist Andrew (call me Andy) Haldane has already found his voice from the private sector, warning that inflation is rising rapidly and could reach 4% this year.

It seems you can take the economy away from the economist, but you can’ take the economist away from the economy!

In his Mansion House Speech to the City, Bailey labelled inflation a blip. That remains to be seen, but it is paying off globally for Central Banks to be reactive, so it is likely that they won’t veer too far away from what works in uncertain times.

The pound rose modestly in quiet Independence Day trade yesterday. The market is still keen to hear who said what at the latest FOMC meeting where the Fed’s likely actions were clarified, but only a little.

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But no definitive forecast to be presented

The most recent meeting of the FOMC took place three weeks ago. It was made fairly clear both in tone and reference by Jerome Powell that the Fed is looking to raise rates twice in 2023.

He made little reference to when the Bank will start to taper its bond purchase programme, but two of his colleagues have already said they would like to see that happen this side of the New Year.

Inflation remains a key topic for everyone it seems except the FOMC’s members. They have been fairly vociferous recently, dancing around the subject, but haven’t named inflation as being the main reason to begin the taper.

Yesterday’s meeting of OPEC+ failed to agree on output, which has seen the oil price surge.

Anyone concerned about inflation should look away now!

Brent Oil jumped past $77. This is a Pandemic high and a price level not seen since 2018.

Tensions over production are highlighting the general degree of mistrust that exists, and that is likely to see prices rise even further.

That may see the Fed become a little more hawkish going forward, although no one really expects anything significant, or not already in the market, from the minutes. The most hawkish members have been identified, but those being called doves would probably prefer to be called patient.

The dollar index has settled back again following last week’s employment data, and it may be already beginning to enjoy a summer lull. Yesterday, as the country celebrated Independence Day, the dollar took a quiet slumber. It fell to a low of 92.13, closing at 92.21.

Senior German officials disagree about inflation

The Eurozone economy continues to gain strength, but it still has some way to go before it reaches pre-Covid level.

The ECB remains divided over both the direction and timing of monetary policy. Although inflation slipped back to 1.9% in its latest release, there are still concerns that unless it is tackled now, higher inflation will be here to stay, and that strikes at the very structure of the Union.

Dutch Central Bank President and ECB Council Member Klaas Knot warned, in an article published over the weekend, that it is not within the Central Bank’s control to decide what is temporary and what is structural about rising inflation.

His words echo those of his German counterpart Jens Weidman, who has voiced concerns about inflation to such an extent that he believes the ECB should be tightening policy even if it hurts the recovery of other EU members.

Knot, while not going that far, has nailed his colours to the anti-inflation group within the General Council.

Christine Lagarde will be keen to support the ECB’s independence, although she will also be concerned about the frugal five lobbying away from the council chamber for support for the tapering of bond purchases to begin.

At a special meeting this week, Lagarde will preside over the outcome of the recent summit that was held where the Bank’s strategy review was completed. It is widely expected that the wording of the bank’s inflation target will be changed from close to but below 2% to something more like around 2%.

This will be seen as a softening of the stance on inflation and will push back any tightening of monetary policy even further,

The euro lost a little ground versus the dollar yesterday, and closed marginally lower at 1.1862