Not the time to begin to taper

The rise in cases of Coronavirus which is almost being ignored by the Government will start to concern the Bank of England if it continues for any length of time.

With most restrictions set to be withdrawn in under two weeks’ time, it will be difficult to halt, and although hospitalizations will remain low as a percentage of the number of those infected it will hit the economy hard if it continues for any significant period of time.

The Bank of England Governor has clearly set out his agenda for the beginning of tapering the Bank’s support for the economy, and his most obvious virtue is patience.

Andrew Bailey believes that despite the rise in inflation, even if it does reach 4%, as his former colleague Andrew Haldane believes, any damage to the economy will be transitory.

There is no reason to believe that inflation will be a factor for any extended length of time but given the circumstances that have prevailed for the past eighteen months, nothing can be ruled out.

That is why, in keeping with Central Banks in other developed countries, the Bank of England has become reactive to the data, rather than trying to be pre-emptive.

The housing market will have taken a hit from the removal of the Stamp Duty holiday, but borrowers will have received a boost yesterday from HSBC releasing its lowest ever mortgage rate.

It is now possible to borrow for two-years fixed at 0.94%. There is, of course, a catch. This will only apply to those with a 40% deposit and there is a fee of £999, so in overall cost the rate is a little over 1%.

Other banks are likely to follow, but it is likely this will be a one-off opportunity, with rates likely to be rising by the time that renegotiation comes around.

The pound rallied briefly to a high of 1.3898 yesterday, but buying interest quickly fizzled out, and it fell back to close at 1.3799.

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Market set for uncertainty

There is an air of doubt surrounding the release of the minutes of the latest FOMC meeting later today.

Traders and analysts are prepared for a degree of disappointment, given that Fed Chairman Jerome Powell has been fairly forthright in his views on tapering Central Bank support, while several of his colleagues have already disclosed their own views.

The most interesting outcome will probably be the views of those who haven’t expressed an opinion. They will be in the minority, but the market may be able to speculate over when the taper will begin.

Speculation is all it will be, as were there to be any definitive agreement, it would already be in the market.

The Dollar has managed to hang on to the gains it made post-FOMC, but it won’t continue to climb now with concrete evidence. Even last week’s NFP data, which was significantly better than had been expected, failed to light a fire under the Greenback since it was clear that the Fed would take it in its stride.

This indicates that there is an underlying plan within the Central Bank, but it is unlikely that the minutes will reveal any hard and fast plan.

As already mentioned regarding the Bank of England, Central Banks have become reactive, and the Fed is no different, although that will change as soon as the taper begins. Of course, one takeaway that is already in the market is the Fed’s prediction that at the rate the economy is currently improving, it is set to raise rates twice in 2023.

President Biden continues to search for backing for his latest infrastructure plan. While it is a struggle there has been no significant dip in his approval rating which, although marginally lower than it was when he was elected, still remains higher than his predecessor managed to achieve at any time during his Presidency.

The dollar is suffering from a lack of impetus. Its direction is fairly clear, but it is acting as though its batteries need a recharge.

Yesterday, it managed to reach a high of 92.65 but slid back as daily traders took profits, closing at 92.53.

Plenty of rebounds, but recovery still fragile

The Eurozone economy is currently strewn with several rebounds.

Confidence, activity and output are rebounding, as are retail sales and services.

However, the rebounds are still not sufficient to drive the economy past the level it was at pre-Pandemic.

It should be remembered that the Eurozone economy was suffering from fears over a shallow but long-lasting recession before the Pandemic hit, so the significant volume of support it has received should have seen it at least reach where it was in early 2020.

There has been a lot of talk recently about structural defects in the economy. These are similar to faults in a manufacturing process and mean that no matter how good the end product looks on the surface, an inherent defect will always hold it back.

In the case of the Eurozone, the two most significant defects are the fact that there is no fiscal union to go along with the monetary union that has been in place twenty years, and the fact that the ECB is expected to be the only arbiter of financial discipline.

Each nation is still responsible for levels of taxation and social spending. This makes the entire area lopsided. It is difficult to see Ursula von der Leyen ever being in a position to drive such a sea-change in the economy through. It is hard to conceive how the creators of the EU expected this to work in the long-term.

Once the Pandemic dust has cleared, the entire region should be able to see the faults that have been developing for some time.

The question will be, are they prepared, and do they have the political will to change?

Yesterday, the euro continued to follow the dollar. It fell to a low of 1.1807, but only managed to recover to 1.1823.