Central Bankers To The Rescue
MARKETS RESCUED BY CENTRAL BANKERS’ COMMENTS
Financial market performance continues to reflect a positive view of future economic developments. Most equity markets seem set to end the w eek up again although the gains are more modest than in the first w eek of February. Credit markets similarly remain buoyant. Government bond market yields are mostly little changed on the w eek. In at least some cases, notably the UK and the US, medium to longer dated yields are some way above levels at the start of the year but rates are still w ell below pre-pandemic levels. Meanwhile, in currency markets sterling has continued its strong start to 2021, at one point touching new highs for the year against both the US dollar and the euro. Positive comments from key central bank policymakers are probably helping maintain the ‘risk on’ mood. A number have expressed optimism that a strong rebound in economic growth should be possible later this year, with one Bank of England official likening the UK economy to a “coiled spring”. Despite that policy makers have also reaffirmed that economic policy w ill remain supportive of economic growth for some time. Notably in the US this w eek, w here some commentators have questioned whether President Biden’s call for a further $1.9trn in fiscal support is now necessary, Fed Chair Pow ell said that the economy remains a long w ay from full employment. Such comments have reassured markets that they w ill have continued support from a combination of the expected rebound alongside very loose monetary and fiscal policy. In the UK, the relative success of the vaccine roll-out programme and reports that Covid-19 cases are down for a fourth successive w eek is fuelling speculation about w hen the latest set of lockdowns w ill start to be eased. UK PM Johnson has promised a ‘roadmap’ for the low ering of restrictions in England on 22nd February and has reaffirmed that English schools could start to re-open from the 8th March. How ever, as some scientists have suggested that both dates may be premature the coming w eek w ill be w atched for any adjustments to this timetable. Meanw hile, another key near-term date for the UK economic outlook is Chancellor Sunak’s Budget speech on 3rd March w hen w e should hear w hether he intends to extend various support measures including the ‘furlough scheme’ beyond April.
FURTHER TALKS ON UK-EU RELATIONS
Another near-term issue for UK markets is the UK’s post-Brexit relationship with the EU. The past w eek has seen further discussions on the arrangements over the Irish border, with the EU rejecting UK demands for an “urgent reset”. More may be heard on this in the coming w eek. Meanwhile, BoE Governor Bailey in his annual Mansion House speech said that important arrangements regarding trade in financial services have still to be negotiated. Finally some reports point to ongoing delays at UK ports as a result of implementation of the new trade protocols. A survey this w eek by the British Chamber of Commerce noted that around half of exporters to the EU are seeing border disruptions post the trade deal. The January PMI survey also pointed to issues at ports that w ere leading to lengthening supply chains that are impeding manufacturing production in particular. The February PMI, which are out next Friday may provide more information.
PMIs TO SHOW FALLING UK & EUROZONE ACTIVITY
The coming w eek’s busy calendar will see some of the first data for February. The latest set of lockdowns in the UK is now well into its second month and much of the Continent has been shutdown for a similar length of time. Survey data for January suggested that economic activity has probably fallen again in response to those developments. How ever, the declines w ere smaller than during the first lockdown and more confined to services industries most exposed to social distancing measures. February data w ill undoubtedly again be subdued. For the UK w e expect the manufacturing PMI to slip to 52.0 from 54.1, although the services index may rise modestly to 43 from 39.5. Overall that adds up to a second consecutive monthly contraction and confirms consensus forecasts that UK GDP is likely to fall in Q1. More positively, the forw ard looking aspects of the report are likely to again show expectations of a spring rebound. In the Eurozone, w e also expect the manufacturing PMI measure to slip modestly but the services index to rise but stay w ell below the 50 expansionary level. Overall, the Eurozone data also point to a decline in Q1 GDP. There are hopes of a spring rebound although the slow progress of the vaccine roll-out does seem to be impacting on confidence.
ONLINE SPENDING SUPPORTING RETAIL SALES
Other significant UK data this w eek include January retail sales w here w e think a modest rise is possible despite the latest set of restrictions as consumers once again turn to online spending. January annual CPI is forecast to show a second consecutive monthly rise to 0.7% from 0.6% in December. That w ill still leave inflation w ell below the BoE’s 2% target although it is likely to pickup further heading into the spring. Finally January public finance data is expected to post a deficit despite a boost to tax revenues from ‘self assessment’. In the US, both the manufacturing and services PMIs are predicted to stay w ell above the 50 level signalling expansion. Meanwhile, in other signs that the economy is continuing to grow , both retail sales and industrial production are forecast to have risen in January. Restrictions in the US continue to vary by state but overall seem less onerous than in Europe. Consequently while Covid-19 is having a substantial negative impact on the economy, GDP currently still appears on course to rise in Q1.
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