Good morning,

The Bank of England were unanimous in their position that rates in the UK are where they should be and only the outgoing  Andy Haldane had a contrarian view to the other eight policy makers about quantitative easing:  The Bank have warned that inflation will rise above 3% this year – adjusted upwards from their previous 2.5% expectation – but are still convinced that it will be transitory. Rishi Sunak is also playing it cool on the subject and is comfortable with the trajectories, which as the Times points out is very important given that a fifth of the Treasuries bonds in issue are inflation linked and a one percent rise in inflation equates to about £25bn in debt servicing costs. The Bank also upgraded their growth forecasts, with expectations of 5.5% in the current quarter – particularly as households spend their accidental savings.

All that spending has led to a shortage of cardboard which is causing packaging prices to spike:  The massive increase in home deliveries has led to a huge increase in demand for cardboard which is having a much slower time making its way into the recycling chain because it’s either being stockpiled in people’s homes, or at local authority run recycling centres which can’t cope with the influx. Pre-pandemic there was a far greater efficiency, in that goods would be delivered to shops in larger boxes and those shops would have arrangements in place that recycling would be collected much more regularly.  There doesn’t seem to be an end to the problem in sight, as consumer habits have evolved far more quickly than policies, procedures, and infrastructure. The Guardian has more.

Stock markets seem to be having a good time of it this week, with the combination of strong economic data, supportive central banks and continuing strong corporate earnings.  The Federal reserve also gave banks a boost yesterday when their stress test results showed that  American banks are very well placed to withstand any shocks from a severe recession.  The S&P closed at a record high last night and the futures market is showing this theme is likely to continue into the weekend.

The market also got a lift yesterday from news that a bipartisan group of senators has come to an agreement on an infrastructure bill that would see $579bn of new spending on upgrading roads, bridges, railways, broadband and green transportation infrastructure. The bill is well short of the $2.3trn that was originally touted by the president, but Biden is praising the collaborative effort which reminds him “of the days we used to get an awful lot done in congress”. He now hopes that it can pass swiftly through congress and has warned that it needs to happen quickly because “there’s massive investment going on with the autocrats…we have to move and we have to move fast”.

By ‘autocrats’ president Biden means China and there’s an interesting interview in the FT with outgoing Nato military chief, Sir Stuart Peach, which covers his views on the country.  He says, “it is quite shocking how quickly China has built ships, how much China has modernised its air force, how much it has invested in cyber and other forms of information management”. He also talks about the increased cooperation between Russia and China but says the opening up of Arctic trading routes and mineral reserves is likely to cause tension between the two countries down the line.  It’s worth a read.

China has a record stockpile of foreign currencies, with banks there now holding more than a trillion dollars’ worth of non RMB deposits.  The problem banks now have is that because of the restrictions in exchanging RMB for foreign currencies, these stockpiles are only likely to go one way and the banks are going to be very limited in what they can do with them.  There is an expectation that this could provide China with an opportunity to relax the rules around capital outflows and in doing so would also be in a position to weaken their currency as companies and individuals would be able to sell it more freely. It would be a balancing act though and authorities will be mindful to tread carefully, as too much enthusiasm amongst investors being able to move their assets outside of the country could be damaging and hard to reverse. Bloomberg has the story.

Looking to today: There’s enough data flow to keep us busy, but nothing that markets will worry about particularly.  The one exception is a US inflation number, but the Fed have done the groundwork here already, by taking a mildly hawkish stance, but reassuring the markets still aren’t changing for a good many months. Sterling was dented slightly by yesterday’s unanimous vote on keeping rates on hold but is rebuilding slowly. Stock markets are currently up more than 2% on the week and they’ll be gunning for another record close.

Have a great weekend.

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