Good morning,

The US inflation number we spoke of yesterday came in low enough to keep investors happy and markets moving. The February increase in consumer prices was just 0.1%, versus the expected 0.4%, which will have gone a long way to discounting immediate inflation fears.  The timing of the announcement was pretty important too, as it preceded a US government bond auction of ten year debt, which the government managed to issue at an incredibly competitive rate and there was still a huge amount of demand, particularly from overseas investors who took up more than half of the subscription, which bodes well for the US’ burgeoning debt pile.

Stock markets also liked the reading and though they didn’t have the same sort of day they had on Tuesday, they managed to consolidate their gains and push on a little.  This now brings the S&P to about 2.5% away from the 4,000 level and we wonder now whether it is better placed to break through that number, with a bit of confidence that short term inflation isn’t running rampant and that Biden’s stimulus bill will be signed on Friday and that the cheques are in the post thereafter.

The US inflation number has probably done a bit to help the Bank of England’s cause too, as the UK bond market has been caught up in concerns over just how long interests rates can stay low if inflation were to be on the up.  This now probably allows BoE governor Andrew Bailey to still talk about the post pandemic economy in a positive light without stoking fears that such a bounce back is going to immediately lead to monetary policy changes.  The Bank would probably like to keep more QE and negative rates as possible ammunition, in case there are any more curveballs thrown their way, but with rising inflation they would have been tough to justify.  Now though he can continue talking about them without the market questioning his ability to act if required.

Andrew Bailey doesn’t get his turn until next week, but today it’s Christine Lagarde of the ECB’s turn to give her thoughts on the state of play in Europe and make any calculated comments to try and get the market moving as she would like.  Much like the BoE and the Fed, the ECB will be taking note of the tightening financial conditions and though yesterday’s US inflation number will have given her some hope that the market won’t continue to think that inflation is a one way bet, Ms Lagarde may decide that some carefully chosen words along the lines of “we’re ready to do more and we have the headroom to do more, even if it’s not entirely clear that it’s required” might pick things up a bit.

Back in the UK:  Reuters is running a piece following a survey from manufacturing industry group, Make.  They say that 75% of British manufacturers have experienced delays as a result of Brexit and that the government still has more to do to fix the problems they are facing.  As well as delays, more than half of the firms surveyed have also seen an increase in costs because of the border issues and a third of companies are saying that they have lost revenue as a result.  This is not new news, but it’s not going away either.  The government is throwing money at the situation and is expected to announce a £2k grant for businesses to get training or professional advice to deal with the red tape, but there is a bit of concern that whilst they are giving money to UK business to deal with the effects, what they’re not doing is working proactively with the EU to try and fix the cause.

With the Biden stimulus plan a done deal, the market hasn’t had to wait long to see what the next agenda item is for the Administration:  Yesterday Chuck Schumer announced a plan to ‘out-compete China’ in critical areas such as semi-conductor manufacturing and 5G technology.  He wants three goals to be achieved by the legislation 1.  Enhance competitiveness with China, by investing in American innovation, American workers and American manufacturing. 2.  Work more closely with global alliances and partners such as NATO, South East Asia and India. 3.  Expose, curb and end China’s “predatory practices”, which presumably refers to things like intellectual property theft and steel dumping.  Interestingly, this doesn’t sound a million miles away from what Trump was planning, so we wonder whether this might be the sort of legislation that gets Biden that cross party support that’s been eluding American Politics for so long.

Further afield: Australia’s council of small businesses has warned the government that winding up their wage subsidy scheme at the end of the month will put at risk 10,000 businesses and as many as 300,000 jobs.  Whether the government listens now and acts (learning from Rishi Sunak’s mistake of waiting too long to announce the first extension to furlough) or carries on its planned course, given that on paper at least their economy is in a pretty good shape, will be a subject of much debate for the coming weeks.  There’s a good long read on ABC news Australia.

Today, as we’ve said, is mostly about the ECB’s rate announcement and press conference.  After that we get US jobless claim numbers, but imagine they won’t move things materially given the support being posted through millions of American mailboxes over the coming weeks.

Be well


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