Good morning,

It was a win-win for Sterling yesterday, with the bank of England unanimously deciding that interest rates shouldn’t be going anywhere and the market continuing to punish the Euro for their slow rollout of the vaccine.

At the BoE meeting yesterday, policy makers effectively took negative rates off the table for at least the next six months and said that the Q2 economic recovery was likely to be significant. If you add those two up, then it’s unlikely that they’d feel the need to cut interest rates into negative territory some time after August, if things are going as well as they think they will be.  Sterling jumped higher on the news, though in doing so it potentially creates a rod for the Pound’s back, in giving a high economic bar for it to reach and downside if it doesn’t get there.

The Euro move below the critical 1.20 level versus the Dollar yesterday came despite German inflation data printing much higher then expected and potentially posing an issue for the European Central Bank when it comes to their ultra-loose monetary policy.  Typically inflation on the rise would be good news, especially for a currency where inflation has been so lacking for so long, but it does seem to be that the market is punishing the bloc for its slow roll out of the vaccination programme, with the trend in a weakening currency really kicking off on the 6th January and the Euro weakening pretty much in line with the divergence between the amount of vaccines delivered in Germany versus the UK.  It’s been accelerated a little along the way with Italian politics and the ECB saying that they might not be at their policy limits, but it’s not like the market hasn’t seen both of those situations before, so vaccines must be playing a decent role.

To the Italian political situation:  Mario Draghi has been tasked with forming a new coalition government and will be speaking today and over the weekend with the various political parties that make up parliament to try and get as many signed up to the idea as possible.  The general consensus is that he will find enough support – or not run in to too much resistance – to be able to get a government up and running, which would certainly be reassuring to the markets and the EU, who are going to be sending tens of billions of euros from the covid relief fund to Rome in the second half of the year.  The Guardian points out that Mario Draghi is the right choice for the time being, but shouldn’t be thought of as a long term solution, as the last technocrat government that Italy had might have got them through the debt crisis, but it also sparked the rise of populist movements, so doubling down on this approach to government risks not being without consequence.

Back to the UK quickly, where the government is working on a few things covid related of note:  Enforced quarantine on travellers arriving in the UK won’t be in place until the 15th of this month, as they’re trying to work out logistics (despite having the best part of a year to have a contingency plan for such an event).
The treasury has got economists involved in the governemtn planning of the economic re-opening, which might be a good thing if your view is that it should happen sooner rather than later.  Original guestimates were that schools would be back in March, retail open in April and then hospitality in May, but it might be that the treasury influence accelerates the process, particularly as Rishi Sunak was frustrated at the pace of re-opening after lockdown one – at the current run rate, everyone over 50 could have their first vaccine dose by the end of March, so a swifter timetable might also be supported by the scientists too.
Lastly, the government is working on a vaccine passport that could be up and running ahead of summer to allow international travel for those that can prove they’ve had the jabs.  Greece are planning to waive quarantine rules for people that have been vaccinated and it could be as early as May that people will have a government document to say that they have been.

Over in the US, Joe Biden is reported to be planning an executive order to forgive some student debt.  It’s been a hotly contested idea for some time now, but the progressive arm of the Democratic party has been pushing hard for this, which has prompted the White House to confirm that they are considering it.  There’s $1.6 trillion in student debt in the US and the burden of that debt is clearly putting the brakes on people spending on things that would boost the economy, but writing off a portion of it would be seen as unfair to taxpayers, those that didn’t go to college, people that have already paid off loans and also those that can comfortably afford repayment getting unnecessary relief.  Such a move would be controversial, but whilst you’re writing big cheques the economic argument can definitely be made for it.  Though the legal challenges would be significant.

Biden spoke of his telephone conversation with Putin yesterday, saying “I made it clear to President Putin in a manner very different from my predecessor, that the days of the United States rolling over in the face of Russia’s aggressive actions, interfering with our elections, cyber-attacks, poisoning citizens are over”.  He also said of China that the US will “confront China’s economic abuses, counter its aggressive course of action to push back China’s attack on human rights, intellectual property and global governance… but we’re ready to work with Beijing when it’s in America’s interest to do so”.  Meanwhile Beijing has accused the US of creating tensions after one of its warships was sailing in the Taiwan Strait as a visible show of support for the country.  This is clearly going to continue to be a complicated relationship.

Looking to today, and it’s non-farm payrolls.  The US employment data has real potential to be a market mover and with big moves in stock markets and asset allocations between stocks and bonds in the last week, any outcome that differs from the broad consensus could really shift prices as we head into the weekend.  In the FX market, the Dollar has performed well in the last week and a strong reading could cap the week off with another push higher.

Be well


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