Getting over Covid

In a speech yesterday, Bank of England Governor Andrew Bailey warned that “The risks around the Covid recovery… are still on balance distributed on the downside”. He also faced, head-on, concerns that the re-emergence of inflation would mean higher interest rates. The bank will not make that move without “clear evidence” that employment and inflation are on target.

The governor was notably less bullish than Chief Economist Andy Haldane and his expectation of a “coiled Spring” recovery. He also predicted that many of the changes to work and spending habits will be permanent. Nevertheless, his tone was upbeat, and he was careful to pay even-handed attention to the possibility of negative interest rates and “tightening policy, should that be needed”. The governor stuck closely to the title of his speech, studiously avoiding the elephant in the room with not a single mention of Brexit.

Investors took his sentiment in good part, especially when an opinion poll from YouGov showed consumer confidence rising to its highest level since the pandemic began. Sterling had a positive day, strengthening by an average of 0.4% and taking more than half a cent off the euro and Swiss franc while holding steady against the US dollar. It was beaten by the Norwegian krone, which led the field for a second day despite a setback for oil prices.

Reflation

Whether or not the Bank of England, the Federal Reserve or any other central bank is disinclined to address rising inflation, that is what investors see coming down the road. They are tending to favour “value” stocks over tech shares, hence Monday’s divergence between the Nasdaq index (-2.4%) and the Dow Jones 30 (+1%), which touched a record high.

Investors’ abandonment of such heavyweights as Apple, Netflix and Facebook did not translate into greater caution in the FX market. The JPY was last-placed on the day, though admittedly the AUD and NZD did not fare a whole lot better. The CAD in fourth place was nipping at the heels of the USD and GBP.

Sentiment was a far bigger driver than statistics in Monday’s market. The Sentix index of Eurozone investor confidence improved by more than five points to a post-pandemic high. US wholesale inventories went up by 1.3% in January, as forecast. NZ manufacturing sales rose by a modest 0.5% in Q4. Business confidence in New Zealand deteriorated while in Australia it improved further. The BRC reported a return to growth for UK retail sales in February.

Eurozone jobs and growth

The important numbers during today’s London session are for Eurozone employment and revised fourth quarter gross domestic product. No change is expected to the previous estimate of a 0.6% quarterly contraction in GDP, and a 0.3% rise in employment is predicted.

There is not a great deal else on the ecostat table today. This morning Sweden and Italy report on industrial production. South Africa updates fourth quarter GDP, with growth of 4.1% expected. US small-business confidence comes after lunch.

Tonight brings NZ electronic card retail sales, Australian consumer confidence and new home sales and Chinese inflation. Reserve Bank of Australia Governor Philip Lowe will be talking about “The Recovery, Investment and Monetary Policy”.