The next round of money printing is designed to prevent a dip back into recession and judging by the success of the first round of QE back in 2009 it did indeed give companies more cash to throw around and thus contributed to the recovery that we’ve been through in 2010.
But as we’ve seen it was only a temporary measure that has actually shot itself in the foot by causing inflation to remain way above target. In the past we’ve often written about inflation being too high in this comment and once again the Bank of England’s actions will cause asset prices to remain inflated and make life even more difficult for not just pensioners and savers, but almost everyone.
It is no wonder that this week we saw Tesco saying that their UK market has seen sales contract as consumers tighten their belts for tough times ahead. Whilst the temporary boost to the economy might be welcomed by many, it doesn’t mean that beyond this growth will be maintained by this artificial assistance. I’m happy to have a little bet that in two years time we’ll be in the same position and the BOE will simply print more money.
What the UK really needs is to be more competitive. OK we can’t raise rates just yet in order to tackle inflation but the price rise needs to be stopped and the only other way we can get competitive is to cut back the state which is draining the funds dry. With no money to go around the government’s cuts have barely touched the sides and the UK deficit is still a huge balloon. It’s worrying to think that our annual deficit now is greater than it was when we needed assistance from the IMF back in the 1970s. If state spending isn’t cut back more sooner then markets will become tired of the UK’s fiscal position and we could see bond yields heading the way of France and Italy. This would put us in a dangerous position, but for now at least the markets are giving us the benefit of doubt.
This morning the FTSE is biding its time hovering around 5300 as it’s all about the non farm payroll today. We all remember how last month saw a big fat 0 hit the screens and subsequently the Dow shed some 400 points or so in the following few days. Today’s number is expected to come in around the 73k mark and if the ADP figure on Wednesday and yesterday’s initial jobless claims is anything to go by we could see this and maybe more.
The euro has managed to scrape back this week’s losses against the dollar, on the back of news that the ECB were to freeze interest rates at 1.5% and plans to buy €40bn of bank bonds. Traders took this with great delight and shifted out of the safe haven yen and dollar, creating a spike in the euro. The euro is trading against the dollar at 1.3455 having rebounded on it’s last support level and after yesterday’s moves, we could see the euro have a bit of a squeeze to end the week.
Gold’s negative correlation with the greenback started to take its form again yesterday, finding direction from the general sentiment on the global economic outlook. Demand for the yellow metal could grow after yesterday’s central bank manoeuvres. On the other hand, the fact that the advance was only 8.5 dollars to 1650.0 on such significant news could show that there is still a heap of caution around. Currently, gold is still on the rise, trading at 1660.3.
The energy markets look like they are jumping on the back of optimism in the equity markets and with this crude prices are clawing back losses made last month. General census was that the ECB were seen to be making the right moves to deal with the ongoing debt crisis and therefore demand for the black stuff will not decline as had been initially feared. All eyes will be on the non-farms later today to confirm this optimism though.