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No magic money tree: Rishi Sunak, the UK Chancellor, has told Conservative MPs that he wants to wean the country of stimulus and restore the public finances. Apparently, the chancellor will use the March Budget to start reducing the deficit and raise taxes, with a focus on corporation tax at first. The government must be confident about vaccines to allow the focus to turn to tax hikes. Compare this with his US counterpart Janet Yellen’s calls to act ‘big’, and it looks as though the Tories are falling into the old austerity-mantra trap. Or are they? We should note, cynically, that it is never about doing what’s right for the country, only about getting re-elected. So, keeping the lid on spending, being ‘responsible stewards’ of the public finances and showing they are not spendthrifts like the other lot, is all terribly important. Only it may not be the right course of action for the people of this country. It’s going to take a long time to repair the damage of the government’s actions to destroy the economy. Perhaps some MMT’ers should start making their case a little more vocally? It would be an interesting debate to have in Britain, one that so far has only really focused on the US. 


PMIs this morning show confidence is holding up just but remains susceptible to further extensions to lockdowns. UK retail sales in December were weaker than forecast and consumer confidence has slipped. Retail sales rose just 0.3% last month from November, when sales dropped 3.8%. This compared with an expected rise of 1.2% and indicated that restrictions are not just physical. The GfK consumer confidence index eased down 2pts to –28 as people worry about their finances and those of the wider economy (quick Rishi, all that borrowing needs to be repaid quickly!). Sterling retreated in early trade, with GBPUSD easing back from the 1.37 level having traded through 1.3740 in yesterday’s session.


European stocks head into the weekend on a down note markets continue to search for direction amid the uncertainty of the pandemic recovery. Stocks on Wall Street were flat for the session, although the Nasdaq rose 0.55%, building on Wednesday’s record high, as investors bet on big tech delivering bumper earnings in the wake of the Netflix bounce. Apple shares rallied over 3% ahead of next week’s earnings, with quarterly revenues seen exceeding $100bn for the first time on renewed iPhone demand and other devices delivering strong gains. It’s similar to last Friday with risk coming off into the weekend – not a great sign of confidence, and whilst remaining constructive on the big picture thanks to stimulus and vaccines, it’s very possible there is some kind of corrective move lower in major indices over the next few weeks.


Jobless claims in the US continued to show the need for targeted stimulus. Initial claims totalled 900,000 last week, slightly lower than expected and down from 926,000 in the prior week. Continuing claims fell 127,000 to 5.05 million. 


The ECB left everything on hold as expected. There was a change to the statement around recalibrating PEPP that ruffled some feathers but really was nothing to note – Lagarde and co have been saying this since the last meeting and only affords the ECB the kind of optionality we fully expect it to maintain.  But it did help push EURUSD higher and this morning it’s trading at week highs north of 1.21750.


The statement featured the following lines that were not present before: “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.”  So PEPP could be smaller or larger, it all depends on financing conditions. Could go up. Could go down. This is not a new thing but a reiteration of what Governing Council members have been saying since the last meeting. You could argue it’s a slight sop to the hawks as it means they could reduce the PEPP envelope – or not use if fully – but really this is not a material change.


Chart: Gold retreated from the 21-day SMA and is back testing the 50-day SMA support.


 Gold retreated from the 21-day SMA and is back testing the 50-day SMA support

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