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America's reset

Wednesday, January 20, 2021

UK inflation, as measured through consumer price inflation (CPI), remains low at +0.6% year on year, well below the Bank of England’s (BoE) target, but in line with market expectations. The disinflationary effect of the Covid-19 pandemic on the economy is clear and persistent and will mean that the BoE will have to remain in easy money mode for the foreseeable future.

You can almost hear the collective sigh of relief across the globe today of a return to normalcy. We will see a change of administration in the US with Joe Biden becoming the 46th president. America’s natural reset of hope and expectation that we experience on every presidential transfer of power allows for the genuine argument to be made that the economic tea leaves are predicting an increased rate of change in fortunes. While the overall election result was not the forecast ‘blue wave’, more a ‘blue rinse’, Biden will still have the ability to enact more aggressive stimulus. Nevertheless, he has his work cut out and will have to employ his commensurate skills of bridging the divide in the US both at the societal level but also, more importantly, at the political level.

“Building back better” is a key message to the new administration with an obvious emphasis on renewable energy and infrastructure spending – so less a message of dividing walls at the border and protectionism and more a vision of better drivable roads in battery operated cars. Certain sectors are almost guaranteed to come under higher regulatory scrutiny. I am not convinced energy stocks and even financial stocks have priced this in completely yet – such reflation-wave assets could be volatile in the months ahead.

A level of partisan gridlock has been removed and government spending through expanded stimulus programmes might be expected to increase quite quickly. One would normally expect this to lead to higher inflationary pressures further down the line. The general market consensus however is stuck in the mantra of ‘not today’ regarding inflation – the danger is we all know that the consensus is invariably wrong over the longer term.

The obvious elephant in the room is how the pandemic continues to progress and affect the economy and while the Biden administration has signalled a step up in action to combat the virus with a more aggressive vaccine roll-out, the crystal ball is still frustratingly murky here.

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