“The UK economy is enjoying a sharp, V-shaped recovery”. The UK economy is like a “coiled spring…”, straining to release “…pent-up energy”. Both statements were made by the Bank of England’s chief economist, Andy Haldane. But they were made seven months apart, the ‘V-shaped recovery’ comment in July last year and the ‘coiled spring’ comment last week.

He shares the optimism of his boss, Governor Andrew Bailey, who in a recent interview with the Observer said that even if just a fraction of the estimated £125bn additional savings accumulated by UK consumers during the pandemic is spent when the handcuffs come off, then the effect on the UK economy will be significant. Bailey then tempered his view by insisting that all UK lending banks must be able to implement negative interest rates, if needed, by the middle of this year.

What is Bailey really trying to tell us? Is his optimistic economic view a firm belief that all will be well and the negative rates warning is merely a contingency? Or is he hinting at a triumph of necessity over hope? The Bank has been dangling negative interest rates in front of us as a possibility literally for months now and it seems remarkably reluctant to haul the kite down despite the game-changing inception of the mass vaccination programme since such a profound shift in interest rate policy was first mooted.

Optimism for recovery is certainly not misplaced but those two projections made by Haldane more than half a year apart demonstrate the difficulty all economists have of not only trying to second-guess the progression of the virus, but as importantly the Government’s response to it. That in turn is informed not only by the competing forces of risk-averse scientists pitted against politicians who fear never-ending economic penury and who urge a more bullish stance, but also by the Government’s attraction for, and acute sensitivity to, focus group opinions which consistently take a cautious view on relaxing lockdown restrictions. As we have said many times before, at its core, the economic future will be determined as much as anything by confidence, that most intangible and ephemeral of factors.

All that conjecture aside, the historic hard facts were laid bare in the 2020 GDP data released last Friday. December, with the benefit of Christmas spending, saw growth of 1.2%; fourth quarter output grew 1% after a 16% bounce in the third quarter; overall the economy shrank by 9.9% for the year, in line with the Treasury forecast of -10%. We are already exactly half-way through the first quarter of 2021; the current lockdown regime was only implemented in Christmas Week without much likelihood of any significant change before mid-March at the earliest, on which basis it is estimated that the UK economy will have shrunk again by around 4.5% by the quarter-end; bad but far less severe than the -19% horror story of the second quarter in 2020.

As to when the ‘coiled spring’ is released, it is not easy to say even as we pass the remarkable milestone of 15 million vaccines being administered bang on schedule. If much of that pent-up demand is projected to come from the hospitality and tourism sectors, Transport Secretary Grant Shapps was quick to pour a ton of cold water on the prospects of a summer holiday, either at home or abroad. A somewhat cynical political ploy to make us feel ever more grateful if the sector is allowed to re-open early? Or is he really telling us that significant restrictions are still likely to be in place at least until the autumn?

Investor sentiment to all this is playing out in the bond markets. Follow the path of the 10-year Gilt in the last 7 months: its yield bottomed on 4 August at 0.08%, since when its trajectory has been a fairly steady progression upwards to where we are today nudging 0.6% (58 basis points, 15 February). The 5-year Gilt, whose yield over the same period has been negative more often than it has been positive, is +0.1% and rising; even the 2-year Gilt which has been almost entirely negative since June is now only just below zero.

Notwithstanding the Bank’s contradictions between ‘coiled spring’ optimism and the potential for negative interest rates indicating a radical defensive shift in monetary policy, markets are hedging their bets that the next change in UK interest rates, whenever it might be, is up, not down. Nothing dramatic (10-year yields remain below the rate of inflation, albeit only by 0.02%, the slimmest of margins); but up.

In America, Federal Reserve Chairman Jerome Powell has been banging the drum again that it is his intention to maintain current loose monetary policy for the foreseeable future with essentially free money available on tap thanks to virtually zero interest rates. With his predecessor, Janet Yellen, now confirmed in post as US Treasury Secretary and pledging to ‘go big’ on government spending and, adding spice, the election of veteran hard-line socialist Bernie Sanders to the Chair of the highly influential Senate Budget Committee, fixed income investors did not bat an eyelid: the US 10-year Treasury yield at 1.21% is the highest since the collapse in March 2020. Similar to the UK, real yields remain negative. Again, without predicting any dramas, bond dealers are seeking protection in higher yields as the perceived risk of rising longer-term inflation grows.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
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