The vaccine has landed: All is well Nick Keeling

If its possible, cast your mind back to last week – yes, before the vaccine (BV). Finding it difficult? You’re not the only one. Yet last week we were lamenting the start of another lockdown, virus cases continued to rise sharply, and the UK government/Bank of England had found it necessary to expand monetary and fiscal support to revive a faltering recovery.

One week later everything has changed….

Okay, so I’m nit-picking. The vaccine gives us real cause for optimism, showing that there is a way to bring this challenging period to a close or, at least, make some semblance of normality possible. While this was widely expected, we did not really know. The vaccine has also appeared ahead of expectations, seems to be more effective than many hoped and is only the first of many in development. This suggests the possibility that the economic recovery could come earlier, boosting growth, saving jobs and raising earnings and survival expectations for many companies. It’s no surprise to see a wave of optimism driving a welcome recovery in UK equities.

Gilt yields are also higher as investors buy into riskier assets. The 10yr gilt yield is up around 15 basis points at 0.45%, while the 30yr yield breached the 1% barrier. Rate cut expectations remain, but have been trimmed (a 60% chance of a cut in Bank Rate to zero by June 2021, down from a 100% chance BV). Are negative policy rate expectations a thing of the past? When the MPC announced another £150bn of asset purchases last Thursday, essentially signalling that the economy remains on life support, its members probably didn’t expect a surge in yields a couple of days later (interestingly, while this is probably true, government bond yields have a history of rising after QE is announced).

So, the perceived outlook has changed, but given that the expectation of a vaccine was widespread and surely baked into many economic forecasts, has the outlook actually changed? And its this question that brings me back to the point I made (badly) in at the start of this piece. The economic damage from the pandemic is real and it will take years to recover. A vaccine delivered in 2021 is unfortunately not likely to help the millions on furlough or the businesses already on the edge. Social restrictions and even lockdowns may be required through the winter: Q4 2020, and possibly Q1 2021, will be quarters to forget.

Furthermore, the pandemic is a catalyst for change, if only considering the working- and shopping-from-home trends. Change can be disruptive in the short term and invariably leads to winners and losers; depending on the importance of the loser to the economy (office space for instance, and the industries that design, build, outfit, maintain, transact or are in some way connected with it), rapid change can therefore be economically disruptive. The extent of the disruption depends how quickly the winners can be mobilised.

Add Brexit into the mix, whatever the eventual agreement, and it’s difficult to get too carried away. While growth will bounce back strongly later in 2021 as life returns to normal, the overall economic outlook is relatively weak with or without a vaccine. The vaccine announcement and what this possibly means for the wider vaccine situation has provided some welcome upside risk, and we have since built this into our forecasts for interest rates. But our central case over the next year remains largely unchanged.

At least we’ll all be able to go back to the office…