Economics news – import drive and the march of the makers ... Import Drive ... “Sales of European cars drive trade gap wider” is the headline in the Times today as Britons “flocked” to buy cars built on the continent. The trade figures released this week, reveal the September deficit (trade in goods) increased to £9.8 billion from £9.6 billion last month. The trade deficit with the EU reached a record £6.0 billion as imports increased by £0.4 billion to £18.6 billion. “Half of the increase is attributed to cars”, according to the ONS, hence the slightly unbalanced headline from the Times. In reality, Britons have been flocking to the showrooms since the start of the year. Car sales are up by 10% this year. The deficit was offset as usual by a trade in services surplus of £6.5 billion. This is a familiar pattern which should come as no surprise to readers of The Saturday Economist. The trade deficit will deteriorate further especially if the UK continues to grow at a faster rate than major trading partners in the EU and USA. We are forecasting an overall trade deficit this year of £110 billion offset by a service sector surplus of almost £80 billion. The residual overall deficit easily financed. The September figures are confirmation of the trends within our well established trade model. Depreciation damages UK trade in goods performance. Imports do not react significantly to price changes. There will be no rebalancing of the economy. March of the makers picks up pace ... Did the march of the makers pick up the pace in September? Not really. According to the latest figures from the ONS. Manufacturing output increased in the month by just 0.8%. Output for the quarter was flat as signaled in the Markit/CIPS PMI® survey data last week. Nevertheless we still expect manufacturing growth of almost 2.5% in the final quarter of the year. Last year was such a dismal quarter, even the stumbling marchers will make progress. Watch out for the headlines heralding the rebalancing over the next few months and tie me to a chair. Other survey news ... The service sector continues to drive growth in the economy according to the Markit/CIPS UK Services PMI® for October. The headline Business Activity Index reached a level of 62.5 in October. “The UK service sector maintained its recent run of strong growth during October, with activity expanding at the fastest pace since May 1997 as levels of incoming new business rose at a survey record rate”. The construction rally also continues according to the Markit/CIPS UK Construction PMI® index. The sharp rebound in UK construction output continued in October. The lead index posted 59.4, up from 58.9 in September, above the 50.0 no-change threshold for the sixth consecutive month. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. The pick up in manufacturing output will add to the growth in services and construction. Higher growth, more jobs, lower borrowing, inflation falling, investment will pick up in the second half of next year, it’s all looking pretty good for the Chancellor. Just the trade figures will continue to disappoint. We now think base rates are now more likely to rise by around 50 basis points in 2015. Higher growth will result in unemployment hitting the 7% hurdle rate in the third quarter of 2015, several months after the election. What happened to sterling? The Euro rate cut weakened the hybrid and Sterling strengthened as a result. The pound closed at £1.6018 from £1.5912. Against the Euro, Sterling closed at €1.1982 from €1.1814. The dollar moved up against the yen closing at ¥99.1from ¥98.7 and closing at 1.3368 from 1.3484 against the Euro. Oil Price Brent Crude closed at $105.12 from $105.91. The average price in November last year was almost $110. We expect Brent Crude to average $110 in the month, with no material inflationary impact. Markets, pushed higher - The Dow closed at 15,762 up from 15,616. The FTSE closed at 6,708 from 6,721. The rally continues with a stronger Santa rally in prospect over the next five weeks. UK Ten year gilt yields closed at 2.77 from 2.66 US Treasury yields closed at 2.75 from 2.62. Yields will test the 3% level over the coming months. Gold closed at $1,284 from $1,312. The bulls may have it may just have to wait for now. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Friday Financials Feature with Monthly Markets updates coming soon. John Join the mailing list for The Saturday Economist or please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist.
0 Comments
On the road to prosperity Chancellor Osborne greeted the GDP figures this week with the confident claim we are on the road to prosperity. “Britain’s hard work is paying off, we see that in the economic numbers today”. Indeed we do. Growth in the third quarter increased by 1.6% year on year, exactly as we had expected. Service sector growth continues to underpin the recovery, increasing by 1.9% with particularly strong growth in the distribution, hotels and leisure sector (3.8%). Construction output, boosted by developments in the housing market, increased by almost 5%. Manufacturing output was flat in Q3 up by just 0.1%. Of itself this is a measure of recovery. Output (goods) fell by almost 3% in the first quarter of the year. We expect the recovery in manufacturing to continue with strong growth of over 2% in the final quarter of the year. Our forecast for growth in the year as a whole is unchanged at 1.5%. We expect the economy to be running at trend rate (around 2.5%) in the final quarter. We are on the road to recovery, with prosperity for some, but not all, as growth will continue at 2.5% into 2014. Open for Business Open for business was the theme of a Mark Carney speech this week. The Governor of the Bank of England is shaking up the Bank of England significantly. Last week, Spencer Dale Chief Economist was on Twitter, in an online Agony Aunt economics session. This week, the Governor hired McKinsey and Deloitte to review the central bank's resources and identify cost savings. There will be blood, sweat and tears in Threadneedle Street, as the Old Lady sheds a few layers. The UK is at the heart of a renewed financial globalisation the headline of the Governors speech to celebrate the 125th anniversary of the Financial Times in London. The UK has a strong financial services sector which is to be sustained and developed. [Don’t kill the Golden Goose just because it bit the postman? is the message, if not the exact central bank wording on the subject.] To help the process, the Bank of England is open for business in supporting the banking sector. Facilities will be made available at lower coupon rates and covering a wider risk profile. “The Bank of England today is the friend of resilient banks, continuous markets, and good collateral”. Hurray! Now we have a sensible grasp on economics strategy from the Chancellor and a central banker who talks to the bankers. Whatever next? Borrowing Figures Well lower borrowing figures for one thing. This week, the ONS released the PSNBR figures for the month of September. In September 2013, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £11.1 billion. This was £1.0 billion lower than in September 2012, when it was £12.1 billion. There is more good news to come. Public Sector borrowing is set to fall to £104.5 billion in the current financial year compared to £115 billion in 2012/13. Given the acceleration of growth in the economy into the second half of the year, we believe borrowing could possibly fall below the £100 billion threshold for the year as a whole and below £90 billion in the following year. Good news for the Chancellor as tax receipts including VAT, capital gains and income tax increased by almost 5% in the first six months of the year. Spending on the other hand was up by just 2.4%. Public sector debt was £1.2 trillion at the end of September, equal to 76% of GDP. Of itself a prosperity challenge for the grandchildren. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. Base rates are now more likely to rise by around 50 basis points in 2015 rather than 2016. A short rate rise by the end of 2014 still has low odds given the prevarications in the USA. What happened to sterling? Sterling steadied against the dollar and moved down against the Euro. The pound closed at £1.6166 from £1.6174. Against the Euro, Sterling closed at €1.1713 from €1.1816. The dollar moved down against the yen closing at ¥97.4 from ¥97.7, closing at 1.3803 from 1.3682 against the Euro. Oil Price Brent Crude closed at $106.93 from $109.94. The average price in October last year was almost $112. We expect oil to average less than $110 in the month, with no real inflationary impact. Markets, pushed higher - The Dow closed at 15,570 up from 15,399. The FTSE closed at 6,721 from 6,623. The US debt deal is done. The rally is on. UK Ten year gilt yields closed at 2.63 from 2.72, US Treasury yields closed at 2.51 from 2.58. Gold closed at $1,352 from $1,313. The bulls have it, at least for last week. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Friday Financials Feature with Monthly Markets updates coming soon. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist, #TheSaturdayEconomist, by John Ashcroft and Company, Dimensions of Strategy and The Apple Case Study. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. Economics news – news from Washington and Beijing ... Washington Good news from across the Pond, a Washington truce has been achieved. The US government has returned to work, Yosemite National Park is open, international creditors will be paid. The debt crisis is over. A twenty week truce has been secured. Markets rallied, the dollar slipped, Google shares breached the $1,000 level and the S&P 500 hit a new high. What more could we ask? Beijing In China, growth continued at 7.8% into the third quarter up from 7.5% in the second. For those fearing a hard landing, crash landing, soft landing, end of the world scenario, it is time to stop shorting the markets and buy in, the world is not coming to an end any time soon. London - Mortgages In the UK, mortgage lending increased by 32% in the third quarter compared to Q3 last year. FLS and Help to Buy are boosting the market. We expect house prices to rise by 5% this year and almost 8% next year before a normalized escalation returns. Prices are beginning to rise across the UK. Yes Prices will move across the UK, like a tidal wave across the flood plain. Check out The Saturday Economist Housing Market Review for more information. Inflation Tuesday, the ONS released the latest inflation figures for September. CPI inflation was unchanged at 2.7% as RPI moved down slightly to 3.2% from 3.3%. We expect a further fall in CPI inflation around 30 basis points next month, as education fees drop out of the data series. Thereafter prices will be pretty sticky around 2.5%. Energy costs are set to rise and service sector inflation at 3.4% up from 3.0% last month will create problems for policy makers. As we have long pointed out, service sector inflation has averaged 3.7% for the last twenty years. Manufacturing prices Manufacturing Prices, on the other hand, have averaged around 1% over the same period, boosted by falls in clothing and footwear specifically. The immediate outlook for manufacturing prices is pretty benign, Output prices increased by just 1.2% in September and input costs increased by 1.1%, down from 5% in July. Retail sales Retail sales were also released this week. Retail sales volumes were up by 2.2% in September and by 2.4% in the third quarter. Sales values increased by almost 4% in the three months boosted by on line sales and department store sales. Is the housing market stimulating footfall? Quite probably. We expect the volume of housing transactions to increase significantly this year, boosting sales of carpets, furniture durables and DIY goods in the process. Employment The employment figures were also released this week. The claimant count fell by over 40,000 in September to a rate of 4% compared to 4.2% last month. The wider FLS count fell in the three months to August, to 2.87 million, a rate of 7.7% from 7.8% last month. Lagging as it does, the broader unemployment rate could fall to around 7.5% by the end of the year. The Bank of England “knock out rate” under forward guidance at 7% could be in sight by the end of 2014. So what of base rates? Interesting Spencer Dale the Bank of England’s chief economist was on Twitter this week in a hashtag #AskBoE “open hour” adventure. The telling tweet - a rate rise in 2014 was unlikely. Just as unlikely as a rate rise in 2016 no doubt. The markets expect a move in 2015 but will it wait until after polling day? We will have to ask next time the bank is online, perhaps using Facetime or Skype? What would Governor King have made of it all! So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. The first estimate of GDP in Q3 will be released next week. We expect growth year on year to be over 1.5% rising to trend rate in the final quarter of the year. Inflation is falling, employment is rising, even the debt figures due next week will look much better. Energy costs may provide a problem for households but “wear a jumper”, the ministerial advice could keep bills down and boost retail sales in the process. What happened to sterling? Sterling moved up against the dollar and against the Euro as the dollar slipped. The pound closed at £1.6174 from $1.5954. Against the Euro, Sterling closed at €1.1816 from €1.1772. The dollar moved down against the yen closing at ¥97.7 from ¥98.5 and closing at 1.3682 against the Euro. Oil Price Brent Crude closed at $109.94 from $111.28. The average price in October last year was almost $112. We expect oil to average less than $112 in the month, with no inflationary impact. Markets, pushed higher - The Dow closed at 15,399 up from 15,237. The FTSE closed at 6,623 from 6,487. The US debt deal is done. The rally is on. UK Ten year gilt yields closed at 2.72 from 2.74, US Treasury yields closed at 2.58 from 2.69. Gold closed at $1,313 from $1,270. The bulls have it, at least for the week. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below. If you enjoy the content, why not forward to colleague or friend. Economics news – Building recovery one brick at time .. Construction data Good news this week from the construction sector. Output in August was up by 4% compared to August last year. New work increased by almost 6% driven by developments in the housing market. FLS and Help to Buy are stimulating new mortgage activity on a really significant scale. The Council of Mortgage Lenders announced home-owner house purchase lending was up by 15% on August last year. First-time buyers took out 27,100 loans in August, an increase of 33% compared to August 2012. The house market is on the move. We expect the surge in housing activity to continue into the final quarter of the year and into 2014. Do we really need “Help to Buy Phase 2” probably not. No need to pay for a landslide, the economic recovery secured. We have increased our forecasts for GDP growth this year to 1.5% increasing to 2.5% next year. NIESR monthly GDP data Our estimates are in line with the NIESR monthly GDP tracker for September, released this week. The (NIESR) GDP rate of growth in the third quarter was 1.6% year on year. We expect the rate of growth to accelerate further into the final quarter towards trend rate of 2.4%, driven by a steady recovery in the service sector and a big push in construction output. Monetary Policy No surprise this week the MPC voted to keep interest rates and QE on hold. Forward Guidance is the new mantra. UK base rates will not rise until the U rate falls to 7%, assuming no shocks to the monetary system and the inflation outlook. In the USA, the Fed continued with the monthly asset purchases of $85 billion. What is it about the USA? The Fed might as well commit dollars to a NASDAQ tracker fund to sustain confidence in the markets. “Tapering will not begin until the DOW hits 17,000 could be the new forward guidance. Janet Yellen is to replace an exhausted Bernanke. Such a dove, they should “paint her white and give her wings”, the markets will love Planet Janet orbiting, as it will, around Planet ZIRP. So what of the UK recovery? The trade figures and manufacturing data were also released this week. Remember, "the march of the makers, rebuilding the workshop of the world, rebalancing the UK economy away from domestic consumption with an improvement in net trade"? Well forget that. The professor (Milton Keynes) invested in a sandwich board and spent his summer holidays in Cornwall this year. Stationed at Land’s End, facing Western traffic, the sign read “sail on - the earth is not flat”. “We get the message” shouted a wise cracking grockle. The professor turned to reveal the message on the other side, “Exports will not lead a UK recovery”, “yeah but how long did it take”, replied the perspicacious prof. Trade Data And so it proved with the trade data this month. The trade in goods deficit was £9.6 billion in August. We expect a deficit of £29 billion in the quarter compared to £26 billion last year. Our forecast for the year, is now at the top end for the year as a whole around £110 billion. The UK recovery will exacerbate the deficit. Monthly data can be erratic but fifty year trends provide a certain guide. The UK cannot grow faster than Europe and the USA without a significant deterioration in net trade in goods. Is this such a problem? Not really. The surplus on services will mitigate the deficit to around £30 billion. At 2% of GDP this is neither a threat to sterling nor a constraint to growth. Manufacturing The march of the makers skipped a drum beat in August as output fell by -0.2% compared to August last year. Consumer goods output fell by just over 2% as capital goods growth slowed to a similar level. We expect a better performance in September and in the final quarter of the year. Housing new build and a higher level of transactions will stimulate direct related construction output, (bricks & mortar). Housing related spending on products including furniture and carpets will also stimulate growth. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. Will US debt intransigence derail recovery? We assume not. If you lived through the Cuban missile crisis and the era of an international nuclear strategy underwritten by the concept of Mutually Assured Destruction, (They call it MAD), You assume sooner or later, the Republican ships will turn around and avoid the disaster that could unfold. Failing that, the President can always mint a few Trillion Dollar Platinum coins, develop section four of the fourteenth amendment or invoke the 1861 Feed and Forage Act. Union soldiers were allowed to “eat your crops, kill your chickens and water their horses”. The Act ensured, sooner or later, Congress would enact the necessary appropriation. The troops had to eat even though the deficit had not been approved. And so it is with debt markets, “let them eat noodles” is no message to send to international creditors. What happened to sterling? Sterling moved down against the dollar and against the Euro. The pound closed at £1.5954 from $1.6012. Against the Euro, Sterling closed at €1.1772 from €1.1816. The dollar moved up against the yen closing at ¥98.5 from ¥97.4.The dollar euro cross rate at 1.3542 was largely unchanged from 1.3556 Oil Price Brent Crude closed at $111.28 from $109.46. The average price in October last year was almost $112. We expect oil to average $112 in the month, with no real inflationary impact. Markets, rallied - The Dow closed at 15,237 from 15,073. The FTSE closed at 6,487 from 6,454. The markets sense a deal on the deficit is in sight. UK Ten year gilt yields closed at 2.74 from 2.75, US Treasury yields closed at 2.69 from 2.64. Gold closed at $1,270 from $1,310. The bulls have it or do they? Gold will trade sideways for some time yet. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. By John Ashcroft and Company, Dimensions of Strategy. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. Economics news – inflation falls, no boom in the housing market, good news on borrowing, Chancellor Osborne is ticking the right boxes this week ... Inflation - Retail Prices The rate of inflation slowed to 2.7% in August compared to 2.8% in July. We expect a further significant fall next month and by the end of the year the inflation rate should be around 2.4%. Thereafter prices could be a little sticky. Service sector inflation was 3% in August and goods inflation was 2.4% in the latest monthly data. Inflation - Manufacturing Prices The good news on inflation was also manifest in the manufacturing sector. Output prices increased by just 1.6% compared to 2.1% in July. Input costs for manufacturers also fell back from 5% in July to 2.8%. Part of the reason for the slow down was oil and energy costs. The average price of oil in August was $111 dollars per barrel, slightly down on the same period last year. The rate of wages and earnings growth remains subdued, presenting a benign outlook for inflation over the short term. At close this week Brent Crude was trading at $109 dollars per barrel. The outlook for manufacturing inflation is pretty benign. House Prices - ONS data For those wary of a housing boom, the ONS also released the House Price Index in July. In the 12 months to July 2013 UK house prices increased by 3.3%, up from a 3.1% increase in the 12 months to June 2013. Signs of a national boom? Not really but certainly signs of a good recovery! Annual house price increases in England were driven by London (9.7%) and the South East (2.6%). Excluding London and the South East, UK house prices increased by just 0.8%. In the North West, prices actually fell by almost 1%. The RICS has made the call for a peg on prices around 5%. This to reflect a normalised earnings growth rate of 3% plus a supply side restraint adjustment to stimulate additional investment presumably. Would this work nationally? Obviously not. But some consideration to mortgage rationing on a regional basis especially in the South East may gain political if not market traction. Retail Sales August - A further indication, the recovery is on track with no signs of a runaway boom in prospect... Retail Sales in August were up by 2.1% in volume and 3.6% by value compared to August last year. Internet sales were up by 22% in the month accounting for 10% of all retail sales. Trading is better but not that much. With online trends and large store consolidation, life for most retailers is tough. Government Borrowing Further good news for the Chancellor, the level of borrowing fell in August. We expect further significant falls before the end of the financial year. In August 2013, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £13.2 billion. This was £1.3 billion lower than in August 2012 when it was £14.4 billion. The Chancellor is on track for a significant fall in borrowing this year. We expect the level of borrowing excluding interventions and transfers to fall to around £105 billion compared to a revised £115 billion last year. Car Manufacturing Car output increased by 16% in August bring the year to date output growth to 3%. More good news but the August headline should be kept in perspective. The year to date total is the better trend guide and let’s not forget commercial vehicle output is down in the year by 17%. Tapering USA Despite clear indications “Tapering” may begin in the Fall, the Fed decided to continue the process of QE, purchasing mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities at the rate of $45 billion per month, this week. What does this mean for US and UK interest rates? Not much in the short term. Check out the Saturday Economist Special Post "No tapering, more tampering, leads to more questions than answers at the Fed". Assessing market reaction over the week, Bernanke fires a blank would have a more appropriate headline. What happened to sterling? Sterling responded to the news on tapering, moving up against the dollar but down against the Euro. The pound closed at $1.5994 from $1.5871 having tested the 1.60 level intra week. Against the Euro, Sterling closed down at €1.1824 from €1.1940. The dollar moved little against the yen closing at ¥99.3 from ¥99.4 Oil Price Brent Crude closed at $109 from $111. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact. Markets, rallied - The Dow closed up at 15,451 from 15,376 . The FTSE closed up at 6,596 from 6,584. The Fed statement this month was a mis fire non event. We still think the FTSE will clear 7000 within ten weeks and the DOW will press 16,000. UK Ten year gilt yields closed at 2.92 from 2.94, US Treasury yields closed at 2.79 from 2.89. The fed statement this week pulled long rates down by just 12 basis points. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave, with pleas from the FOMC to “stick around”! Gold closed at $1,331 from $1,312. The bulls have it or do they? The news on tapering bought some upside gain but not much, we think gold will trade sideways for some time. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy . The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. No tapering, more tampering leads to more questions than answers at the FED. So much for forward guidance. Despite clear indications “Tapering” may begin in the Fall, the Fed decided to continue the process of QE, purchasing mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities at the rate of $45 billion per month, this week. The objective - to maintain downward pressure on longer term interest rates to support mortgage markets, a fragile housing recovery and to make broader financial conditions more accommodative in the short term, In that way, growth plans for the US economy are not derailed in the recovery phase. The Federal Open Market Committee had been concerned by the rapid rise in ten year Treasury rates by 120 basis points and evidence of low inflation and slightly weaker jobs market. Furthermore, fiscal consolidation and a higher tax burden were likely to damage growth this year. The FOMC reduced their own forecasts for 2013 to around 2.1% from 2.4% in the July review, as a result of recent developments. Should we be surprised by the decision? Should we be surprised by the decision? Well yes and no. In July the mood was more optimistic about the economy. The US economy was expected to growth by almost 2.4% in 2013 and by 3.3% next year. Unemployment was expected to fall towards 7% this year, then down to 6.5% next. Inflation was expected to average around 1.5% next year, with no obvious inflation threat on the horizon. The surprising thing is the revised forecasts haven’t changed the medium term outlook over much. The US recovery is still on track. The growth forecasts have been reduced to a more realistic level for the current year. We still think the USA will struggle to hit the 2% mark but nothing has changed of late to alter that view. So what’s changed? So what’s changed. The FOMC committee has been disturbed by the rally in long rates and the rise in ten year Treasury yields towards 3%. The labour market has seen moderate growth but no reason of itself to step back from tapering. Bernanke’s phone line must have been ringing off the hook by calls from central bankers in emerging markets. Faced with the repatriation of hot monies to the USA, capital outflows and plummeting exchange rates, Brazil, India, South Africa, Indonesia, Turkey and more have confronted the realignment of the US yield curve to some semblance of normality but not without some considerable cost to their own domestic economies. The BISTO kids would have welcomed the continuation of the QE gravy train for now. For the Fed and Bernanke, there is no fall back. They have to get the timing right to begin to tighten policy. “Monetary shocks played a major role in the Great Depression” said Bernanke in Essays on the Great Depression :Princeton 2000 and “Much of Japan’s [lost decade] can be attributed to exceptionally poor monetary policy making” writing in "Japanese monetary policy, A Case of Self Induced Paralysis Princeton in 1999. The Fed cannot be seen to move too soon and damage the recovery. Bernanke would rather hold the patient a little longer on life support, than allow the economy and the markets, to leave intensive care too soon. Will a few months or so make much difference? Not really, sooner or later, and better sooner, QE must be drawn to a close in the USA. What about Base Rates? Despite the delay on tapering, the FOMC believe base rates will be on the rise in 2015 towards 1%. The labour market is likely to hit the 6.5% hurdle rate at some stage next year. The tapering process may begin by the end of the current year or may await the cosmic flip from Planet ZIRP to Planet Janet in January. (Assuming Janet Yellen takes over as lead astronaut at the Fed early in the New Year.) By 2016, US rates are expected to rise to 2% on their way back to a 4% norm over the medium term. Indeed 20% of the fed votes would expect rates to be back at 4% by 2016. So what does this mean for the UK. Our guideline is watch the US and add six months. Fed rates are expected to remain on hold until the end of 2014, rising in 2015 to 1%. By 2016, they may be at 2% or above. In the UK, the MPC’s forward guidance suggests rates may be on hold for three years until 2016. That’s a long way off. For the moment, the decision not to taper but to continue to tamper, will please the markets but only in the short term. The traders will find a reason to test the Fed towards the end of the year. Tapering is coming and so are the rate rises in the USA and the UK. Posted by John Ashcroft. Keywords, Forward Guidance, Tapering, QE, FOMC, Bernanke. © 2013 John Ashcroft, The Saturday Economist, John Ashcroft and Company. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. Good news for the economy continued this week. A fall in the rate of unemployment AND an increase in output and orders for the construction industry. Who would believe it was just a few months ago headlines were devoted to the risk of a triple dip recession? The year is becoming a tale of two halves with a significant pick up in activity and sentiment into the third quarter. Get ready, we are leaving Planet ZIRP. Speed bumps in the housing market It is a strange recovery with strange roles in evidence. The Bank of England is hoping to keep base rates on hold for three years. The RICS warned this week of the need to maintain a stable and sustainable path for house prices. “We suggest setting an annual growth rate threshold in a national index, which if exceeded, triggers tighter macro prudential policy” said Josh Miller Senior Economist in the RICS report. The RICS is advocating “speed bumps” to limit the rate of price increases. The Bank of England (in the form of the FPC) should intervene to regulate mortgage allocations of LTV ratios across the UK if prices moved over 5%. That sort of thing. “Taking away the punch bowl as the party gets started” is the traditional role of the central banker. Now some of the heavy drinkers are suggesting, we dilute the hooch. How strange. Most commentators have reacted badly to the suggestion. Why 5%? Is there a regional variation? Is it the same for maisonettes and mansions? Should the government confiscate revenues where prices exceed the guidelines? Are the RICS advocating a prices and incomes board, monitored by the RICS perhaps? Graeme Leach at the IOD has suggested it is a “statist solution to a state created problem”. Calm down Graeme, it was just for fun and not to be taken too seriously. The FPC is to meet this week. Top of the agenda will be the need to limit loan to value ratios. The government “homes for heroes” scheme, (the scheme in which the tax payer underwrites high loan values for house buyers) will be on the agenda no doubt. Unemployment The unemployment rate ticked down in July to 7.7% in July. The claimant count fell to 4.2% in August. The number of claimants - down by 32,000 to 1.4 million. Further indicators the recovery is on track, towards trend rate of growth, into the final quarter. What does this mean for forward guidance? The models still suggest it will be the end of 2015 at least before the 7% threshold will be reached. That is the rate at which the MPC will begin to think about base rate rises, (speed bumps and knock out drops aside). The caveat about earnings continues. The recovery cannot be sustained without a change in household fortunes, either lower inflation or higher earnings growth is required. Plus, the UK cannot grow at a faster rate then Europe for too long, without the trade deficit coming under severe pressure. The trade deficit, of itself, “a speed bump or pothole”, where growth is concerned. Construction Good news on construction. Output increased in July by 2% compared to July last year. Orders for new work, especially in the housing market, were up by 33% compared to the same time last year. This is an important change indicator for the sector. Overall the growth in services continues. The recovery in manufacturing and construction will look much stronger into the final quarter of the year. The UK recovery is on track. It is just over eighteen months to the election. Buckle up, we are leaving Planet ZIRP. Gilts are already in low orbit. What happened to sterling? Sterling responded to the economics news, moving up against the dollar and also against the Euro. The pound closed at $1.5871 from $1.5627 and at €1.1940 from €1.1860 against the euro. The dollar moved up against the yen closing at ¥99.4 from ¥99.0 Oil Price Brent Crude closed at $111 from $114. The average price in September last year was almost $113. We expect oil to average $112 in the current quarter, with no real inflationary impact. Markets, rallied - The Dow closed up at 15,376 from 14,923. The FTSE closed up at 6,584 from 6,547. The Fed statement this month will mark the larger DOW move. Still a good time to move in? The FTSE will clear 7000 within ten weeks and the DOW will press 16,000. UK Ten year gilt yields closed at 2.94 from 2.95, US Treasury yields closed at 2.89 from 2.93. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave! Gold closed at $1,312 from $1,388. The bulls have it or do they? Some still worry about tapering. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy . The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. Economics news – the Governor speaks on forward guidance ... A relatively quiet week for UK economics news. Nationwide announced house prices increased by 3.5% over the past twelve months and the Bank of England reported the number of mortgage approvals for house purchases had increased to 60,624 compared to around 48,000 in July last year. That’s a 30% increase in activity over the year. Housing Boom? The Funding for Lending Scheme and the Help to Buy scheme are stimulating a recovery, already manifest over the last three years. Are we about to experience a housing boom? Well not just yet. Activity is still a long way off the top, half the level of January 2007 and still way down from the average 100,000 level experienced from 2000 to 2007. Even so, Treasury would be wise to re-examine the plans for Help to Buy phase 2. This the plan to support LTV ratios for all house purchase transactions (under £600,000). An election winner perhaps, but Chancellor Osborne should heed the words of Jack Kennedy senior. “Dear Jack, Don't buy a single vote more than is necessary. I'll be damned if I'm going to pay for a landslide.” Yes, the house market is on the move, no need to rock the foundations in the process. In Nottingham, Mark Carney made a key speech to business leaders reaffirming the foundations of forward guidance. The governor offered further reassurance base rates would be kept on hold until unemployment falls below 7%, probably 2016 at the earliest. An opportunity for businesses to invest and households to spend wisely in the interim. The Governor stressed the 2% CPI inflation target is still paramount beyond the medium term. At present, 2.4% CPI is a more realistic inflation target for the foreseeable future and probably the Governor’s tenure in office for that matter. Markets believe 2015 may see the first rise in base rates, the governor suggests, it’s a three year wait. We suspect more QE is off the agenda, now the old regime has moved aside. Interesting the Governor is decoupling base rates from long term gilt rates. The Governor keen to stress the MPC controls the short rate no matter what markets may think or do. Just as well, markets will push the gilt curve back into shape, offering a real yield over the ten year horizon and about time to. Good news for the banks and lending, the governor announced an easing of liquidity requirements once the 7% capital ratios have been achieved. Here is a central banker who talks to the banks. Moral dilemma confined to the tutorial room. A pragmatist not limited by theory and dogma. A man with whom we can all do business. The Governor skillfully avoided any comment on exchange rates “some will go up and some will go down” the actual remark. Those who thought the new regime would seek further currency weakness will be disappointed. What’s wrong with forward guidance. Not much. FG offers a commitment to securing growth at the expense of an inflation trade, off in the recovery phase. Policy makers are concerned about making a move (on rates) too soon in the cycle. Japan revisited and a lost decade in prospect, if monetary policy is tightened too quickly and escape velocity is not secured. The risk at the moment, still slightly to the downside, as world trade slows, despite the evidence of UK recovery. Is there a risk of runaway inflation? Not really. Despite domestic and international price pressures, the substantial output gap, relative to trend rate of growth, will ensure there will be no runaway inflation. Real wages will improve over the next few years but substantial escalation will be avoided. In any case, FG offers guidance with lots of small print. Rates may rise at any time within the guidelines. Borrowers beware. During the past week, the downward pressure on the BISTO kids continued with the currencies of Brazil, India, Indonesia, South Africa and Turkey coming under further strain. Brazil has won the plaudits for swift action which included a substantial $60 billion foreign currency intervention plus base rate increases of 200 basis points, to a current level of 9%. Growth may be the victim as down grades follow, lower inflation currently at 6% the prize, plus, some element of stability in the exchange rate, the bonus. In India, growth forecasts have been cut to 4.5%. Inflation at 10%, a large government deficit and a $250 billion external funding requirement do not augur well for the rupee as the world faces a run to the Dollar. International hot money flows estimated at 15% of global GDP are on the move, as the prospect of the “start of the beginning of tapering” in the USA pushes up yields on Treasuries and funds are repatriated towards the homeland. The depth of foreign currency reserves and the limits to foreign debt, the real key to weathering the storm. Brazil better placed than India to withstand the cyclical pressure, which inevitably leads to capital flight at the expense of domestic asset prices, bonds, equities and real estate. Capital controls, fixed exchange rates and interest rate policies, the “trilemma” for policy makers. Hot money, leverage and asset price hikes the price of international liquidity. Yes, long term rates are on the move as bond prices come under pressure. Pack the bags and forward the luggage, we are leaving Planet ZIRP. Gold bulls have marked the next direction for the old relic. Black gold, is also on the move. Oil prices came under pressure as the prospect of an escalation of the Syrian crisis pushed prices to $114 dollars per barrel. What happened to sterling? Sterling responded to the economics news, moving lower the dollar but up against the Euro. The pound closed at $1.5494 from $1.5569 and at €1.1719 from €1.1629 against the euro. The dollar moved up against the yen closing at ¥98.1 from ¥98.6 Oil Price Brent Crude closed up at $114 from $111. The average price in August last year was almost $115. We expect oil to average $112 in the current quarter. Markets, slipped - The Dow closed down at 14,810 from 15,010. The FTSE closed down at 6,413 from 6,492. A further chance for market makers to clean out the bear pit as Syrian uncertainty adds to the shift. A good time to average in? We still think the FTSE will clear 7000 within ten weeks. UK Ten year gilt yields closed up at 2.79 from 2.72, US Treasury yields closed at 2.79 from 2.82. Gold closed up at $1,394 from $1,397. The bulls have it or do they? That’s all for this week, If you enjoy the Saturday Economist, why not forward to a colleague of friend. Here's is the link to join the Mailing list for The Saturday Economist. John 10,000 now receive the Saturday Economist each week. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John Ashcroft - the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. Economics news – for a further week, the good news keeps on coming ... falling inflation, a fall in unemployment plus a boost to retail sales in July ... Inflation figures were reported on Tuesday. The CPI inflation index fell to 2.8% in July from 2.9% in the prior month. By the end of the year we expect inflation to fall below the 2.5% threshold but the 2% target will be elusive for many months if not years ahead. In October the hefty tuition fees will fall out of the index providing a drop of 20 - 30 basis points. The 2% target will be a challenge - goods inflation averaged 2.4% and service sector inflation averaged 3.1%. Bad news for rail travelers, the rail fares will be indexed to RPI plus 1%. A 4.1% increase in fares is in prospect for 2014, placing additional pressure on retail prices and disposable incomes. The unemployment picture continues to improve, for those who can find work at least. The claimant count fell by 29,000, to a rate of 4.3% in July. The wider LFS data suggests a more modest fall in the three months to June. The rate of unemployment at 7.8% was unchanged, still way above the 7% threshold that may signal a change in monetary policy. Retail sales volumes increased by 3% in July as sunshine and consumer confidence provoked a spending rush, stimulated by sunny weather, a Murray win at Wimbledon and the Royal baby allegedly. Sunny weather boosted sales across a range of products including food, alcohol, clothing and outdoor items. By value retail sales increased by almost 5%. After a slow start to the year, the retail outlook has improved in the summer months. Will this continue? Why not! Employment is increasing and earnings are improving. A further 400,000 are in work compared to this time last year and earnings increased by 2% in the three months to June. We expect the retail rally to continue, though perhaps not at the 3% rate for the rest of the year. Housing - The big story continues to be the housing market. Prices are rising, mortgage activity is increasing, the help to buy scheme is providing a boost to first time buyers. New home build is set to increase by almost 30% this year. The housing market is on the move, time to lock up your fixed rates, as prices rise, the real cost of borrowing is zero, capital appreciation - the bonus. So what does this mean for the year? Our forecast is for growth of around 1.2% plus, rising to 2% in 2014. The economy has turned, the real risk - monetary policy is behind the curve. It is difficult to believe rates will be kept on hold until 2016, watch the US and add six months the best guide as always. Markets were equally sceptical, gilts and treasury yields are rising - gold is beginning to glitter again. What happened to sterling? Sterling responded to the economics news, moving higher. The pound closed at $1.5633, from $1.5505 against the dollar and at €1.1713 from €1.1617 against the euro. The dollar up against the yen closing at ¥97.5 from ¥96.24 Oil Price Brent Crude closed up at $110.40 from $108.22. The average price in August last year was almost $115. We expect oil to average $112 in the current quarter. Markets, were troubled - The Dow fell to 15,081 from 15,425. The FTSE closed down at 6.499.99 from 6,583. It’s a chance for market makers to clean out the bear pit. A good time to make a move. We still think the FTSE will clear 7000 within ten weeks. UK Ten year gilt yields closed at 2.72 from 2.45, US Treasury yields closed up at 2.83 from 2.58. Yields are moving higher, despite the wishes of central bankers. The name is Carney not Canute after all. Gold closed up at $1,377 from $1,315. Still waiting for the next big move but which way? Last week we said, the arguments are building for the bulls. It looks like they have made a decision. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more! Join the mailing list for The Saturday Economist or forward to a friend to let them share the fun! John John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. 7% unemployment and 2.5% the inflation the thresholds - rates may be on hold until 2016. The Bank of England released its quarterly inflation report, the first since Governor Mark Carney assumed the role of Governor. The report presents a more optimistic view of the UK’s growth prospects following a batch of recent good news on the economy. The MPC increased the GDP growth forecast for this year to around 1.5% increasing the 2014 forecast to around 2.5%. Consumer price inflation is likely to fall back to 2.0% but not for some time yet. It could be 2015 before inflation falls back to target and then some, 2.5% is the new threshold target for CPI inflation. Governor Carney introduced the first every version of "Forward Guidance" linking a change in monetary policy to the rate of unemployment. In particular, the MPC intends not to raise Bank Rate from the current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a level of 7%. On current projections, this is unlikely to occur until 2016, inline with forward market forecasts on base rates. Is this an unconditional commitment? No. The Old Lady of Threadneedle Street will exercise the prerogative to change her mind subject to certain conditions. The guidance linking Bank Rate to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached: In the MPC’s view, CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target. Medium-term inflation expectations no longer remain sufficiently well anchored and the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability. What does that mean? We can’t be sure. The intention is to suggest rates will be held until the recovery is well developed and “escape velocity” from recession has been achieved. The MPC would have us believe this is 2016. The risk is that inflation will remain above target as the recovery gains momentum and the MPC will be forced to raise rates before the suggested 2016 timeline. It is a knock out start by Mark Carney. The economy is recovering, rates will be held for the next twelve to eighteen months at least. Forward guidance has made a promising start. Let’s hope it does not provide too much mis direction. For now enjoy the recovery. Bank of England inflation report, August 2013 7th August 2013 |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
May 2024
Categories
All
|
The Saturday Economist |
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.
The Saturday Economist, weekly updates on the UK economy.
Sign Up Now! Stay Up To Date! | Privacy Policy | Terms and Conditions | |