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.
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Economics news – don't get carried away with survey data ... The week started well but ended on something of a whimper. The highly rated Markit/CIPS PMI® series reported this week with strong updates on manufacturing, construction and services. The manufacturing index hit a two year high of 57.2 as output grew at the fastest rate since 1994. The construction output index increased at the fastest rate since 2007 to a level of 59.1.The service sector grew at the fastest rate since December 2006, as the headline index increased to 60.5. The Saturday Economist weighted index closed at 60.0 suggesting strong growth, around trend rate, in the economy overall. Good news? Of course but survey data should always be treated with a little caution. It’s hard to believe just a few months ago, markets were concerned about a triple dip recession, relying, as they will, on shot run runes. OECD and NIESR The OECD added to the impetus suggesting growth in the UK will be 1.5% this year rising to 2.5% in 2014. The NIESR monthly GDP tracker for August released this week, implied the economy is growing at a rate of 1.5% in the third quarter. House Prices The Halifax House Price Index reported house prices increased by 5.4% in August. As Martin Ellis, Housing economist at the lender explained, “Economic improvement and low interest rates, supported by official schemes such as Funding for Lending and Help to Buy, appear to have boosted housing demand in recent months”. Quite! Payroll Friday It was all looking pretty good until “Payroll Friday”. The US jobs data proved something of a disappointment to markets. The US economy added 169,000 jobs in August as the unemployment rate remained relatively unchanged at 7.3%. Is that so bad? Not really, the US is on track for growth of almost 2% in 2013. It’s a recovery of sorts and probably just enough for the Fed to stop tampering and begin tapering later this month. In the UK, a further setback for those who ever believed in the march of the makers, rebuilding the workshop of the world and rebalancing the economy in the process. Are there any left? Manufacturing output fell in July by just under 1% and the trade balance slumped to a deficit of just under £10 billion. Hardly a recipe for strong growth this year. Manufacturing output will be better in the second half of the year but we see little contribution to output for the year as a whole. The deficit (trade in goods) will be around £106 billion, providing a significant drag on net growth. For the moment we are sticking with our growth forecast of around 1.2% for the year rising to over 2% in 2014. The rate of growth in the second half will be stronger but the legacy of the first six months is a great drag on output for the year. It could be time to upgrade the forecast for next year towards trend rate 2.4%. What happened to sterling? Sterling responded to the economics news, moving up against the dollar and also against the Euro. The pound closed at $1.5627 from $1.5494 and at €1.1860 from €1.1719 against the euro. The dollar moved up against the yen closing at ¥99.0 from ¥98.1 Oil Price Brent Crude closed up at $116 from $114. The average price in September last year was $113. We expect oil to average $112 in the current quarter. Markets, rallied - The Dow closed up at 14,923 from 14,810. The FTSE closed up at 6,547 from 6,413. The Fed statement this month will mark the DOW move. 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 up at 2.95 from 2.79, US Treasury yields closed at 2.93 from 2.79. Long rates are decoupling from shorts, returning to fair value. Gold closed at $1,388 from $1,394. 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 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. 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. |
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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.
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