Economics news – lunch with the Governor and a trip to the Isle of Manchester It has been an interesting week, lunch with the Governor of the Bank of England on Thursday before catching a flight to the Isle on Man to spend the day as a guest of the Government Economic Development Office. Lots of key meetings crammed into a 24 hour visit to understand more of the great opportunities for cross trade between Manchester and the Isle of Man. More on that next week. As for the lunch with Mark Carney, you have to admire the new regime at the Bank. Pragmatic, approachable, with a real understanding of the banking sector. The governor is skeptical about QE, has allowed long rates to decouple from short rates, understands low rates do not of themselves lead to a surge in investment and depreciation will not, of itself, lead to a boost to exports. Indeed in the Budget for Greater Manchester, many of our “Ten challenges to economic thinking at the Bank of England” have largely been confined to the dustbin of economics history. (Along with many of the old theories of Governor King). Yes we welcome the regime change at the Bank and we are also supportive of Forward Guidance. My thanks to John Young for the invitation. What is it about FG? The great thing about FG, is that it marks the end of QE. For this alone we should be grateful. Analysts and commentators are having real trouble accepting forward guidance. William Buiter writing for Citigroup, describes FG as a “pleonasm”. I had to look it up! Pleonasm, the use of more words or word parts than is necessary for clear expression. How absurd. It’s just two words after all. WB then goes on to describe over 17 pages, using 12,000 words in the process, why this is so, with a bit of obtuse greek econometrics thrown in for good measure. What does FG offer? During the recovery, the Bank will not move to inhibit growth by an early increase in base rates before certain conditions relating to employment and inflation have been met. FG is not “carte blanche”. It is state dependent not time dependent. The MPC reserve the right to increase rates notwithstanding the forward guidance. For the moment, it offers reassurance to businesses. Investment plans can be brought back to the board table, with rate risk evaluated, as the economic outlook clears. GDP and UK Growth and clearing it is. The GDP stats this week did not change the view of the economy over the first half of the year but the outlook for the second half is improving radically. In the GM Chamber of Commerce Survey for Q3 to be released next week, The QES Composite Leading Indicator® surged higher in the latest survey suggesting strong growth in the third quarter of around 1.5% rising to trend rate 2.4% by the final quarter. The index measured 28.3 from 18.9 in the second quarter, higher than the peak levels recorded in 2007. As a result of this, we are upgrading our forecast for GDP growth in the year as a whole, to 1.5% rising to around 2.5% next year. Why so positive? The outlook for orders and deliveries were much higher in the quarter in both the service sector and in the manufacturing sector. Growth was positive in both the UK and export markets but particularly strong in domestic activity. Businesses are less worried about interest rates and are revising the investment plans! In the wider economy, growth, jobs, inflation, government debt and borrowing are all heading in the right direction. Only the trade figures will continue to disappoint. The UK cannot grow faster than Europe and the USA without exacerbating the structural trade in goods deficit. World trade is also recovering. Flat in the second quarter but up by 3.6% in July, for the year as a whole we expect world trade growth of just over 3% well down on the pre recession growth of 5.5% but a recovery nevertheless. House Prices, The Nationwide House Price index confirms house prices increased by 5% in September. The increases confined not just to the South East but across the UK. In the North West prices increased by over 3%. The housing market is also recovering but for the moment, the overall level of transactions is still well down on the “boom” years. No need to worry about another “Boom” just yet. Is this the right time to introduce, Help to Buy Stage 2 in the New Year? Of course not. This week the Chancellor invited the FPC to exercise more control over the Help to Buy scheme. A bit like handing over car keys and credit cards before heading out for a night on the town. Enjoyable in the short term with a bad hangover in the offing, the bank will move to limit the damage with higher interest rate spreads and capital provisions forthcoming. The FPC will ensure money is “put behind the bar”, to pin the profligacy. What happened to sterling? Sterling moved up against the dollar and up against the Euro. The pound closed at £1.6150 from $1.5994 clearing the 1.60 level intra week. Against the Euro, Sterling closed up at €1.1935 from €1.1840. The dollar moved down against the yen closing at ¥98.2 from ¥99.3.The dollar euro cross rate at 1.353 was largely unchanged. Oil Price Brent Crude closed at $108.63 from $109. 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, slipped - The Dow closed at 15,258 from 15,451. The FTSE closed at 6,512 from 6,596. The Fed statement forgotten, markets are beginning to fret about the US debt ceiling. It creates volume if nothing else. What’s the problem with the ceiling? The plasterers will be called in to cover the cracks sooner or later, usually later. UK Ten year gilt yields closed at 2.73 from 2.92, US Treasury yields closed at 2.63 from 2.79. The fed statement has now pulled long rates down by 25 basis points. Long rates are decoupling from shorts, returning to fair value. They are reluctant to leave, with pleas from the FOMC to “stick around” but leave they must. Gold closed at $1,336 from $1,331. The bulls have it or do they? The news on tapering bought more upside gain but not much, we think 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 forward to a colleague or 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. 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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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 Economics news – Base rates on hold, houses are moving, manufacturing and construction - building on the recovery. No surprise this week - base rates and QE were kept on hold following the meeting of the Monetary Policy Committee on Thursday. Guidelines on the Bank of England’s use of intermediate thresholds and forward guidance on monetary policy, will be released next week, along with the Inflation Report. It will be ground breaking, The Old Lady has a new cosmetic tool in the handbag. Fashion is in all things, including monetary policy. The Federal Reserve has adopted forward guidance using inflation and the rate of unemployment (6.5%) as guidelines for the timing of any rate increases. Latest US data on growth (1.4%) and jobs (162,000) in July, pushed the unemployment rate down to 7.4%. Any change in US rates is unlikely until late 2014 at the earliest. US growth is still below trend rate 2.4%. So what will the UK version of forward guidance look like? It won’t be pretty but it will be protracted. It could turn out to be more misdirection than guidance, if the MPC is behind the curve. Check out our Forward Guidance on Forward Guidance on The Saturday Economist web site this week. The pace of recovery could catch many by surprise. Manufacturing and construction are staging a strong recovery. Markit/CIPS UK PMI® data in July, suggests, growth of UK manufacturing production and new orders “surged” higher in the month. An increase in domestic demand is the main driver of growth. The key index jumped to 54.6 in the month, marginally above the average rate prior to recession. The construction index jumped to 57.0 in July from 51.0 in June. New orders and a “surge” in housing activity led to a pick up in orders and positive sentiment about the future. Ah yes, the confidence fairy drives a mail van, stacked with orders. So what is happening in the housing market? The Nationwide House Price Index suggested prices increased by nearly 4% compared to July last year. Prices are moving back to levels last seen in June 2008 and within 8% of the peak in late 2007. “The Homes for Heroes” campaign is helping to push prices higher. The level of transactions and new home building are beginning to respond. Our full report on the housing market will follow next month. Time to book the Pickfords van, the housing market is on the move. The Prime Minister has installed Jim Messina, Obama’s major foreign policy advisor, as campaign strategy adviser ahead of the next election. As part of the new team line up, George Osborne will deliver growth, jobs and debt reduction in time for the hustings. The most successful Chancellor in history? Perhaps. What happened to sterling? Sterling slipped this week closing at $1.5284 from $1.5384 against the dollar and down against the euro to 1.1504 from 1.1581. The Euro dollar closed unchanged at 1.3279 and against the Yen, the dollar closed at 98.9 from 98.2. Oil Price Brent Crude closed up at $108.95 from $107.2. The average price in July 2012 was $103 approximately, the average price in July was $108.5. Markets, were up - The Dow closed up 15,658 from 15,558. The FTSE closed at 6,648 from 6,554. Markets continue to rally. This is the time to average in, steadily into August. The FTSE may clear 7,000 within ten weeks. UK Ten year gilt yields closed at 2.42 from 2.34, US Treasury yields closed down at 2.60 from 2.56. Yields are set to move higher albeit against the wishes of the central banks. It really is time to pack up and leave Planet ZIRP. Gold closed down at $1, 308 from $1,325. The ancient relic will be cast aside as markets focus on equities and bonds. 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 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 – news in the droppings - understanding market movements This week it doesn’t get more exciting for economists. The first set of minutes of the MPC under the Mark Carney regime were released on Wednesday. Looking for nuggets of information, amidst the download. A bit like the scene in Jurassic Park when Dr Ellie Sattler is digging with her hands through a pile of dinosaur droppings. Nuggets of information, amidst the download! How did the new Governor vote on QE? How did the other members vote? What was the guidance on forward guidance? Would the ten page minutes be worth the ten thousand minute wait? They were! The death of QE was foretold! “Regarding the Bank Rate and the stock of asset purchases, the Committee voted unanimously in favour of the proposition that base rates and Quantitative Easing (QE) should be kept on hold.” The MPC were united - Carney called time on QE. The epoch of Quantitative Easing draws to a close. David Miles [MPC member] and Paul Tucker [Deputy Governor Responsible for Financial Stability] fell into line with the “new reality”. The pair had been the two QE stalwarts who had “stuck it out” with Mervyn King right to the end of the line. With the economy recovering and inflation rising, it was time to say goodbye to QE. Time for the MPC to wash it’s hands of the monetary experiment, just as Dr Sattler, post examination of the dung, washed her hands before tucking into dinner, we hope. Now we enter the era of forward guidance and intermediate thresholds. The Governor is not ruling out a quantum of additional stimulus. He just needs time to think about the form it may take, plus guidance on the time frame and “triggers” for the new monetary policy framework. Can’t wait for the August deposit. Monetary policy is a bit like genetic experimentation. We have tried M3, shadowing the Deutschmark [An old Germanic monetary medium] and QE. Time for a cautionary word from Jurassic Park’s Dr. Ian Malcolm [Jeff Goldblum], “The kind of control you're attempting simply is... it's not possible. If there is one thing the history of evolution has taught us it's that life will not be contained. Life breaks free, it expands to new territories and crashes through barriers, painfully, maybe even dangerously, but, uh... well, there it is.” And so it is with gilt yields, sooner or later the market will break out, back to equilibrium value, as the period of financial repression and life on Planet ZIRP draws to a close. For the moment, rejoice. QE is dead, it ran out of intellectual currency long ago. In other news ... The good news for the UK economy continued. In jobs data, the claimant count fell by 20,000 in the month to June, an unemployment rate of 4.4%. The wider unemployment rate fell 6,000 to 2.51 million in the three months to May, a rate of 7.8%. Retail sales also presented a positive picture with volumes rising by 2.2% in June after 2.1% in May. On line sales continue to force the pace of change in the high street, with internet sales up by 18% in the month. In the first quarter of the year, retail sales were pretty flat but the second quarter (up 1.7%) offers promise for the rest of the year. Government borrowing figures were also released this week. Good news as the figures for last year were revised down by £2.1 billion to £116.5 billion last year. Not so good news as the borrowing figure for June was slightly higher than June last year. The net figure flattered by the transfer of almost £4 billion from the Bank of England Asset Purchase Facility. The old lady mugged again for gilt coupons under the Treasury - “Money for nothing, gilts for free” campaign. Public sector debt was £1.2 trillion at the end of the month equivalent to 75% of GDP. For the year as a whole, the recovery, if maintained will positively impact on net borrowing. The tax take is rising but spending is resilient to austerity. Nevertheless, the Chancellor may be in a much stronger position by close of year. Inflation, proved to be the real negative in the week. Inflation CPI increased to 2.9% in June from 2.7% in May. The Governor narrowly avoided having to write an explanatory letter to the Chancellor, explaining the missed target. Not to worry, the 2% target is off the agenda for now. We may not see the like in Mark Carney’s term in office. 2.5% by end of year will be challenge enough. Producer prices suggested inflation pressures are rising but not intense. Output prices increased to 2% in June as input costs increased to 4.2%. Home food prices along with energy and oil prices to blame for the latter. What happened to sterling? Sterling recovered further this week closing at $1.5258 from $1.51 against the dollar and up against the euro to 1.1608 from 1.1560. The Euro dollar closed relatively unchanged at 1.3411 and against the Yen, the dollar closed up 100.3 from 99.01. Oil Price Brent Crude closed relatively unchanged at $108.1. The average price in July 2012 was $103 approximately. Markets, were up - The Dow closed up 15,543 from 15,464. The FTSE closed at 6,630 from 6,545. Markets continue to rally. This is the time to average in, albeit slowly into August. UK Ten year gilt yields closed at 2.29 from 2.33, US Treasury yields closed down at 2.48 from 2.59. The feral hogs back in the pen. Yields are set to move higher, the financially repressed will break free from their golden fetters. Gold closed up at $1,292 from $1, 277. Bernanke admitted this week, he didn’t understand gold? I think he was referring to the movements, our theme of the week. That’s all for this week. 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 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. “Regarding the Bank Rate and the stock of asset purchases, the Committee voted unanimously in favour of the proposition that base rates and Quantitative Easing (QE) should be kept on hold. The Governor had "invited the Committee to vote on the propositions that Bank Rate should be maintained at 0.5% and the Bank of England should maintain the stock of asset purchases at £375 billion". The MPC were united as Carney called time on QE. “And so the period of Quantitative Easing draws to a close, as an experiment in monetary policy. David Miles [MPC member] and Paul Tucker [Deputy Governor Responsible for Financial Stability] fell into line with the “new reality”. The pair had been the two QE stalwarts who had “stuck it out” with Mervyn King right to the end of the line. With the economy recovering and inflation rising, it was time to say goodbye to QE. A farewell stimulated by the arrival of the new Governor. “Earlier this week, Paul Fisher, Head of Markets at the Bank of England, gave evidence to the Treasury Select Committee. Fisher suggested any unwinding of monetary stimulus was likely to be years in the future. No need to worry about the unwinding of QE, the gilts will be held to redemption and like old soldiers will fade away, into the ghostly shadows of public sector accounting. “Paul Fisher also confirmed that market expectations of rate rises was much sooner than the Bank might expect. The MPC would like markets to believe base rates will not rise until 2016. We shall await the notes on forward guidance in August for more information on this. For the moment, rejoice, QE is dead, it ran out of funding and intellectual currency a long time ago.” - See more at: http://www.gmchamber.co.uk/stories/committee-united-on-quantitative-easing#sthash.Z3vxUJnC.dpuf The decision to hold rates was widely expected. The economy is showing signs of recovery, confirmed by recent data including our own QES survey and the important GM composite indicator. It is too early to begin the programme of base rates rises but it is time to say goodbye to QE as a policy option. Commenting on today's Monetary Policy Committee (MPC) interest rate decision, as Chief Economist at the Greater Manchester Chamber of Commerce. The sooner long term gilt rates return to some semblance of normality the better. The August meeting should be more interesting to rate watchers. Markets are looking for a statement on forward guidance and the future path of interest rates. Mark Carney must be careful not to make the same mistakes as Bernanke. Forward guidance increases market volatility with an unhealthy focus on the US non farm payroll data. The markets can no more ignore a speech delivered by Bernanke, than Chinese banks can ignore a directive from the People’s Bank of China. The new Governor must avoid becoming hostage to a monthly data set. What can the markets tell us about the future direction of interest rates? Not much if we look at the projections over the last few years. In the Inflation Report (May) the Bank of England suggested markets were not expecting base rates to rise until the middle of 2016. Why should the MPC worry if markets think rates may rise in 2015? The analysis of expectations over the last four year has not proven to be much of a guide as the Chart of the Day indicates. |
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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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