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
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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. Base rates on hold this week as the MPC voted to hold rates at 0.5% and withstand any further pressure to increase QE above the £375 billion level. Speculation continues that rates will remain on hold into 2016 but can we really be so sure that UK base rates will remain at such low levels for a further three year period? In the USA Bernanke has opted for a QE infinite policy, injecting $85 billion monthly into the US economy until unemployment falls below 6.5% or inflation ticks higher above the 2.5% level. So much for forward guidance, it just gives the markets more things to fret about. In Europe the ECB held rates this week, forecasting negative GDP growth this year of -0.6%. Croatia with slowing growth and rising unemployment meets the convergence criteria apparently and will join the ranks of the soaring unemployed in Europe. It really is a difficult international back drop, against which to set rates in the domestic economy. The latest signals are that rates will rise sooner rather than later in the UK as a raft of data suggests the recovery in the second quarter could continue at trend rate of over 2%. Car sales in April and May have increased by almost 10% compared to 2012 and latest data from the British Retail Consortium suggests retail sales in May increased by almost 2% like for like. More convincingly, the latest survey data from Markit/CIPS PMI® surveys suggest the worst may be over in the construction sector. The short lived fillip to output from the outgoing labour administration has now worked it’s way in and out of the system. The latest boost to new home construction from the Treasury Homes for Heroes campaign may be having some effect. The construction index moved into positive territory led by residential building activity. The UK manufacturing sector continued its positive start to the second quarter of 2013. After returning to growth in April, May saw operating conditions improve at the fastest pace in over a year, with growth of production and new orders both improving. At 51.3 in May, up from 50.2 in April, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) posted its highest reading since March 2012 and remained above the neutral 50.0 mark for the second straight month. But it was in the service sector, the most positive signals to growth were found. The headline seasonally adjusted Business Activity Index hit 54.9, up from April’s 52.9, the index signaled a strong rate of growth, the largest since March 2012. New business activity increased at the fastest rate for three years. It has been a great couple of weeks for the Chancellor, with inflation falling, the deficit dropping and growth confirmed in the first quarter. Even the trade figures improved in April according to latest data this week. Alas, the improvement in trade for the wrong reasons, imports fell as exports remained flat. No signs of a booming economy in the second quarter but survey data suggests the recovery is continuing at a respectable pace. The UK economy should experience growth well above 1.0% this year, despite the problems in Europe. No pressure for rate rises in the short term. What happened to sterling? It’s all about dollar weakness this week. Sterling rallied to 1.552 from 1.5198 against the dollar and to 1.1763 from 1.1687 against the Euro. The Euro dollar closed at 1.3216 from 1.2996 and against the Yen, the dollar closed below the critical 100 level at 97.6. Why? US jobs data suggests more QE is guaranteed in the short term. Oil Price Brent Crude closed at $104.56 from $100.39. In June last year Brent Crude averaged $95! The best for inflation may be over, oil prices will be up 10% this month compared to last year. Markets, settlement week. The Dow closed at 15,248 from 15,115. The FTSE closed at 6,411 from 6,583. The easy calls have been made for the moment. Nervous money should move to the sidelines before the Autumn moves. UK Ten year gilt yields increased to 2.09 from 2.03 - US gilt yields closed up at 2.18 from 2.13. The great rotation continues albeit at a subdued rate. As for gold, closed at $1,384 from $1,387. The excitement is over for now, this is a hung chart. 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 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 – Inflation Report, a welcome change in outlook Inflation Report Wednesday, May Inflation Report, last in the series (of 82) for Sir Mervyn King as Governor. “There is a welcome change in the economic outlook". Projections are for growth to be a little stronger and inflation a little weaker than expected three months ago. "A recovery is in sight”. Excellent. The Governor is upbeat. The forecast is for growth - slightly above 1% for the year as a whole, with a gradual recovery thereafter. Base rates are likely to remain on hold until 2016, inflation will moderate from the current 2.8% level but is likely to remain above target by the end of the year. This all fits nicely with The Saturday Economist outlook outlined earlier in February this year! No black clouds, no stormy water, no difficult charts to navigate, the economy is headed for a safe harbour that even a Canadian novice could pilot apparently. The King has had his day, "now it is over to the next generation to have theirs", he added, before leaving the room with an obvious smile on his face. Concerns about Europe Well there are a still a few concerns about Europe! “The main downside risk to the recovery continues to stem from overseas, especially in the euro area”. So it proved with the Eurostat updates on the Euro economy mid week. Not doing quite so well, the flash estimate for the first quarter of 2013 suggested Euroland GDP fell by 1% compared to the first quarter of 2012. It is not looking too good, the pigs are breeding and heading north. The French economy slipped back into recession with a fall of 0.4% following a similar fall in the prior quarter. Even the Germans, took a knock, with output down by 0.3% in the first three months. NIESR predicts negative GDP out turn for the Euro in the year, which fits nicely with the IMF three speed world recovery outlined recently by Christine Lagarde. Hopefully the UK is moving away for European trends and joining the Anglo Saxon growth alliance, as the US recovery gathers pace. Employment UK Not quite so fast as hoped, perhaps, the employment stats released on Wednesday were a little disappointing. The claimant count continued to fall into April, down by 8,000 to 1.52 million and a rate of 4.5%. The number of vacancies also increased slightly but on the wider LFS count, the number in employment actually fell slightly in the three months to March. That’s the great thing about the employment stats, sixty pages with something therein for politicians of any hue. For two handed economists, the data is at times indecipherable, the earnings data, incomprehensible, flat at best. Confused? Check out The Saturday Economist web site, probably the best economics site in the UK. What happened to sterling? Once again, it’s all about the dollar, pushing to 103.1 from 101.5 against the yen and to 1.2838 (1.2992) against the Euro. Sterling also fell to 1.5168 from 1.5356, down slightly against the euro at 1.1811 from 1.1825. Oil Price Brent Crude closed at $104.64 from $103.91. No impact on inflation at this level. Markets, once again the beneficiaries of US hopes. The Dow closed at 15,354 from 15,118 and the FTSE closed at 6,723 from 6,625. Time to sell in May and go away perhaps our US readers cautioned otherwise last week. UK Ten year gilt yields held at 1.90 but US gilt yields closed up 1.95 from 1.90. As for gold, gold closed down at $1,361 from $1,447. 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! Don't forget to check out the new web site The Saturday Economist.com. 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 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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