The Home Secretary outlined the new Tory immigration policy this week. In the biggest change to immigration since William stepped off the boat in Hastings, Priti Patel was in no mood to pull punches.
"Today is a historic moment for the whole of the country. We are ending free movement, taking back control of our borders and delivering on the people's priorities by introducing a new UK points-based system which will bring immigration numbers down."
EU and non EU citizens will be treated equally. High skilled workers like scientists, academics and engineers will be prioritized. Skilled workers will be allowed in under a points system with points awarded for language, education and a job offer above a salary floor of £25,600.
Fruit pickers and other seasonal farm workers will be accommodated. Farmers will be allowed to recruit 10,000 low skilled workers from outside the EU to harvest, flowers, fruit and vegetables. Farm workers from Eastern Europe will have to pick their own fruit from now on.
Not everyone was convinced by the change in policy. Fears of recruitment problems in construction and care came to the fore. Carolyn Fairbairn, Director General of the CBI, warned against the ending of low skilled immigration. "In some sectors, firms will be left wondering how they will recruit the people needed to run their business".
Health and health care were immediate cause for concern. "The proposals would negatively impact the sector and will not meet the health and care needs of the population" said Dame Donna Kinnair, the Chief Executive of the Royal College of Nursing.
This week, the ONS announced a further fall in unemployment and a rise in vacancies. With 1.3 million out of work, a rate of 3.8%, unemployment is at a 45 year low. The employment rate has never been higher. The number of vacancies in the economy increased to over 800,000.
8.5 million are inactive and could be put to work given the right encouragement and training by business according to Patel. That sounds an awful lot of resource. Unfortunately for the Home Secretary, 2.3 million are students, 1.9 million are looking after family or home, over 1.1 million are retired and 2.1 million have long term illness.
"Rise, take up thy sick bed and work" is the Patel Patois. The good news, 1.9 million of the economically active want a job allegedly. The just don't like the look of the 800,000 vacancies currently on offer apparently ...
Budget Nears ... Deficits Increase ...
Rushi Sunak is on the case. The budget will take place on the 11th March. An end to austerity and a boost to infrastructure problems will create both a financial challenge and an intellectual challenge.
More doctors, nurses and police on the streets will boost current spending. Big commitments to infrastructure will place greater demands on longer term capital spending.
The intellectual challenge will be to cobble together a set of "fiscal rules" which will present some semblance of order. The financial challenge, there really is not much money to play with and not much appetite for tax hikes at this stage of government.
The latest data on government borrowing was somewhat disappointing. In the ten months to January 2020, borrowing was almost £45 billion compared to £39 billion last year. For the year as a whole, borrowing is expected to increase to £44 billion compared to £38.4 billion last year.
Total debt increased to £2.1 trillion if the Bank of England obligations are taken into account. It would appear the Chancellor is not well placed to meet the £150 billion bill for infrastructure spending. On the other hand, life on Planet ZIRP is incredibly accommodating for profligate spenders. Ten year gilt yields fell to 0.56% this week.
A thirty year Sterling Infrastructure Bond could hit the streets with a 1% coupon. The market has appetite for debt, the Chancellor must have the ambition to exploit. £150 billion should be the ambition, more than enough to finance the refurbishment in the open plan accommodation between Number Ten and Eleven ...
China ... Inflation on the rise ...
Inflation CPI basis increased to a six month high this week. Despite the strength of Sterling and the weakness of oil prices, CPI inflation increased to 1.8% from 1.3% last month.
Service sector inflation increased to 2.3%. Goods inflation increased to 1.3% from 0.6%, providing the major boost to prices.
Producer prices remained subdued. We expect inflation to move to the target rate of 2% through the year. Relatively low inflation and a strong jobs market suggests the new Governor of the Bank of England will not face any tough decisions on rates this year.
The latest retail figures for January were pretty dismal, despite the headlines to the contrary. On the other hand, the latest PMI Markit Composite index suggested a significant boost to manufacturing and service sector activity in January.
With a positive budget outcome next month, we expect growth to average 1.3% to 1.5% compared to 1.4% last year. Many difficult challenges remain to resolve the trade deal with Europe and to determine the strategy for many sectors including fishing and agriculture.
It continues to appear as if Cabinet members are trying to earn their lines in a script that has yet to be written. Let's hope not too many continue the process of ad libbing ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
Boris Johnson confirmed this week, the High Speed Rail network would be built in full. The 330 mile Y shaped network will connect London, Birmingham, Manchester, Leeds and Wigan.
Plans were also outlined plans for "High Speed North". The East West link across the Pennines will connect Liverpool, Manchester, Leeds and Hull. The Northern network would be extended to Carlise and Newcastle.
The HS2 costs would be closely monitored by cabinet. Grant Shapps, transport secretary, promised the whole of government would be involved in ensuring the project ran on budget. "Just like the Olympics"
A bridge across the Irish Sea is to be evaluated. Cycle tracks in the air are under review across London. 4,000 carbon neutral buses are to be added to the transport fleet. The project costs could total £150 billion in total.
For Sajid Javid it was all too much. The Chancellor resigned just four weeks before his maiden budget. "Boris Johnson had attached conditions to the role which "no self respecting minister would accept" he explained in his resignation letter.
All Treasury SPADs will be sacked. Partition walls between Number Ten and Eleven were to be knocked down. The Treasury was to be brought more directly under Prime Ministerial control.
Rishi Sunak was appointed to the job. Dubbed as the "Maharajah of the Yorkshire Dales" the fast rising Tory star is ex Goldman Sachs and is married to the daughter of the Infosys Tech billionaire, Narayana Murthy. A more flexible approach to "spending rules" from Treasury is now expected.
Fed warns on debt and spending ...
Spending was very much on the mind of Jerome Powell this week. The Chairman of the Federal Reserve warned Congress on Tuesday, of the dangers presented by rising U.S. debt and deficit.
Now would be a good time to begin to reduce the level of deficit the Chairman explained, putting the economy on a sustainable path for the future.
The deficit is set to exceed the $ one trillion dollar level this year. The Congressional Budget Office has warned deficits will average over $1.3 trillion in the years ahead. The deficit has already increased by $3 trillion dollars since Trump has been in office. A further $5 trillion will be added based on current plans and budgets. There are no plans to eliminate the deficit over the next ten years according to briefing documents.
It was a week of set backs and challenges for the President. The Senate voted to limit Trump's authority to wage war with Iran. A judge ordered all work on the Jedi project should be halted, pending a review of the Amazon claim of Presidential prejudice. The Department of Defense contract had been awarded to Microsoft. Trump hates Jeff Bezos and the Washington Post.
The President was accused of another quid pro quo in his dealings with New York. Attorney General William Barr complained "His tweets make it impossible to do my job". Trump attacked former Chief Of Staff John Kelly. John Bolton, former national security adviser, sprang to Kelly's defense.
Trump's nominee to the Federal Reserve Judy Shelton faces rejection by the senate. Trump admitted sending Giuliani to Ukraine, a claim he denied through the impeachment process.
A glimmer of hope for the President? U.S. troops will be leaving Afghanistan. A deal with the Taliban has been outlined. If the Taliban can stop killing people for a few weeks, the U.S. will begin to pull out military personnel from the country. This will "Open the way for the Afghan government and the Taliban to negotiate the future of the nation" ... Ah yes, peace in our time ... sort of ...
China ... Inflation on the rise ...
Chinese Inflation increased to the highest level in eight years in January. The consumer price index increased by 5.4% in the month. It was the highest level since October 2011.
Food prices increased by over 20%. Pork prices jumped by 114%. Pig stocks have halved over the last two years as the country has grappled with an outbreak of African swine fever.
The Coronavirus continues to weigh on the economy. It is thought that economic growth could slow to 4.5% in the first half of the year, as the country grapples with the viral outbreak.
Evidence continues to suggest the outbreak may have peaked. The number of new cases reported has fallen to around 2,000 per day by the end of last week. The World Health Organization reports some 49,000 cases to date. The mortality rate is approximately 2.8%.
A return to work is now encouraged. The impact of the outbreak is extensive. This week JCB warned of production cutbacks as a result of part shortages. Economists will be scouring the data releases over the next few weeks for further information on the extent of the economic slowdown.
"Boris Bounce Helps the High Street" the headlines in the Times this week. The BDO Retail Tracker reported like for like sales up by almost 6% in January. It was the biggest increase in six years. Consumers are feeling more confident about the future of the economy, under the Johnson administration, apparently.
The housing market is showing signs of life. House prices were up by 4% in January, according to the latest Halifax data. December mortgage approvals increased by 4.6% year on year. Housing transactions were up by 7% in the month. The BDO data revealed sales of sofas and furniture increased by 9% in January. Feet up and watch the TV for further news on Brexit the guideline. On the look out for policy gaffes, the comedy option, as new ministers move into office.
The service sector enjoyed a solid recovery in January according to the latest PMI data. New orders, more employment and continued business activity pushed the index up almost four points to 53.9 from 50.0 last month. A combination of greater consumer confidence and business confidence had translated into rising client demand. It was the first indication of growth in five months. Positive expectations for the year ahead, continued to improve.
Respondents noted the "headwind" from delayed decision making had lifted since the general election. No fears of a Labour government with a radical agenda. No hung parliament and further legislative indecision. No concerns about Boris Johnson, dead in a ditch. A clear deadline for Brexit declared.
The surge in activity will settle in the months ahead. Growth for the year is expected to be around 1.3% with continued growth in jobs and earnings. Much is awaited in the March budget. Policy clarification is required on the ask for trade deals with the EU and U.S. An understanding of immigration policy would help. Bold statements on the greening of the economy would be better made in co-operation with the manufacturing sector, especially in the car industry.
New ministers appear to be learning their lines in a script which has yet to be written. The Home Secretary has vowed to clamp down on counter terrorism. The Chancellor has promised no alignment with the EU or any other country for that matter. Truly global Great Britain will not be bound by instructions from others.
The Tory government has a great opportunity to capitalize on the strong platform in Parliament. A series of sensible policy proposals developed in conjunction with, not isolation of, all stakeholders would help. Putting cabinet on tour will achieve nothing but road noise. A show boat on the Thames would be just as effective and greener ...
Trump Acquitted ... Pelosi lets Rip ...
The President was acquitted this week, retribution was swift to follow. Never one to hold a grudge when you can throw it, Gordon Sondland, the U.S. Ambassador to the E.U. was recalled from Brussels. Colonel Alexander Vindman and his brother were removed from the White House.
Trump is punishing witnesses who testified against him in the impeachment process. More firings are probable. The President will exact retribution on perceived enemies. It is a long list.
For Gordon Sondland it has been an expensive departure. The U.S. ambassador donated $1 million to Trump's inaugural committee. A hasty recall to Washington seems indecent. At least he wasn't routed via the Saudi Consulate in Istanbul.
The President delivered the State of the Union address this week. Nancy Pelosi let rip. Listening to Trump was all too much. The Speaker of the House ripped up a copy of Trump's speech in a premeditated action. He had refused to shake hands after all.
Trump's delivery had the fact checkers working over time as usual. The President claimed the U.S. economy is "roaring" and moving forward at an unimaginable pace. "Jobs are booming, incomes are soaring, poverty is plummeting, our economy is the best it has ever been". It is the "Great American Comeback" and it is all down to me, the claim.
A fiscal stimulus worth some 10% of GDP fueled the expansion. Accelerating and deficit the price to pay. In January the expansion continued as 225,000 jobs were added to the payroll. Earnings increased by 3.1% . Yet Trump's tariff and trade policy is damaging growth. The U.S. is now experiencing "cascading protection", as tariffs are extended on steel and aluminum products including nails, car bumpers and beer kegs to protect domestic manufacturing.
This week, Steve Mnuchin, Secretary of the Treasury, was forced to admit the U.S. economy would fail to meet his 3% growth target this year. In an interview with Fox Business Network, Mnuchin explained officials are reducing forecasts for the year by 50 basis points or more.
Boeing was to blame. "Boeing has had a big impact on our exports", Mnuchin said. Boeing bad, Tesla good, the President claimed. More tax cuts are planned to ensure the President is returned in November.
Fears Grow of Global Slowdown ...
The World Health organization confirmed yesterday the number of cases of coronavirus had increased to almost 32,000. The number of deaths had increased to 638. For the moment the mortality rate appears to the around 2%, significantly lower than the SARS rate of 10%.
Fears are mounting of a global slow down as a result of the epidemic. Commodity prices including oil, gas, iron ore and copper have fallen sharply since the outbreak began. China is the dominant consumer of commodities accounting for 50% of copper consumption. Oil consumption in China has dropped by 20%.
China's factories and transport networks have been shut down to contain the outbreak. Fears are growing of product and component shortages around the world. Chrysler warned of a shut down in Europe. Sony and Nintendo warned of unavoidable delays.
Burberry scrapped it's profit forecast for the year. Sales in China have slumped. The company has shuttered 24 of 64 stores. Those remaining open have experienced a 70% to 80% drop in revenue. Tourism will take a hit. Cathay Pacific urged staff to take a three week unpaid holiday to cut costs.
Chinese officials have suggested growth could be hit by one percentage point in the first quarter. Oxford Economics believe China's GDP could fall from 6% to 4%, with a possible impact on global growth of 0.25%. The forecasts assume the outbreak will be contained within a three month period with a six month duration in total. Thereafter the bounce back will be swift and significant with any losses to output recovered in the year as a whole. As with all crises, this too will pass ... we can but hope so ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
And so it came to pass, the U.K. has finally left the EU. We should have parted ways at midnight last night, but with a final twist of Brussels irony, we were forced to leave an hour earlier due to European regulations. Just a taste of things to come perhaps.
According to the Telegraph today, Boris Johnson is ramping up the pressure on the EU. The Prime Minister is preparing to impose full customs and border checks on all European goods entering the UK. Comprehensive checks on EU imports will be imposed by the new administration. Excellent.
No thought of the delays on deliveries, nor the threats to just in time manufacturing. Empty shelves in supermarkets, a result of empty thinking in cabinet. No thought of retaliatory measures from our friends across the channel. The French will play catch all in Calais and the Spanish will hold all traffic moving across the border into Gibraltar. If this is setting the tone for negotiations with Brussels, there is little or no chance of a trade agreement before the end of the year.
The Bank of England held rates at the MPC meeting this week. It was Mark Carney's last call. The unreliable boyfriend is off, to be replaced by Andrew Bailey, a bank stalwart. Despite market sentiment, foreseeing a cut in rates, this was never really an option. The Bank is worried about the implications of Brexit on growth and trade.
Forecasts for the UK have been slashed this year to just 0.8%, with a more promising 1.4% growth in prospect for next year. No Boris bounce envisaged by Threadneedle Street. No widespread evidence of a pick-up in growth. A renewal of trade tensions could damage growth. The challenge of Brexit will persist.
The Governor hinted the next move for rates would be up, if growth developed in line with forecasts. "Things are gradual if they are multiple, things are modest if they are not" Carney explained. So much for forward guidance, with one bound he was off ... "When the seagulls follow the trawler, it is because fiscal prudence will be thrown into the sea" would have been my more favoured parting shot ...
Fed Holds Rates ... U.S. growth slows ...
The Fed also held rates this week providing no real shock to markets. The President would like rates slashed to negative and beyond. The "Boneheads At The Bank" are unlikely to oblige.
Officials are monitoring a number of risks including a renewal of trade tensions and the threat of the coronavirus outbreak in China. Any mention of a "very stable genius" in the White House with "unstable economic policies" was omitted.
"We expect moderate economic growth to continue" Fed Chair Jerome Powell told reporters Wednesday "but uncertainties about the outlook remain, including those posed by the new coronavirus".
The Fed funds rate remains in a range between 1.5% and 1.75% following three cuts last year, from a high of 2.5%. Further changes in rates are not expected this year as the Fed assesses the implications of a soaring fiscal deficit, with further tax cuts on the cards from the Trump administration.
The latest data confirms the U.S. economy expanded by 2.3% in 2019 with a slowdown in the final quarter from 2.7% at start of year. Household spending is supporting growth (up by 2.6%) but business investment came under pressure in the second half of the year. Private sector investment, up by 5% in the first quarter actually fell in the final quarter by almost 2% year on year.
Business investment is under pressure. The manufacturing sector was in recession last year. Capital spending actually fell in 2019. Trade and tariff policies clashed with tax cuts, as Gary Cohn, former director of the National Economic Council and Chief Economic Advisor to President Trump explained last week.
Growth in the U.S. is expected to slow to around 2% this year. The fiscal deficit will rise beyond $1 trillion dollars, with no relief for the trade deficit, as consumer spending continues. The Senate will vote to acquit Trump this week. No need for witnesses, the breaches of protocol are evident. Abuse of power and obstruction of Congress admitted. Senators condemned to drink nothing but water or milk during the impeachment process are eager to provide a swift response.
"Let the people decide" Trump's White House counsel said this week. They will get their chance in November, a Trump dynasty awaits the verdict ...
High Speed Rail Goes Ahead ...
China announced ten new infrastructure projects this week. The schedule includes four new high speed rail projects, covering some 2,000 kilometers. The rail links will be completed in the next four years, at a cost of $50 billion dollars. The extensions will be added to the 35,000 kilometer network already in existence.
Next year, China will trial the MagDev rail project with speeds of up to 500 kilometers per hour possible. That's fast!. The emergency hospital in Wuhan, to treat coronavirus patients will be completed in four weeks. That's also fast.
Next week we will assess the economic implications of the viral outbreak. The World Health Organization has defined the outbreak as a "Global Health Emergency". 10,000 cases have now been identified in China. More hospitals may well be needed in due course. In due course they will be built at speed.
For the moment we return to the pressures on the Johnson administration to make a decision on HS2. The government made the right call on Huawei last week. The U.S. is falling behind in the 5G race. It has long abandoned any move to High Speed Rail.
The Prime Minister is in favor of HS2 allegedly, a decision is expected soon. The issue is one of capacity rather than speed. The decision more pressing now the "Smart Motorway" Aporia has been revealed. Road congestion will place freight traffic under greater pressure if not. It is time to make the call if real productivity gains are to be secured ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
Ray Dalio founder of Bridgewater Associates was in Davos this week. Bridgewater manages about $160 billion of assets under management. He thinks investors should not miss out on the strength of the current market. "With too much money still on the sidelines, investors should dump cash for a diversified stock portfolio", with a little gold on the side.
"Cash is trash" Dalio said. "Get out of cash there is still a lot of money in cash". You have to balance with a certain amount of precious metals in the mix.
Dalio has made the call before. In 2018, he warned that investors would feel pretty stupid if they remained on the sidelines during the market run up. Since then, the Dow and S&P have moved up over 20%, with Nasdaq showing a 40% gain.
U.S. markets hit new highs this month, despite some profit taking during the week. The Dow is set to test the 30,000 level, the S&P and Nasdaq, looking a little over extended.
"Say Goodbye to Old Highs" is the new mantra. The volume of activity suggests markets will push higher as the Senate denies the Democrats an impeachment victory next week. Google joined Apple, Amazon and Microsoft in the $ Trillion dollar club. Next step why not $2 trillion, the question asked. Strange when a PE of 30 is just chump change.
Low interest rates are driving asset prices ever higher. U.S. ten year bond yields slipped 11 basis points this week to close at 1.71. US gilts closed down 6 points to 0.57 per cent. Life on Planet ZIRP is turning into a quarantine of international dimension.
Jamie Dimon, Head of J.P. Morgan Chase warned this week, negative rates are the only thing worrying him in this otherwise "Goldilocks Place". "The only thing I have trepidations about are negative rates and QE. It's one of the great experiments of all time and we still don't know what the ultimate outcome is".
"I would never buy a negative yielding bond" he added "In history, whenever we have seen anything like that, it didn't end well …"
Risk of Great Depression …
Kristalina Georgiva is the new boss of the IMF. Speaking at the Peterson Institute in Washington last week, Georgiva warned the latest IMF research compares the current economy to the "roaring twenties". We know that didn't end well. The Great Crash of '29 led to the Great Depression of the 1930s. The IMF thinks a similar trend is underway!
"If I had to identify a theme at the start of the decade" she added "It would be greater uncertainty". Climate change and increasing trade protectionism would lead to greater social unrest and financial market instability.
The IMF released their forecasts for growth in 2020 which were remarkably upbeat. World growth is expected to increase by 3.3% this year and by 3.4% in 2020. This compares with growth of just 2.9% last year. The U.K. is expected to grow by 2.4%, a higher rate than France and Germany, higher than the EU as a whole.
In Davos, Trump declared the U.S. economy to be the strongest in the world. The IMF forecasts would beg to differ. Growth is expected to slow to just 2% this year and 1.7% next despite the tax cuts and spending plans. The President would like to blame the Federal reserve for raising rates too fast last year. "Without the rate hikes, the U.S. economy would be growing by 4%" Trump said..
Steve Mnuchin, Secretary of State at the Treasury, advised climate activist, Great Thornberg to "go to college and get an economics degree". Mnuchin graduated from Yale in 1985 with an economics degree, as if that helps when working with the Trump administration.
With ballooning internal and external deficits, the U.S. is in danger of becoming a banana republic. The administration is preparing a second round of tax cuts to boost growth. Growth will be self funding and will mitigate the borrowing deficit, Mnuchin explained. The Fed is confused, confronted by fiscal irresponsibility AND financial repression, a heady cocktail for crisis, with the odd trade war on the side.
Trump Tariffs Damaged U.S. growth ...
So what went wrong? Gary Cohn former White House Chief Economic advisor explained on Sunday, how President Trump's tariffs hurt the U.S. economy and undermined the stimulative impact of the massive tax cuts passed in 2017.
Trump's steel and aluminium tariffs "collided" with tax policy. The tariffs increased input costs reducing margins and profits, damaging investment plans and job expansion.
Last week, the Federal Reserve confirmed the U.S. manufacturing sector was in recession. Output fell in 2019, despite the Trump claims to "Make American Manufacturing Great Again".
Cohn, one of the "adults in the room" clashed with the President on the issue of tariffs and protectionism. The former Goldman Sachs President resigned in March 2018.
Trump also faced push back from former State Diplomats over the conflict with China. "President Trump's lack of understanding of China, is to blame for the deteriorating relationship with Beijing" former diplomats explained. Doubts persist about the viability of the Phase One Trade deal with significant tariffs still in place.
With "successful" trade deals concluded with Canada, Mexico, Japan and China, Trump will now turn his attention to Europe and the U.K. The dystopian disaster that is "Trump on Trade" will now inflict further damage on growth in the West.
In the U.K. within days we shall be leaving the EU. The Prime Minister may claim we have crossed the line. Julius Caesar crossed the Rubicon but then became involved in a prolonged civil war.
There is much to be done to understand policies on trade, immigration, investment, infrastructure and fiscal policy. Taking lessons from the Trump playbook on trade negotiations will not help ...
The Chancellor warned this week, there will be no alignment with EU regulations following the exit from the European Union. "There will be no alignment, we will not be a rule taker, we will not be in the single market, we will not be in the customs union".
It was all going so well. The election result, produced a Boris Bounce in confidence among business and the markets.There was even talk of a "Brino" deal, Brexit in name only, trade secured with our biggest trading bloc.
During the referendum campaign it was Boris Johnson who asked the question about EU regulations. In a lorry park in the South East he asked, "Why should Brussels determine the dimensions of our lorries and containers?". It's a fair question but if they are to travel safely across Europe, it is best if UK drivers are able to pass over motorways and under bridges without a problem. Size is everything after all ...
For regulation, read standardization. Manufacturers like common standards on products and components in many markets. Common standards guarantee quality, generate lower unit costs, economies of scale and improve productivity. The Chancellor claimed the Treasury would not lend support to manufacturers favoring EU rules. That just does not make sense.
The Chancellor is out of step with industries including car manufacturing, chemicals, food and pharmaceuticals. Javid admitted, that some businesses may not benefit from Brexit.
"The UK economy would ultimately continue to thrive in the long term. Once we have this agreement in place with our European friends, we will continue to be one of the most successful economies on earth".
This week, the new boss of the IMF, Kristalina Georgieva, warned the global economy risks a return of a Great Depression comparable to the thirties. The benchmark for success may just be getting lower ... the Chancellor's trade stance will assist the process ...
Retail sales disappoint ...
One of the most successful economies in the world, had a disappointing end to the year. In the three months to the end of November, growth in the UK economy slowed to just 0.9% year on year. Manufacturing output fell by almost 2%.
Growth of 2.2% in the first quarter, slowed to 1.2% over the following six months. The economy is slowing. Retail sales are falling. In December retail volume growth year on year was just 1%. The value of sales increased by 1.5%.
Online sales increased by almost 6% accounting for 20% of all volume activity. Exclude food and the number rises to 30%. Almost one in three sales have now been lost from traditional retail to online trading.
Boohoo is one of the great beneficiaries. Sales jumped 44% in the four months before Christmas. The share price has risen over 70% in the last year. The business now has a higher market cap than M&S. The online platform has rescued Karen Millen and Coast, now in the stable along with Boohoo, Nasty Girl and Pretty Little Thing. M&S slipped out of the FTSE 100 last year, Moody's is warning off a credit rating adjustment to "junk". No change in retail trends any time soon ...
Price pressure is easing in the economy. Retail prices CPI basis slowed to 1.3% in December from 1.5% prior month. Low oil prices, a stronger currency and a slowing economy led to lower prices in food, clothing and services.
Markets began to price in a rate cut at one stage last week. Michael Saunders, and MPC dove, suggested a rate cut may be necessary citing a slowing economy and subdued inflation. Let's hope not. What on earth could a 25 basis point cut achieve as we await the maiden budget from the "No Alignment Chancellor".
Google Joins the Trillion Dollar Cap Club ...
Google shares moved higher this week, joining the $Trillion dollar club along with Apple, Amazon and Microsoft. Together the four stocks account for almost 20% of the total market cap of the S&P 500.
U.S. markets moved higher as Trump signed the "phase one" trade deal with China. The "currency manipulator" tag was removed from Beijing before the signing. China committed to buy $200 billion of goods from Uncle Sam across four main sectors including manufacturing, energy, agriculture and services. Plans for further tariff increases have been cancelled, some tariffs have been cut. 25% charges on some $250 billion of goods remain in place. Trump is now free to turn his attention to Europe.
Whatever the merits of the trade war, it is clear U.S. manufacturing has not been the beneficiary. Latest data confirmed the manufacturing sector moved into recession last year. U.S. economic growth is slowing, the US deficit is set to hit $1 trillion dollars. The Treasury is issuing a twenty year bond, last seen in 1986, to assist with the huge funding process.
China reported growth of 6.1% in the past year, with a further 6% growth in prospect this year. Growth in the US slowed to 2.3% in 2019 , with growth of just 1.8% expected in the current year. So much for "Make America Great Again."
Next week sees the release of "A Very Stable Genius: Donald J Trump's Testing of America" "Taut and terrifying, it reads like a horror story" according to the New York Times. "It is as if the President, as patient zero, has bitten an aide and slowly bite by bite an entire nation lost its wits and compass."
"You're a bunch of dopes and babies" Trump launched a stunning tirade against his generals during a Pentagon briefing, the book reveals. Impeachment looms. This week the President beefed up his legal team to include two of the biggest celebrity lawyers of the 1990s. Some express surprise, the President just doesn't handle the whole thing himself ...
Markets rallied, Oil and Gold surrendered early gains, the prospects of war in Iran eased significantly, then both sides appeared to de-escalate the crisis. Neither the U.S. nor Iran are marching as to war, for very good reason, as we explain below.
U.K. car sales ended the year down by just 2%, confidence among CFOs bounced back, following the election result. A modicum of clarity over Brexit appeared. The withdrawal bill passed through the house with a majority of 99 votes.
Boris Johnson promised a deal with Europe by the end of the year. No extension will be considered, deal or no deal, the old "dead in a ditch" dictum still rules OK. Ursula von der leyen, the new President of the European Commission has made it clear, such a timetable is impossible. It will be a long and drawn out process before any deal is done.
In the latest news from the SMMT, UK car sales ended the year down by 2.4% at 2.3 million units. Diesel sales were down by over 20% accounting for just 25% of total sales. Petrol sales were up by 2%, the share of sale increasing to 65%. Hybrid sales are charging up. Alternative fuel vehicle sales increased by 50% accounting for 10% of new registrations. Consumer confusion over diesel continues. Hybrids are sent to overtake the poisoned fuel source within three years. Despite the set back in the UK this year, car sales are charging up, here and around the world.
What a difference a deal makes. The latest Deloitte CFO survey, shows an unprecedented rise in business sentiment. Brexit worries dropped to third place in list of concerns. Weak demand at home and geopolitical risks around the world moved ahead of Brexit and protectionism for the moment.
Businesses are more optimistic, less uncertain, more confident about profits but still casting a cautious cloak on costs and cash flow. UK stocks closed down, Sterling slipped against the Dollar to hold at $1.30. Mark Carney caution on the year ahead, spooked markets as the prospects of more QE and rate cuts appeared possible. Oil prices Brent crude basis returned to our $65 dollar benchmark ...
U.S. Wage Growth Disappoints ...
In the U.S. markets rallied as the prospects of World War Three slipped. The Dow and S&P closed up, Nasdaq moved ever higher. Recession indicators moved lower. Markets expect growth of just 1.8% in 2020 compared to 2.3% last year.
The U.S. trade deficit fell in November to $43 billion dollars compared to $47 billion prior month. Exports increased by 0.7% as imports fell by 1%. Whilst some rush to acclaim the Trump trade strategy, a slowing economy will provide the best explanation of the modest improvement for now.
Latest data on jobs and earnings disappointed. U.S. non farm payroll growth came in lower than expected at 145,000. The unemployment remained steady at 3.5%. Wages increased by just 2.9%, the smallest annual gain since July 2018. More women than men were on the payroll for the first time in ten years. The data marks ten years of continued job expansion in which 22.6 million have found work. Last year employers added 2.1 million jobs, slightly down on prior year.
Major job expansion is in the service sector. With education, health and business services featuring. Leisure and hospitality also strong, significant gains were made in construction, distribution and financial services. Any gains in manufacturing, were offset by losses in the mining sector. So much for "Make America Great Again" the blue collar workers are not the beneficiaries of Trump's economics.
With continued expansion in prospect and inflation subdued, the Fed is unlikely to make any move on base rates. Ten year bond yields were up by just one basis point at 1.84%. The economy is moderately set for the election in November ... bring on impeachment ...
Marching as to war ...
Tensions were heightened following the Iranian missile strikes on American bases in Iraq this week. China called for for restraint and the pursuit of a peaceful resolution of conflict. Neither side seeks war, least of all the Iranian government.
The Iranian economy is in poor shape following the imposition of sanctions by the U.S.A. in 2018. Economic growth fell by 10% last year following a contraction of 5% in the prior year.
Inflation is increasing at 30%, unemployment is rising to just under 20%. Oil exports are falling, the trade deficit is increasing, the internal fiscal deficit is also on the rise.
The economy is measured at around $400 billion in the current year. The defense budget at around 3% of GDP is valued at some $12 billion dollars. Compare that to Uncle Sam's coffers and it is clear Iran is in no shape "marching as to war".
The US economy is worth about $22 trillion dollars this year. Defense spending at around 3.6% of GDP is expected to increase to $800 billion dollars. that's twice the size of the economy of Iran and well over fifty times the money spent on defense.
This week, the Baghdad government called for the withdrawal of all U.S. troops in Iraq. The strategic prize is within reach for the leaders of Iran. Russia is the dominant great power in Syria, China is set to become the soft influencer in the East.
It is said President Trump would like to see the return of all troops from the Middle East. For the moment the administration is reserving the right to maintain "whatever force is required to achieve its goals there". If only we knew just what they were ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
What to expect in 2020 ...
We look at the options ...
No peace prize for the President, no trip to Stockholm any time soon. No flowers from Tehran, no vases from Pjongyang, Trump has set the tone for his tangent with the axis of evil. It doesn't bode well.
How do you like your foreign policy? Sunni side up with a hint of oil on the side. Troops withdrawn from Syria are moving in to Iraq. As the cavalry arrives, US citizens are urged to leave "by plane whilst possible, by any other means when not".
Iran has vowed "severe revenge" for the assassination of Major General Quasem Soleiman. Trump has explained this was action to stop a war. "We did not take action to start a war" the President explained. World leaders called for calm. Dominic Raab, called for de-escalation of tensions in the region. Yep that should do it.
Markets acted with cynical response. Defense stocks, Lockheed, Northrop and Raytheon moved higher. Oil prices moved up but not by much. Brent crude closed at $68 dollars per barrel. WTI closed up a few dollars more at $62.90. The Dow, S&P and Nasdaq surrendered early New Year gains. It had been a great start to the New Year following gains of around 30% in 2019.
In 2019, our major concerns were of Trump and Tariffs, Boris and Brexit. The President has promised to sign a deal with China by the 13th of January. The Prime Minister has promised a deal with the EU by the end of the year.
During the past year, world trade growth slowed to standstill, manufacturing output slumped. Output was damaged in North America, the Far East and Europe. The world needs a trade deal. It does not need a major geopolitical conflict played out in the Straits of Hormuz.
US growth slowed to around 2.3% in 2019. A further slow down is expected in 2020. The Fed has indicated no changes in rates during the year as a whole. No recession in sight. Election looms in the second half of the year. Following gains of 30% over the last twelve months, we expect little or no market action for the year as a whole.
It had looked pretty straight forward as the New Year fireworks exploded. A positive outlook overshadowed by trade tensions with China and Europe. Then down came the drone strike just to add to the uncertainty in the year ahead ...
High Street Losses Set to Double ...
In the New Year, Debenhams announced the closure of nineteen stores. A further thirty Debenhams units are planned to disappear from the high street this year.
Analysts expect some 7,000 shops will be closed in 2020 with the loss of 125,000 jobs. High street losses are set to double, according to the Centre for Retail Research. The rate of closure and job losses last year was 3,300 stores closed and over 62,000 jobs lost.
According to official data from the ONS, some 20% of retail transactions take place on line. Exclude food and the number increases to almost one in three transactions lost to the high street. Add price pressures, a margin squeeze, rising staff costs, rent and rates just compound the crisis. The sector faces a severe structural crisis which does not reflect a wider economic malaise.
Latest update for growth confirms of just 1% growth in the third quarter. For the year as a whole we expect growth of 1.3% in 2019 with similar growth an upside possibility this year. Want to know more? Don't miss our Brabners Quarterly Economics Updates in Manchester and Liverpool later this month.
Investment is unlikely to provide a stimulus to growth as our latest update explains. Output will remain muted, we expect manufacturing output to be just 0.5% in the year. Service sector growth will slow to just 1.2% with some hope for the construction sector, rising by 1.6%.
No change in base rates, as inflation remains below the 2% target. We assume Sterling will trade in the $1.30 - $1.35 band with Brent Crude trading around $65 dollars per barrel. The unemployment rate will hover around current levels. A continued deterioration in the trade deficit is expected.
We await details of government spending plans and targets for the period of parliament. An increase in annual debt to around 3% of GDP is expected if election promises are to be maintained. Dominic Cummings may be recruiting "weirdos and misfits" into Whitehall, let's hope not too many end up in Treasury ...
Fed rates set to stay on hold ...
The Fed minutes gave a clear indication base rates are likely to remain on hold during the year. Election purdah will inhibit any action during the second half of the year.
Inflation will remain below target, unemployment will remain at current levels, despite the slow down in the manufacturing sector. No need for Fed action despite pressure from the White House.
Ten year U.S gilts closed down five points at 1.83% this week. Markets are unsure about the shape of the yield curve by the end of the year. We expect little or no movement in real levels by close of period.
It has been a great year for U.S. markets. Nasdaq gains of 36% over the year overshadowed the performance of the Dow (23%) and the S&P (23%). The FTSE was a straggler in comparison, rising by just 12% compared to 25% gains in Germany and France.
Of course all gains were flattered by the setbacks in December 2018. Falls of over 10% presented a great buying opportunity. Evidence of over extension in the Nasdaq will moderate our New World enthusiasm in the medium term, we expect limited upside in the year ahead.
Our "Empires of the Cloud" Fund (see below) posted gains of almost 50% led by Apple, Facebook, Microsoft and Alibaba. Baidu our only setback, the omission of Adobe (up 47%) our only regret. Markets expect further upside as the race for Artificial Intelligence and Streaming intensifies.
That's all for this week, have a great weekend. We will be back with more news and updates next week. Wishing you a Happy and Prosperous New Year,
The FTSE closed at 7,582 this week, that's a 500 point move since the start of month. Sterling fell back to $1.30 having tested the $1.35 level on post election euphoria.
UK markets were in "catch up" mode having been left behind by big moves in the U.S.A. and Europe. No threat of a Corbyn agenda and hopes for a trade truce between the Washington and Beijing boosted sentiment.
The Johnson government pushed the withdrawal bill through the house, with a majority of over 120. We are leaving the EU at the end of January. The new trade deal must be completed by the end of 2020 to "Get Brexit Done", the deadline built into law. It even made the Queen's speech in a clear message to Brussels. Fears of a "no deal Brexit" increased and unsettled currency markets.
Sterling pulled back to find support at the $1.30 level as fears the end of year deadline may be a stretch to far. Hawkish sounds of "No EU Rules and Regulations" pushed the probability of a no deal even higher. The excitement of free trade deals with the rest of the world, is in danger of overwhelming the practicality of embedded transactions with the rest of Europe.
One step forward, one step back. Sterling will trade in the $1.30 - $1.35 band over the near term. The FTSE will require consolidation at the 7,500 level with support at 7,300. A test of 7,750 will require a more conciliatory message from Downing Street, to convince traders and business, a trade deal with Europe can be secured ...
Inflation holds, unemployment falls ...
Strong economic data this week, provided support to market moves. Inflation CPI basis held at 1.5% in November, unchanged from prior month. Goods inflation increased slightly to 0.6% as service sector inflation eased to 2.5%. Markets expect inflation to move towards 2% overall by the end of 2020, with no evident pressure from producer prices for the moment.
The number of people in work increased slightly in October with 32.8 million in work and just under 1.3 million unemployed. The unemployment rate was unchanged at 3.8%. Average earnings eased back to 3.2% in October. We expect the average increase to be around 3.5% in the final quarter of the year, representing a significant real income gain over the period.
Low inflation, a strong jobs market and real income gains boosted consumer sentiment. The GfK consumer confidence index jumped 3% in the latest poll. Households were more confident about the future and were more likely to commit to large purchases. The election result is likely to provide a further boost to sentiment and spending in the near term.
The MPC voted to hold rates this month, Just two members of the committee voted for a rate cut. Low inflation, and a soft economy held sway in the decision making process. The Bank will hold off pending a review of the implications of the Brexit process. Courtesy would suggest the new Governor will have the chance to set the pace for the year ahead.
Andrew Bailey, Bank of England lifer and former Chief Executive of the Financial Conduct Authority was appointed to the role this week. The appointment was considered to be conservative and safe. No excitement for the Old Lady of Threadneedle Street considered best for now.
Latest update for growth confirms of just 1% growth in the third quarter. For the year as a whole we expect growth of 1.3% this year with 1.5% a possibility next year. Want to know more? Don't miss our Brabners Quarterly Economics Updates in Manchester and Liverpool in January.
Of Democrats and Dishwashers ...
Congress voted to impeach the President. Trump had other things on his mind. In a rambling speech in Battle Creek Michigan, the President spent part of a lengthy campaign rally bemoaning the problems of plumbing and the poor performance of dishwashers.
"Women tell me they have to run their dishwashers multiple times" the President explained. "Remember the dishwasher?
You would press it and boom, there would be an explosion. Five minutes later you open it up, the steam pours out. Now you have to press it twelve times".
The President has a thing about water regulations, impairing the performance of showers, bathrooms and toilets. He also has a thing about low energy light bulbs which make him look orange apparently.
The President faces trial in the Senate. The Democrats are in no rush to set the date. In a six page letter to Nancy Pelosi, Trump complained of an unprecedented and unconstitutional abuse of power. The process cheapening the "importance of the very ugly word impeachment". It is to declare open war on American democracy. "More due process was afforded to those involved in the Salem Witch trials" the President complained ...
That's all for this week, have a great weekend. We will be back with more news and updates on the 4th January. We will take a break over the break, here's wishing you all a Great Holiday, Merry Christmas and Happy New Year ...
A simple message stated with intense frequency, secured a "stonking" mandate for Brexit and an eighty seat majority in the House of Commons for Boris Johnson and pals.
"Get Brexit Done" the basic message, with auxiliary support for "health" and "law and order". It was the biggest Tory win since the eighties and the biggest Labour Loss since the thirties.
Masterminding the campaign was Isaac Levido, the 36 year old Australian protege of Lynton Crosby. The Tory slogan was linked to a relentless determination to stay on message. Ruthless execution was displayed. Jacob Rees-Mogg was locked up in a dark place following his Grenfell gaffe. Welsh Secretary Alun Cairns was sacked when a former aide was accused of interference in a rape trial.
Dominic Cummings stepped aside, Budgets didn't run to a suitable wardrobe for the "eminence grise". It was enough for the architect of strategy to step aside for the estate agent of the campaign. As Levido explained, "It's about getting your message across as many times as possible". The message included a "Love Actually" clip with the Prime Minister doorstepping a female voter. A for your eyes only "political billet doux" was offered with sound track, to the exclusion of a man in the house ...
For Labour, the result was a resounding rejection of a left wing manifesto and the a big "No to Jeremy Corbyn". The Tories questioned the spending plans as the campaign just kept on giving. Labour strongholds yielded under the bombardment. Dennis Skinner, MP for Bolsover lost his seat as life long voters moved to the right. "I have voted Labour all my life" said a former miner in the constituency, "but I just didn't like Corbyn or his cronies".
Confusion over Brexit cost votes for Corbyn. Assertion over Brexit cost votes for Jo Swinson. The Lib Dem leader lost her seat and leadership of party. Nicola Sturgeon was triumphant with a clear SNP majority in Scotland. The shadow of toll roads along the M6 looms, as the push for independence returns.
Corbyn will resign as leader. Boris Johnson will reshape his cabinet. We will leave the EU at the end of January, talks will take place to shape the trade relationship of the future.
Let the spending begin. 20,000 more in police service, 50,000 more nurses and 6,000 more doctors. More nurses, more doctors and a "crash team" for the economy. Growth is flat lining in the U.K. It will have to be a "stonking" budget. The election result will boost confidence in the short term. Uncertainty about the trade deal with the EU and calls for a referendum in the North will overshadow any short term exuberance as the New Year unfolds ...
The Democrats move to impeach ...
In the US, the impeachment process moves forward. President Trump will be just the third of forty five presidents to be impeached. Acquittal is surely to follow in the Senate. Mitch McConnell, Senate Majority leader has promised to work closely with the White House to ensure a "fair trial and a first class rebuttal" of all charges.
Donald Trump has already called the process "Impeachment Light" just two counts "abuse of "office" and "obstruction of congress" are on the ticket. The President listed many more claims which could have made the charge sheet, including bribery, corruption and profiteering from office.
Trump's approval ratings are unmoved by process. The Republican heartland is unswayed by the Democrat latest move. The economy continues to do well despite the Trump trade policy. The latest job figures point to continued growth into the final quarter of the year. Unemployment is just 3.5%. With no recession or inflation in sight, the Fed made no change to interest rates this week. No rate changes planned for the foreseeable future, the decision was a further boost to markets. So what was really on the President's mind?
The President took time, to lash out at Greta Thornberg. The young climate activist made the front cover of Time magazine as Time person of the year. A spot reserved for the President in his own mind at least.
"So ridiculous" Trump tweeted, "Greta should work on her anger management problem, then go to a good old fashioned movie with a friend, Chill Greta, Chill!" The sixteen year old responded with a twitter troll adjusting her twitter profile to respond to the leader of the free world's advice.
"What if Trump weren't nuts" the headline in Politico on Thursday. John Harris author of the "Altitude" column points out a disrupter with a smidgeon of self control would be remaking American politics and coasting to reelection. Instead we have a raging narcissist, who picks fights that no other President would pick.
Let us not forget, when asked about dealing with rocket man Kim Jong-Un, Trump explained :
"As far as dealing with a madman is concerned, that's his problem not mine ..."
Trump gets his trade deal ...
Markets rallied in the US and China this week as negotiators announced the outline of a phase one trade deal. The planned tariff hikes on Sunday will be abandoned. Some existing tariffs will be cut by 50%. The Chinese have agreed to restore some $50 billion dollars of agricultural products.
Trump needs a trade deal with China in the run up to the election. The USMCA trade deal with Canada and Mexico moved through congress this week. A "massive" deal with Boris Johnson is already in the pipeline. A softer touch with the EU is on the horizon. Into the New Year and Trump will focus on reelection.
With strong stock markets in support, "It's the economy stupid". The Fed will play it's part in the run up to the election. If only Trump would dial down the obsession with tariffs, the US would be a better place.
The campaign plan is well set. The Trump base secure. Impeachment will consolidate the process of re-election as the Democrats struggle to find a credible leader. A move to the left with Elizabeth Warren or a one term President with Joe Biden, hardly a great option to dislodge the incumbent ...
That's all for this week, have a great weekend. We will be back with more news and updates next week ...
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
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.