 Ambushed in Salzburg, the Prime Minister had no idea the Chequers plan was to be rejected out of hand. Twenty minutes before facing the cameras to make a speech about a "constructive" meeting with the EU President, Donald Tusk read out a prepared statement, "The suggested framework for economic co-operation will not work" he said bluntly. The Chequers plan rejected by "Brexiteers" and unloved by "Remainers" had met an inevitable fate.
A diplomatic disaster had taken place. Amendments were hastily made to her speech. Visible angered and shaken, the PM described the meeting as frank. "Blindsided and humiliated", the verdict of the Times today. Tusk compounded the problem with an Instagram post, a photo of the PM at a cake stand, with a caption saying "no cherries". A crude reference to the criticism of "Chequers" as "Cherry Picking" the best bits from any single market deal. The UK proposal was never going to be accepted by the EU, any more than it could be accepted by the Tory Party. Ollie Robbins, the Chief Brexit negotiator, compounded the problem, suggesting further concessions from Britain were not evident. "I said these negotiations would be tough" said the PM "they were always bound to be toughest in the final straight". "While both sides want a deal" she continued", "we have to face up to the fact that there are two big issues where we remain a long way apart". The Prime Minister is an optimist. "Only two issues to resolve, a long way apart, in the final straight". That's an underestimate of a contradiction in terms, one of many in the leave scenario. We are leaving the club whose rules we are trying to change as a condition of absence. "In the meantime, we must continue the work of preparing for a no deal" threatened the Prime Minister. If only we had any idea just what a no deal would entail ... Inflation increased in August ... Inflation jumped in August, CPI basis to 2.7%. Goods inflation increased to 2.8%. Service sector inflation increased to 2.5%. Always amusing to read some of the headlines on the day with a snap rationale of economics news. "Theatre prices push inflation higher" a particular favourite. The underlying reason is the rapid change in oil prices. Oil prices Brent Crude hover below $80 dollars now compared to $50 dollars in August last year. Transport costs made the largest upward contribution to inflation with prices rising by 6.0% in the year to date. The largest contribution within the transport group came from motor fuels. Manufacturing prices, better explain the story. Input costs increased by just over 8% in the month, driven higher by a 40% increase in crude oil prices. The rate of input inflation was actually lower than prior month. In July the price hike was nearer 10%. That's why, we expect the rate of consumer price inflation to moderate towards the end of year as oil prices work there way out of the index. CPI inflation will remain some way off the 2% target. No Christmas present for the Governor in the top line figures Goods new for retail. Volumes increased by over 3% in August. Spending in value terms increased by 5.6%. Don't write the consumer off just yet. The hot weather contributed to the growth in activity. On line sales increased by 14%, now accounting for 18% of all activity. If current trends are maintained, internet penetration will increase to 20% by the end of next year. That's one in five transactions out of the high street. Within five years, on line sales could account for 25%, that's one in four retail transactions. Food penetration is currently just 5%. The challenge - to get the online food model right. Amazon is leading the way with the acquisition of Whole Foods and the development of 3000 cash less stores. It's all about "managed footprint and last mile logic" ... Trade talks are off ... The Chinese are pulling out of trade talks ahead of the mid term elections. Confronted with further tariffs on $200 billion of goods, there would seem to be little point in talks with Washington. China will not return to the table any time soon Trump continues his political incantations in the search for votes. Japan is next in the firing line. The biggest deficit generator after China and Mexico, Tokyo will be pulled in for talks about trade. A 25% tariff on cars would be a real threat to local output. "Trade is bad" "protectionism is good" the White House mantra. But is it? Vivian Sayward, a manufacturer of athletic clothing in San Diego, is not quite so sure. Prices are expected to rise on a number of materials, including a polyester-Spandex-blend fabric heavily used by the firm. “This tariff was supposed to help American manufacturers, but truthfully, we may have to start manufacturing outside the U.S.," said Sayward, who founded Vivacity Sportswear six years ago. “I’m not quite sure, to be honest, how my business can survive long-term." Rising prices will be the result of higher tariffs. Higher prices will mean lost out put for many manufacturers and pain in the pocket for households and consumers. Apple was able to secure tariff exemptions for key products but Apple is an exception. The Trump proposal to assemble components in the USA subject to import tariffs from "Another Place" is illogical. The threat to world trade is significant as the IMF and the OECD have pointed out. Let's get the mid terms out of the way, the GOP may lose control of the House and the Senate, then we must hope, some semblance of sanity may return to talks about trade ... That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update this week, John
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 "The High Priest of Project Fear" was Jacob Rees-Mogg's depiction of the Governor of the Bank of England this week. The Governor had been in a Cabinet Meeting suggesting house prices would fall by over 30% in the event of a hard Brexit next year, allegedly.
The Arch Brexiteer was incensed. "The Governor of the Bank of England should influence events by the modest movement of eyebrows, rather than imitating a screaming banshee" he said. Unfortunately for the Mogg, long gone are the days of bushy eyebrows and the subtle draft of disdain as eyebrows are raised in modest reproach. The Governor has a job to plan for the worst and not hope for the best, as he explained in a Daily Mail article this week.. The Bank is not forecasting a fall in house prices as a result of a hard Brexit. The house price fall, along with a surge in unemployment and rising rates is one of several "stress tests" for the banking system in the event of a financial crisis. The extreme case is "Candles, Caves and Cans". One in which we are all "living in caves, lit by candles, eating out of cans". But then who would need a banking system and a central bank anyway. The Governor did explain there could be a £16 billion bounce to the economy in the event of a "Chequers" deal. Consumer confidence would receive a boost. Investment plans would be revised. A collapse in Sterling would be avoided. The sky would not fall down. Theresa May would be triumphant. The Governor knew what he was doing. Eighty MPs including Boris Johnson, David Davis and the Mogg have already said they would reject the Chequers deal. In quantifying the £16 billion boost, the Governor demonstrated a wry sense of humor. The "High Priest of Project Fear" had morphed into "The High Priest of Fun" ... The UK is hiring ... and paying more ... Good news on the economy this week, the unemployment rate held at 4% in July. The number unemployed was 1.36 million, Vacancies increased to 833,000 and pay increased by 3.1%. There was a big jump in public sector pay, matching the private sector increase. One months data can be subject to revision. The three months average, increased by a more modest 2.6%. We have long expected an increase in earnings to match the fall in unemployment, rising vacancies and recruitment difficulties. Is this the turning point? Perhaps. In other news, the ONS released the monthly GDP tracker data for July. The rate of growth increased to 1.6% year on year, following 1.3% growth in the second quarter. Services grew particularly strongly, with retail sales performing well. Activity was boosted by warm weather and the World Cup. The construction sector also bounced back after a weak start to the year. The legal profession performed particularly well. Manufacturing output continued to disappoint. According to ONS data, manufacturing output increased by just 1.1% in the month. [We expect manufacturing growth of just 1.5% this year, following growth of 2.5% last year.] It could get worse. The boss of Jaguar Land Rover, Ralf Speth, warned this week, of thousands of job losses in the UK in the event of a no deal Brexit. In June, JLR said it would shift production of its Land Rover Discovery to a new plant in Slovakia. The statement follows warnings from BMW, Nissan and and other large manufacturers including Airbus. The SMMT reported, car sales were down by 4% in the year to August compared to prior year. Diesel sales were down by almost 30%. Consumers are confused. We expect registrations to fall by 4.5% for the year as a whole largely as a result of the diesel shock. So what of interest rates? The Bank of England MPC voted unanimously to keep rates on hold this week despite the pick up on growth and earnings. The Fed is expected to raise rates again this year. A further rate rise on the UK seems possible this year, if current trends continue on earnings and inflation. Sterling closed up at $1.3068 against the Dollar on Friday and €1.1231 against the Euro. Ten year gilt rates closed up at 1.54 from 1.45. In the USA ten year bond yields closed at 3.0%. Uncle Sam has lift off from Planet ZIRP. A further weakness in Bond Prices would push U.S. rates back to normality, pegged at 4.5% ... Ignoring the Tweets ... West Wing aides are perfecting a Trump survival skill: Ignoring the tweets according to #Politico. The president peddled a conspiracy theory about the death toll from Hurricane Maria, White House officials went on as though he'd said nothing at all. Trump’s outburst, in which he peddled a false conspiracy theory that “Democrats” inflated the official death toll from Hurricane Maria to smear his image, was met largely with silence from his White House advisers. There was little effort to mount a major defense of the statement. Tweets will be tweets and then move on without comment the current policy. "When Trump visited the island territory last October," he tweeted "OFFICIALS told him in a briefing 16 PEOPLE had died from Maria" "then like magic 3000 people had been killed." Trump often reverts to the third person in his tweets. It's like an out of body (or mind) experience. "3000 people did not die in the two hurricanes that hit Puerto Rico. When I left the Island, they had anywhere from 6 to 18 deaths. As time went by it did not go up by much. Then, a long time later, they started to report really large numbers, like 3000..." Trump tweeted Thursday morning... "This was done by the Democrats in order to make me look as bad as possible when I was successfully raising Billions of Dollars to help rebuild Puerto Rico. If a person died for any reason, like old age, just add them onto the list. Bad politics". Gradually markets too are learning to ignore the tweets. Markets rallied on news of potential trade talks with China. Then slumped as reports emerged Trump wants tariffs on $200 billion of Chinese goods. News of instructions to aide to implement the tariffs did not affect markets this week. The Dow, S&P and NASDAQ closed higher in the week. Monday Morning Markets ... Find out more in our Monday Morning Markets. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week. Last week our eToro "Empires of the Cloud" returned to profit with a strong performance from Apple and Microsoft. Our eToro nine index tracker fund was up by 1.3% as fears of trade wars and Brexit faded from sentiment. That's all for this week, we will be back next week, with more economics, updates and market analysis. Have a great weekend, John  The great Washington "Who Dunnit" was launched this week. It was the search for the anonymous author of the Op:Ed in the New York Times. A damning revelation of life in the White House and the vagaries of life with the President.
The week had not begun well. Bob Woodward released his new book "Fear, the story of Trump in the White House". The book opens with a shocking anecdote about how the President's closest advisors seek to thwart the directives of an unreliable and unstable President. In one instance, according to the Washington Post, Trump had ordered a letter announcing the U.S withdrawal from a trade agreement with South Korea. The then Chief Economic Adviser, Gary Cohn, realised the initiative would be a disaster for U.S. policy. The solution for Cohn, just take the letter out of the President's in tray. Out of sight out of mind, Trump's limited attention span would buy time and short circuit Trump's impulsive policy pronouncement. No fan of GTD, the President doesn't even keep a list apparently. Members of staff would frequently work together to block the President's most dangerous initiatives. Jim Mattis Defense Secretary ignored an order to assassinate Syria's President Bashar al-Assad? Top Brass ignored the President's diktat on trans gender people in the military. Trump's views on world trade are evident. On one speech he had written "Trade is Bad". When Cohn asked the President why he clings to such beliefs, the President responds: "I just do, I have had these views for thirty years". The book "a work of fiction" according to Trump was bad enough. Then followed an anonymous editorial in the New York Times. "I Am Part of The Resistance Inside The Trump Administration" the article declared. I work for the President but like minded colleagues and I have vowed to thwart parts of his agenda and his worst inclinations. The root of the problem is the President's amorality and lack of principle. A disrespect for free minds, free markets and free people. Declaring the Press as the enemy of the people is dangerous. Trump's impulses are anti democratic and anti trade. The President's style is impetuous, adversarial, petty and ineffective. He engages in repetitive rants, off topic and off the rails. Impulsive responses lead to half baked, ill informed, reckless decisions which have to "walked back". Trump has also a extended capacity for mendacity. Advised not to testify to the Mueller investigation, "It's either that or an orange jump suit" advised Attorney John Dowd in March. The President's ability to avoid reality would make it difficult to avoid the inevitable lies under oath, the suggestion. Uncle Sam is hiring ... Meanwhile Uncle Sam is hiring. Unemployment is falling. Job growth continues. Non Farm Payrolls grew by 201,000 in August. Over 153 million Americans are now in work. The unemployment rate fell to 4.3%. Pay rates increased by 2.5%. The US economy is expanding rapidly. The US economy will grow by around 3% this year. US inflation is 2.9% in the latest figures and set to move higher. Borrowing is increasing, a function of tax cuts and expansive spending plans especially on the military. Ten year bond yields increased to 2.94% as Fed hikes loom. The trade deficit is increasing a function of strong growth relative to the rest of the world. The U.S. trade deficit rose to a five-month high in July, with the politically sensitive gap with China hitting a record high. The Commerce Department said the trade deficit increased 9.5 percent to $50.1 billion as exports of soybeans and civilian aircraft dropped and imports hit a record high. Government’s policies including the $1.5 trillion tax cut package early this year will worsen the trade deficit. The fiscal stimulus has boosted consumer and business spending, drawing in more imports. US investment increased by 7% in the second quarter. The U.S. cannot enjoy an investment boom without a surge in imports of capital goods ... the deficit is set to move higher ... "Trade is bad" ...especially with China Trump threatened to extend the tariffs on imports from China this week. Traveling on Air Force One, Trump told reporters he could put tariffs on a further $267 billion of Chinese goods "If I want to". This is in addition to the initial round of tariffs on $50 billion, followed by a second wave $200 billion. The remarks prompted a 100 point drop in the Dow Jones average. Apple warned that tariffs would raise prices for US consumers. Prices for the Apple Watch and Air Pods would be hit. Adapters and Charges for most products would also be hit. "It is difficult to see how tariffs that hurt U.S companies and U.S consumers will advance the Government's objectives with regard to China's technology policies" the company explained. "We hope you will reconsider these measures and work to find other more effective solutions that leave the U.S economy and U.S. consumer stronger and healthier than ever before." Trade is bad, the probable response. The President is hoping to close the deal with Mexico and Canada ahead of the mid terms. Europe and Japan are set aside for the moment. China remains public enemy number one. The President needs a pantomime villain on stage in the run up to November ... China fits the bill despite the damage in the short term ... Don't Miss Our Monday Morning Markets ... Don't forget! Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our eToro "Empires of the Cloud" was hammered as tech and NASDAQ stocks took the hit. Our nine index tracker fund was off by over 2% as fears of trade wars and Brexit uncertainty dominated sentiment ahead of any September shakedown. Don't miss that! That's all for this week, we will be back next week, with more economics and market analysis. We may even talk about the UK economy next week Have a great weekend, John  The Prime Minister was in Africa this week. All the right moves, Theresa May was obliged to dance to a foreign tune. A welcome distraction from the Brussels ballroom perhaps. The world has not seen such great steps, since Lady Penelope's puppet strings snapped at the Thunderbirds Christmas Party in 1968.
The headlines were great in the end. No one really bothered to ask about the priorities for truly global Britain and the push to become a 21st century Exporting Superpower. Was the visit to the Dark Continent really the "Right Move"? South Africa ranked number 27 in the UK's top markets for exports in 2017. Exports were £2.4 billion slightly down on prior year. Imports were £3 billion. The UK has a trade deficit with Cape Town which is likely to increase with any new trade deal. Nigeria, Number 37 in the export list, also featured in the itinerary. UK exports to Nigeria were valued at £1.3 billion last year, offset by a similar level of imports. Kenya, always worth a visit, does not feature in the top fifty markets for truly global Britain. The Prime Minister was "Proud to be the first Prime Minister to visit Kenya for thirty years". Thatcher was the last to make the trip. Exports to Kenya were worth Sh27.3 billion in 2017, about £200 million. Imports were valued at Sh38 billion, almost £300 million. The Prime Minister pledged to make the UK the biggest investor in South Africa among the G7 countries. The USA is the one to beat. China is moving up the ranks fast. It's not sure where the money will come from. UK ten year gilt yields jumped last week. The "kindness of strangers" evaporated slightly in July. Johnny Foreigner dumped government bonds in view of the gloomy outlook for the Brexit deal. How's it going Dominic ... The Prime Minister was able to keep in touch with the Brexit Secretary this week. "How's it going Dominic?" Would the Brexit Boy be able to pull a rabbit out of the hat in dealing with Barnier? Well at least he is talking and making the visits, which is more than can be said for his predecessor. Macron had made a plea for a soft deal with Britain. Barnier returned to the Irish Border issue and recognition of brand rights for French cheese and Champagne. A "soft deal for soft cheese" the slogan. There may yet be progress. Northern Ireland may have to sacrifice the annual move to British Summertime to stay in synch with the rest of Ireland through the year. Nothing in the Good Friday agreement about that. The October deadline will have to slide. Talks continue to provide the basis of agreement. The hard liners strangely silent for the moment. Rees-Mogg offered a second referendum by way of compromise, in twenty years time perhaps. "A soft deal for soft cheese, with a glass of champagne" In other UK news this week, Car production fell by 11% in July. Output is down by just over 4% for the year. Output for domestic sales fell by 16% in the year to date, export output was down by just 1%. Diesel does the damage. Mike Hawes Chief Exec of the SMMT said "To ensure future growth, we need political and economic clarity at home and the continuation of beneficial trading arrangements with the EU and other key markets." Well, Amen to that ... How's it going Donald ... Trump threatened to pull out of the World Trade Organisation this week. He would actually need the approval of Congress to do that. It is, however, a measure of the "isolationist" trend in the White House. The President claimed Europe was as bad as China. "It's just smaller that's all" The EU had offered to abolish tariffs on US cars completely. So what's wrong with that? "Not good enough" the Trump response. They don't like our cars and would have to buy more. Ford has a 10% share of the UK car market and a 6% share of the EU market overall. We will have to do better! Markets shuddered as the threat of a trade war with China escalates. Some $200 billion of China imports will be subject to tariffs in the next round. Ford decided not to import Chinese production into the USA for the foreseeable future. Seems like a good move for the moment. Good news, the USA agreed the NAFTA deal with Mexico. The proportion of car components to be sourced from North America will increase to 75% from 62.5% currently. The deal includes a minimum wage provision and the relaxation of the "Sunset Clause", whereby the agreement is subject to formal review after a set period. Just don't call it NAFTA! "We’re going to call it the United States-Mexico Trade Agreement. We’re going to get rid of the name NAFTA." USMoTA? Maybe we should just call it the Trump Make America Great Again Deal. Part 1. Part 2 will be the inclusion of Canada. "Canada will start negotiations shortly," Trump said. "I'll be calling the prime minister very soon. And if they'd like to negotiate fairly, we'll do that. You know they have tariffs of almost 300 percent on some of our dairy products, so we can't have that. We're not going to stand for that." Trump needs a few good deals ahead of the mid terms. Then comes the EU and China. Talk loudly, Twitter often and carry a big floppy stick. The President's approval ratings slumped this week. Trump continues to rate his own performance very highly. "I give myself an A+". "How can they impeach anyone doing so well?" he asks ... Don't Miss Our Monday Morning Markets ... Don't forget! Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our eToro "Empires of the Cloud" jumped by 4%, thanks to a great performance from Square, Amazon and Apple. Our index tracker fund was up by just 0.3%. European stocks slipped on Brexit fears. US stocks performed well across the board. The Dow and S&P rallied as NASDAQ surged. That's all for this week, we will be back next week, with more economics. and markets. Have a great weekend, John  Good news for the Chancellor this week. Borrowing fell once again in July, compared to prior year. In the month, the surplus was £2 billion compared to £1 billion in 2017. The year to date comparisons were even more impressive. In the first four months of the financial year, borrowing was just £12.8 billion compared to £21.3 billion last year.
VAT receipts were up by 6%, Income tax and capital gains tax receipts were up by 6%. Interest payments were down by some £2 billion. Interest receipts under the "money for nothing, gilts for free" programme [QE] were up by £2 billion. Spending was up by less than 1% as the austerity policy continued. Social security payments were up by almost 3%. Extrapolate the four months trend over the year as a whole and borrowing could fall to £24 billion this year, compared to £39.4 billion last year. This is unlikely. Last month we revised our forecast for the current year borrowing to £30 billion. This remains a fair forecast for the moment. Retail sales in the first four months were up by 4% in value terms. Jobs growth was up by 1%. The average earnings spread was 2.5%. The underlying numbers suggest receipts were flattered in the year to date. The momentum of lower borrowing may slow over the rest of the year. The Chancellor warned this week, borrowing may rise by some £80 billion over the next decade. If hard Brexit becomes the reality, slower growth and rising unemployment will over shadow the outlook for truly global Britain. Should we really be worried about Brexit ...? Your sandwiches safe in my hands ... Dominic Raab provided an assurance this week, there would be no sandwich crisis in the event of a hard Brexit. "So let me reassure you all that, contrary to one of the wilder claims, you will still be able to enjoy a BLT after Brexit. There are no plans to deploy the army to maintain food supplies." Stories had been circulating in Westminster, the government planned a three month stock pile of "Bacon, Lettuce and Tomato" sandwiches delivered to Sainsbury's by the SAS if need in the event of a food crisis. With 10,000 lorries per day delivering food from the EU to the UK some concern was inevitable. Dominic Rabb, Secretary of State for Exiting the EU had the thankless job of addressing concerns about a hard Brexit. The Government released this week the first batch of "What would happen under a hard Brexit" papers. Twenty Five of a planned eighty two in fact. It made for some difficult reading. It now seems clear in the event of a hard Brexit, we will lose all control of regulation and product standards. Business will be tied up in the red tape and administration, we had clearly sought to avoid by leaving the EU. The Government told companies to “consider how they will submit customs declarations in the future. They should engage the services of a customs broker, freight forwarder or logistics provider to help, or alternatively secure the appropriate software and authorizations” to assist. As for standards and regulation ... The UK would take "unilateral action" to "maintain as much continuity as possible". "We will accept the testing and safety approvals of existing medicines if they're carried out by an EU member state". We will hope the EU would do the same for us. The UK will unilaterally recognise EU food standards and pursue equivalency arrangements on food regulation. We hope the EU will do the same for us. Defra minister George Eustice told a Lords committee his department would implement a 'mutual recognition' regime, which amounts to assuming food from the EU was safe to eat, hoping they will do the same for us. Really? Transport secretary Chris Grayling told the BBC in March that "we will not impose checks" at the port of Dover. Let 'em drive through with illegal immigrants clinging to the differential axis presumably. In further bad news, UK expats were warned they may not be able to access pension payments or bank accounts for that matter in EU countries. Banks were advised to open offices in Dublin or along the Danube if things get tough. Car manufacturers will be advised to relocate within the customs union as a next step. "Britain : A 21st Century Exporting Superpower" Liam Fox, declared this week, Britain can become a 21st Century Exporting Superpower following Brexit. Exports can be boosted to 35% of GDP if only 400,000 businesses would begin to export or export more. It isn't really clear how things will be so much easier once out of the EU. German exports to the BRIC countries, China, India, Russia and Brazil were over four times higher than that of the UK last year. German exports to China were valued at almost $100 billion dollars compared to less than $25 billion for the UK. Exports to the USA were over twice the levels achieved by UK traders. It's all about capacity in the manufacturing sector. Capacity further inhibited outside of the customs union, especially in motor, aerospace and big pharma. The clock is ticking. The difficulties are compounding. Time is running out. Taking back control, free from red tape and regulation may not be so easy after all. Need more information on the monthly data? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data with some great charts and forecasts, you can copy and use at will ... Don't Miss Our Monday Morning Markets ... Don't forget! Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our eToro "Empires of the Cloud" jumped by 1.4%. Thanks to a great performance from Square and Twitter. Our index tracker fund was positive across the board as our predicted rally in the DOW, NASDAQ and S&P materialized. Our funds are in the black, despite a continued setback on FB and Alibaba That's all for this week, we will be back next week, with more economics. and markets. Have a great weekend, John  The fundamentals for the Turkish economy are pretty weak. Strong growth has been secured at the expense of high inflation, a balance of payments deficit and high external dollar borrowing. With interest rates, already well into double figures, markets were calling for short interest rates to rise into the mid twenties to combat inflation and stabilize the currency.
The Trump tariffs were the trigger for collapse in the Lira. The currency fell by 20% against the Dollar last week. Contagion fears pushed markets lower in Europe and the UK. Stocks fell in China, Hong Kong and Japan as fears of trade wars increased. Emerging markets came under pressure. Currencies in Argentina, South Africa, Thailand and even India came under threat as sentiment flowed in favour of Uncle Sam and the currency of choice. It's all about the Dollar. The Fed plans further rate hikes this year on the back of strong growth and rising inflation. The impact of the tariffs were slightly irrelevant. Turkey exports just $1.5 billion in metals to the USA. The geo political significance of the move was more significant. The US is prepared to move against an ally on the strength of a whim from the White House. Turkey is planning to buy the S-400 missile defence system from Moscow. Trump threatened to pull the sale of US F-35s to Turkey. Does that make sense? Not really. Trump is upset. "Turkey has taken advantage of the United States for many years." he tweeted. "They are now holding our wonderful Christian Pastor hostage. We are cutting back on Turkey!". The message to friend and foe alike is evident. Strategic partnerships do not from part of Trump diplomacy. There is no think through on actions taken. Russia interests will be strengthened in Eastern Europe. China's interests will be accelerated around the world. Membership of NATO will no longer make much sense to the buffer state. Russia and China were quick to offer support both in terms of trade and finance to Ankara. As for contagion, the real threat of spread is limited. This is not a prelude to the financial collapse of 2008, nor is it likely to be as significant as the "taper tantrum" of 2013. Emerging markets are in better shape, with lower inflation, higher foreign reserves and flexible exchange rates. With the exception of Argentina perhaps, the major problems are unique to Turkey. The Turkish economy grew by over 7% in the first half of the year. Inflation hit 16% in July. A rising balance of payments deficit funded by dollar borrowing led to a hike in risk spreads on the currency. Trump's tariffs were the catalyst for the Lira collapse not the cause. Should we be worried? Not really It is August, most traders are away on holiday. Those at their desks will delight in Turkish turmoil for now. The fundamentals remain strong for the world economy. Once the mid terms are out of the way, we expect peace to break out amongst the threat of trade wars. Making America Great Again will become the priority. It will not be achieved by punitive tariffs and sanctions often in contradiction of American interests ... Back in the UK ... Inflation increased to 2.5% CPI basis in July. Goods and Service sector inflation were unchanged at 2.6% and 2.3% respectively from prior month. The headline marker should probably have increased in June. Weaker currency and a recovery in oil prices largely to blame, we expect inflation to remain above target for the rest of the year closing around 2.4%. Producer prices increased by just 3.1% in July. Input costs on the other hand, increased by almost 11%. Oil, fuel and imported metal costs largely to blame for the hike. It's a familiar story. Rising oil prices and a currency under pressure lead to higher domestic prices and a real household income squeeze. Manufacturing margins will be inhibited as output remains flat. Manufacturing output in the second quarter was up by just 1.5%. "Manufacturing Margins Under Pressure" News from the retail sector was more upbeat. The volume of retail sales increased by 3.5% in July. The value of sales increased by almost 6%. So much for a squeeze on spending. Online sales increased by 15% now accounting for over 18% of retail sales. The squeeze on traditional retail continues, placing further pressure on high street structures. Job news was also good this week. Unemployment levels fell to 1.36 million in June. The unemployment rate fell to 4.0%. The number of vacancies increased to a record high of 828,000. Recruitment difficulties are increasing. So what happened to pay? The low pay anomaly continues. Despite the strong jobs market, whole economy earnings fell to 2.4% in June. Construction pay increased by 5%. Our "brickies" index is going through the roof! Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data with some great charts and forecasts, you can copy and use at will ... Don't Miss Our Monday Morning Markets ... Don't forget! Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our "Empires of the Cloud" fund took a hit. We moved into China taking a hit on the index and our online pair of BAIDU and Alibaba. We are still in profit thanks to a great performance in Apple, Square and Twitter. Our index tracker fund shows the damage from the "Turkish Turmoil". Much red in Europe and South East Asia led to an overall loss of just over 1% in the week. We expect a big rally in the return to work phase ... coming soon! That's all for this week, we will be back next week, with more economics. and markets. Have a great weekend, John  "Economic growth rebounds as feel-good World Cup boosts growth", the headline in the Telegraph today. Let's not get too excited. Underlying UK growth in the second quarter was just 1.3% compared to 1.2% in the first. Not much of a rebound really, as we warned in The Saturday Economist last week.
We expect growth of 1.4% this year and a similar level next. The pattern over the last three months remains very much the same. Service sector growth of 1.5%, supported by strong growth in transport, storage and communications. We expect an ongoing, weak performance in production and construction. Manufacturing growth was up just 1.3%, construction increased by 0.8%. Government related services increased by just 0.2%. In spending terms, household spending, investment, and government expenditure increased by an average 1%. Domestic demand is moribund. Growth hopes are sailing away. The trade deficit increased in the second quarter, compounding the woes for the UK economy. Sam Coates writing in The Times today, suggests there is an "end of days feel in Westminster. A cry out for strong leadership". This is as true over Brexit as it is over the economy. "A sense of helplessness and drift" borne out of a lack of direction and development of policy. Fears are increasing, Britain will leave the EU without a deal. Sensing the mood, Sterling fell on Friday to $1.27 against the Dollar. It will surely test the $1.25 level this week. Sterling closed down against the Euro closing at €1.1188. The holiday season is upon us. Holiday makers will face expensive trips abroad over the next few months. Let's make a wish ... Iran, Turkey and Russia where under pressure this week. Congress announced sanctions against Russia for the nerve gas attack in Salisbury. Sanctions were announced against Iran for violations of the nuclear treaty. The President announced a doubling of tariffs on steel and aluminum imports from Turkey because, well, because he could. Aluminum imports from Turkey will face a 50% tariff on arrival in the USA. The Turkish lira plunged by 20% against the Dollar. The Russian Rouble fell by 12%. Sentiment is with the Dollar as forecasts for US growth this year are increased to over 3%. The Fed plans two more rate hikes in 2018. The problems for the Turkish economy are increasing as inflation increased to 16% in July. The Central Bank increased base rates to near 18%. Ten year bond yields jumped to 20.8%. The economy faces a crisis with fears of contagion impacting on lenders across Europe and the US. Trump tweeted "Our relations with Turkey are not good at this time". "The Turkish Lira slides down against our very strong Dollar". So true! "Our relations with Turkey are not good at this time" In other news, Trump tweeted, "The deal with Mexico is coming along nicely" "The new President has been an absolute gentleman". Enrique Peña Nieto is in. Justin Trudeau is out. "Canada will have to wait. Their tariffs and trade barriers are far too high. I will tax cars if we can't make a deal". Trudeau made the mistake of squeezing the President's hand too hard when they first met. The price must be paid, if we are to make America Great again. The trade wars with China continue to escalate, adding tension to world economies and markets. Somewhere in the Pacific a a giant shipload of soya beans circles off China. A victim of the trade war with the US. Trump unveiled a second round of tariffs on $16 billion of Chinese goods. China responded in equal measure. The Peak Pegasus is a bulk carrier with a 43,000 tonne capacity. The vessel rushed to port to unload before tariffs came in to force. Too late, the ship owned by JP Morgan Asset Management was turned away. The good news soya bean prices have jumped. Just as well. The charter costs are $12,500 dollars every day as it circles around in the Yellow Sea. Who would have thought tariffs could be such fun. Trump has discovered trade tariffs can be used just like late payments to suppliers in the construction business. No need for approval or just cause for that matter. Just a tweet and chaos ensues. The President is now on a working golf vacation. Time alone with Fox News and Twitter. White House staffers are nervous, any semblance of control now abandoned over the break ... Don't Miss Our Monday Morning Markets ... Our Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our eToro "Empires of the Cloud" fund recovered. The NASDAQ moved up. We are in the black and 90% invested. Don't miss the updates. It's just for fun. That's all for this week, we will be back next week, with more economics. Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data. Have a great weekend, John  Rates up, Sterling falls, the Bank hikes UK rates to 0.75%, Markets had expected a rate rise this week. The unanimous decision to increase base rate was a surprise to many. The concerns of group think in Threadneedle Street are enhanced.
So what prompted the move this week? According to the Governor, employment is at a record high, there is limited spare capacity, real wages are picking up. Domestic inflation pressures are increasing. The prospect of excess demand is emerging. Earnings may have increased to 1.75% around the middle of this year. UK growth is estimated to have rebounded in the second quarter. An underlying trend is emerging following the weather affected performance in the first quarter. The Bank expects growth of 1.5% this year. "With domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy is now appropriate to return inflation to the 2% target and keep it there." Is this the right decision? Well probably but for the wrong reasons. Growth in the second quarter is unlikely to have accelerated much in Q2. This according to the short term GDP trackers from the ONS and NIESR. The Governor may cite a recovery in construction output in May but monthly building data is incredibly volatile and subject to revision. Danny Blanchflower has condemned the move. "Raising rates is a big mistake. The decision is made on the basis wage growth is about to skyrocket. It isn't. The decision will have to be reversed." Is it really about wages? The Bank is concerned about the rising possibility of a "no deal" Brexit and a shock to output. The Banking system is "mission ready" with adequate liquidity to absorb a Brexit setback. The Central Bank would like to be in a position to cut rates to ease pressures within the economy in the event of a Brexit shock. It has to put rates up first before it can bring them down again. It is what one might call the "Grand Old Duke of York" Strategy. "March rates up to the top of the hill and march them down again". They won't get very far up the hill before there may be a need to act! The bank is suggesting one rate rise per annum over the next decade. Rates would cap out at just over 3% by the end of the next decade. Forward guidance returns, now with a much longer perspective. The Governor's bearish statements on a hard Brexit pushed sterling to $1.29 against the Dollar before a pullback about the $1.30 floor by end of week. Jacob Rees-Mogg was unimpressed. "Mark Carney has long been the high priest of project fear. His reputation for inaccurate and politically motivated forecasting has damaged the reputation of the Bank of England". Ouch! Some Brexiteers, so tough to please ... Trade wars escalate ... Over in the USA, The White House is considering increasing the proposed tariffs on $200 billion of Chinese goods to 25% from the current 10% initially proposed. China has responded with a threat to increase tariffs on $60 billion of US imports into China. The import taxes would range from 5% to 25% applied to four categories from agriculture to metals and chemicals. Beijing has made it clear, any threat of trade wars or blackmail, will only lead to intensification of conflicts and damage to the interests of all parties. The White House has called on China to address the longstanding concerns about unfair trading practices. According to CNBC there is "Zero Engagement" between the Trump administration as the tensions rise between the two super powers. It's a stand off but who will blink first? China markets wilted this week on the threat of trade wars. The threat to growth will push China to accede to Trump demands is the theory. The political reality suggests otherwise. US business hates a trade war. The tariffs will increase inflationary pressure, lower real demand and damage profits. The White House is realigning. Trump is creating warm overtures to Europe suggesting a free trade deal across the Atlantic. A Mexican stand off is near settlement opening up the prospects of a NAFTA agreement encompassing once again a deal with Canada and the Southern state. The Republican party would like to avoid a trade war on any front. The harsh rhetoric between Beijing and Washington must continue until the mid term elections this year. Trump's base audience loves the tough talk with China. America First the claim. Trump cannot abandon the aggressive trade platform completely. His core base cannot be denied the dogma in the run up to the election. The GOP may lose control of the House in November? It could be a close call. Either way, once the votes are in, an accommodation with Beijing will be sought. The trade deficit is increasing as growth accelerates in the USA. Debt levels are rising as spending plans and tax cuts take effect. Tax cuts of $1.2 trillion and military spending increases of $800 billion will compound the underlying weakness of Trump's grand plan. A $22 trillion deficit will need the "Kindness of Strangers" to avoid a funding crisis and a run on the Dollar in the medium term. Don't Miss Our Monday Morning Markets ... In July, we launched our Monday Morning Markets. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. It's just for fun. Last week our "Empires of the Cloud" fund took a bath on Facebook. Wiping out our gains for the month as a whole. This week, we backed up the Facebook position and moved in on Twitter. The Apple results boosted share prices, The NASDAQ and the DOW moved up. We are back in the black and 40% invested. Don't miss the updates. It's just for fun. Like the tennis scores. That's all for this week, we will be back next week, with more economics. Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data. Have a great weekend, John  The Monetary Policy Committee is set to meet next week. Tom Knowles, Economics Correspondent in the Times today, thinks rates are almost certain to rise when they do meet.
Silvana Tenreyro [Photo] is Professor in Economics at the London School of Economics and an external member of the Monetary Policy Committee. Silvana has been a member of the MPC since July last year. Silvana is considered to be a dove. If rates do rise next week to 0.75% from 0.5%, it will for just the second time since 2007. Ten year gilt yields jumped five basis points this week from 1.23% to 1.28%. Markets are attaching a high probability to the rate rise. It is hard to see why exactly. Unemployment is steady at 4.2%. Inflation remains above target and is likely to remain so for the rest of the year. Earnings growth fell back to 2.5% in the latest data for May. Oil prices are unlikely to rise much further as we explained on our note this week. Food prices may escalate as a result of the severe weather impact on crop performance but the overall performance of the UK economy is muted. We expect growth of 1.2% in the first quarter of the year, to be echoed in the second quarter. The Bank should be moving to 'normalise" rates. The old norm of 4.5% base rates and ten year gilts appears as a complete anachronism. 1.5% is the new "normal now" for base rates or so it would seem. For Andrew Sentance, writing in the Times today, it's hard to avoid the conclusion the Bank has left it too late already. "ECB rates on hold until September ..." The ECB made clear this week, EU rates are on hold. September next year is considered to be the earliest possible date for a rate increase. Governor Carney is anxious to ensure rate hikes do not damage prospects for growth, before his tenure ends in June next year. There is no real reason why the Bank should move next week. Opportunities have been missed in the past. They may well be missed again next week ... Eyes on the Fed ... Over in the USA, all eyes are on the Fed. Ten year bond rates closed up ten basis points this week at just under 3%. The Fed has begun the process of normalisation. At least two rate rises are expected before the end of the year with at least three more penciled in for 2019. Rate hikes are expected in September and November. The Fed is not expected to change rates next week. Don't be too surprised in the move is made. US base rates will range within the 2.25% and 2.50% by the end of the year. The Fed blue dot markets expect rates to rise to over 3.5% within a two year period. The pressure will remain on Dollar strength at the expense of the Euro, Yen, Yuan and Sterling. Further weakness in Sterling against the Dollar is inevitable as short and long rate spreads widen. "US Economy grew by 4.1% in Second Quarter" The Federal Reserve will be emboldened to act with the release of the latest US GDP data for Q2. The US economy grew by over 4% in the second quarter of the year. Consumer spending, exports and business investment all assisted in the powerful performance. Government spending helped as did the $1.2 trillion tax cut. Trump hailed the performance as "Amazing" a result of his policies on tax, spending and trade. "Once again we are the envy of the entire world" Trump declared outside the South Portico of the White House. "We have accomplished an economic turnaround of historic proportions" he added. Well not quite, the economy has been in a growth phase over the past nine years. The fiscal boost and government spending boom will accelerate growth along with government borrowing and the trade deficit. Stock markets are boosted by strong prospects for earnings and stock buy backs. In the first three months, following the change in taxation policy, some $300 billion of overseas earnings were repatriated into the USA. A further $2 trillion dollars may flow back to Uncle Sam within the next two years. Stock buy backs rather than investment may be the priority for the cash boost. Concerns continue about the prospects for trade wars with China and the rest of the world. Eyes on the Fed ... Trump is watching ... The US economy grew by 2.8% year on year in the second quarter, following growth of 2.6% in the first three months of the year. Nominal GDP increased by over 5.4% in the second quarter. We expect US growth of over 3% this year. Nominal growth will be over 5.5%. The export surge in the second quarter is an anomaly. An element of front running soya beans ahead of the tariffs to follow. The IMF forecast growth of over 6.5% for China, with a minimal impact from a trade war with Trump. This week Venezuela warned of an inflation rate of one million per cent per annum. Egocentric dictators with little grasp of fundamental economics lay the ground work for hyper inflation in South America. It is not a confined regional phenomenon. Uncle Sam is a strong "buy" over the next eighteen months but US rates may have to rise beyond the "Blue Dot" horizon if double digit inflation is to be avoided in the years ahead. "Rates may have to rise beyond the Blue Dot Horizon" Jerome Powell head of the Fed has warned of the dangers of the trade wars and the need for rates to rise. As we mentioned last week, Trump is displeased and has moved on the Fed with his latest pointers on how to run monetary policy. "I am not thrilled" "I am not happy about it". So will the Fed move next week ... the odds have increased following the GDP data and the Trump advice. August or September it really doesn't make much difference in the short term. Focus on the growth data, the real comparisons year on year. Real growth of 3% and nominal growth approaching 6% suggest rates will continue to rise on a steady path pushing ten year bond rates back to 4.5% where they belong ... Don't Miss Our Monday Morning Markets ... Earlier this month we launched our Monday Morning Markets. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. It's just for fun. We are not licensed for the giving of investment advice. This week our "Empires of the Cloud" fund took a bath on Facebook. Wiping out our gains for the month as a whole. What next do we take the hit or average in at the new low? The move on Twitter has opened up the "Buy" target. Don't miss this week's edition. That's all for this week, we will be back next week, with more economics. Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data. Have a great weekend. John  Government Borrowing fell in the month of June compared to prior year. Strong receipts, a tight hold on spending and a reduction in the monies paid to Brussels helped to reduce the pressure on Treasury coffers.
In the month, borrowing was just £5.4 billion compared to £6.2 billion in 2017. In the first quarter, the cumulative total was £16.8 billion compared to £22.2 billion in the same period last year. The Chancellor is on track to reduce borrowing in the financial year to £30 billion, compared to £39 billion last year. It hasn't been so low for over fifteen years. The OBR were forecasting £37 billion this year, leading some to suggest the Chancellor has £7 billion to give away in the Autumn budget.That's nonsense of course. The economics decision would be to hold the line and continue to eliminate borrowing. Let's not forget we have some £1.8 trillion of government debt outstanding. That's about 85% of GDP. The political decision may be to ease spending gradually but in the midst of the Brexit confusion, such political gestures would be futile. The Chancellor would be better advised to hold tight for the moment. There may be worse problems to come, if a hard Brexit is the outcome of talks with Johnny Foreigner ... "Unemployment Steady, Earnings Fall ..." What to make of an economy in transition? The unemployment was 4.2% in the three months to May. The number of unemployed was just over 1.4 million. The number of vacancies increased to 814,000 in the three months to June. Recruitment difficulties in service sector leisure are evident. Earnings eased back in the latest data. In May the average level of earnings was just 2.5% down from 2.6% prior month. The economy appears to be stalling if the job figures are a guide. The improvement in the government deficit is more a function of austerity and a Brussels bonus, than the underlying strength of the UK economy. We expect the jobs data to trade sideways over the rest of the year. Retail Sales and Inflation ... Retail sales in the month of June increased by almost 3% in volume terms and by 5.3% in value. In the second quarter of the year the value of retail sales increased by 5% compared to 4% in the first quarter. Too easy to trot out nonsense of a squeeze on household incomes and spending, consumers are out there with credit cards and pushing those pin numbers. It is the pattern of retail sales which overhangs the high street. Smaller retail footprints, the importance of multi channel. Rapid response turn round especially in the fashion sector. The dinosaurs are ageing in the face of an online challenge. Online sales volumes increased by 14% accounting for 18% of all retail sales in June. 25% on line penetration seems feasible within the next five years. Textiles, clothing and footwear will lead the way. "Inflation steady in June CPI holds at 2.4%" Oil prices Brent Crude basis averaged $74.4 dollars in the month of June. That's a 64% increase on prior year. The pressure on manufacturing prices was evident. Input costs for converters increased by 10% in the month. Output costs increased by 3.1%. The largest component in the rise was of course, fuel and energy costs. So what happens for the rest of the year? Assuming oil prices stay at current levels, the inflation impact will mitigate to around 30% in the third quarter and 20% in the final quarter. We expect input costs to ease to around 6.5% by the end of the year. Output costs will fall to around 2.7%. CPI inflation held at 2.4% in the month. Goods inflation eased up to 2.6% but service sector inflation was just 2.3%. For the rest of the year we expect inflation to remain above target. Soft data on earnings and inflation will allow the MPC to avoid a rate rise next month. We expect CPI inflation to be 2.4% by end of year. Chaos on Trade ... Chaos on Trade. Trump is on the case. The meeting in Helsinki with Putin went very well. So much so, Trump intends to invite Putin to the White House in the Autumn. Putin will also be invited to an interview with Mueller and the FBI presumably. That together with a holiday stop over in Cuba on the way home to review facilities at Guantanamo Bay. The American History Association issued a statement about George Washington and the Cherry tree job. George Washington was misspoke. When he said " I cannot tell a lie I did cut it down with my hatchet" He had meant to say, "I can tell a lie I did not cut it down with my hatchet". Truth will out in the end. The moral of the story, never give a six year old a hatchet for his birthday. And never give a moron a job in the White House. Trump is creating chaos on trade. Tariffs on Chinese products have now been extended to some $200 billion of items and may be extended to all Chinese imports. China is the enemy along with Canada, Mexico, Japan and Europe. Putin is a mate. "He even gave me a football." Better test for bugs and bias in the bounce. Back in the US, manufacturers from Harley Davidson to Alcoa are bracing for the shock a world wide tariff war will create. The IMF and the WTO have warned of the shock to trade and world growth if the problems persist. Jerome Powell head of the Fed has also warned of the dangers. Trump is displeased and has now moved on the Fed with his latest pointers on how to run monetary policy. "I am not thrilled" "I am not happy about it". The Fed rate hikes are putting pressure on the Dollar moving higher against the Renminbi and the Euro. Yes that could increase the trade deficit! By convention the White House avoids comments on monetary policy. Trump is unabashed .. "So somebody would say, 'Oh, maybe you shouldn't say that as president.' I couldn't care less what they say, because my views haven't changed". Really? In 2016 Trump berated Janet Yellen for creating a false market in shares by keeping rates artificially low. A contradiction? perhaps, or maybe he was just misspoken ... That's all for this week, we will be back next week, with more economics. Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data. Have a great weekend. |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy. Archives
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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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