Tories face humiliation in poll ...
Brush up your classics, let the hair fly. Boris Johnson is favorite to be the next prime minister of truly global Britain.
"Johnson crushes rivals in member poll" the headline in the Times today. According to a You-Gov poll, 39% of those asked would vote for Johnson. Dominic Raab is the second most popular with just 13% of the votes. Michael Gove fails to hit double figures with just 9%.
The new PM could be in office by the end of July. Sir Graham Brady Chairman of the 1922 committee emerged from a meeting with Theresa May this week. He explained a timetable had been set, to establish a timetable, to define the timetable, within which the current Prime Minister would leave Number 10.
The timetable is to be managed by Chris Grayling, Secretary of State for Transport. Grayling will also arrange ferry transport across the political Styx for the departing Prime Minister. Phillip Hammond has issued a warning to candidates. Do not promise too much in terms of spending in the election campaign. Someone should advise "Spreadsheet Phil", it's unlikely to be his problem. Hot money must be on a dream ticket with Johnson in Number 10 and Gove next door as Chancellor of the Exchequer.
Theresa May will be given one last chance to deliver a Brexit solution. The sadistic streak within the Conservative party runs deep.
The Tories face humiliation in the European elections. The Farage Brexit party will be the outright winner, with a clear "Leave" option. The Lib Dems are likely to be in second place offering the only perceptible "Remain" variant. The Tories will surrender third place to Labour as Corbyn's credibility climbs.
Following the EU setback, Johnson will have the tough job of uniting the party. It won't be easy. 49% of the party's Leave supporters put Johnson as their first choice but just 10% of Remain voters followed suit. The good news, Mr Johnson is considered by members to be the most likeable across the country. Support however, dwindles across the border.
"As far as I can see" said Nicola Sturgeon, "He is a complete and utter charlatan" the prospect of him becoming Prime Minister, is one that will horrify many people across Scotland". The view may not be confined to Scotland. It may be horrifying at times but it promises to be great fun ...
Peace in our time ...
President Trump dialed back the rhetoric this week. There will be no war with Iran. John Bolton National Security advisor is to be put back in his box. Bolton, known affectionately in Tehran as the "moustache" is a hawk. "Who would have thought" said the President this week. "I would be the restraining influence".
"Just give me a call" the President urged Hassan Rouhani the President of Iran, or better still "Just send me a beautiful letter" he could have added. I can add it my collection of beautiful letters from Chairman Kim, President Putin and my great friend President Xi. Yes friends across the world unite for peace in our time. No war with Iran or North Vietnam. I have in my hand a beautiful letter ...
The President did something unusual on trade this week. Tariffs on industrial metals from Mexico and Canada were lifted on Friday. Tariffs on steel from Turkey are to be halved. The threat of tariffs on EU cars has been postponed for six months.
The North American concession clears a major obstacle in securing passage of the "New NAFTA" deal through Congress. The President needs a win to offset the setback with China.
Vice Premier Liu explained to reach agreement, the US must remove all extra tariffs, set targets for Chinese purchase of goods in line with real demand and ensure the text of the deal is "Balanced" to ensure the "dignity" of both nations.
The latter difficult to achieve with Twitter as the medium, both sides are digging in. Trump declared another national emergency this week, announcing further restrictions on Huawei. China is ramping up the pressure with further restrictions on agricultural products. The Presidents are set to meet at the G20 next month to discuss the "little squabble" as Trump describes the trade war.
The Chinese find dealing with Trump to be frustrating and confusing. No long-term plans, or the ability to think ahead. The President has the long-term decision- making ability of an "empty chair". Not sure if that bit was in the beautiful letter ...
Strong jobs data ...
Strong jobs data this week. UK unemployment fell below 1.3 million. Vacancies in the economy were 846,000. The unemployment rate was 3.8%. It has not been lower since December 1974.
Earnings fell back slightly in the three months to March to 3.2% compared to 3.5% prior month. The slowdown doesn't make much sense. Adjustments may follow in the months ahead. Pay rises remain above CPI inflation. Real income growth continues.
The consensus remains for growth this year at around 1.5%. Inflation remains subdued. There seems little or no prospect of a rate rise anytime soon.
Sterling fell to $1.278. The cross party talks on Brexit were officially declared dead in the water. Oil rallied, gold fell, Bitcoin crashed. Markets rallied in the US and the West. Markets in the East fell. China badly hit on fears of an acceleration of the trade wars. If only the "Little Squabble" could be resolved ...
That's all for this week, have a great weekend. We will be back with more news and updates next week!
Is it really all about stock building ...?
The UK economy grew by 1.8% in the first quarter of the year according to the latest data from the ONS. The growth was largely expected following the comments from the Bank of England Inflation report last week.
Service sector growth was up 2% with a strong performance from the leisure and distribution sectors. The Business and Finance sector expanded by just 0.9%. Government and other services were up by 1.2%.
Construction output increased by almost 3% year on year. The "Beast from the East" in 2018, provided an easy target to beat in the start to the new calendar year. Manufacturing output increased by 1.2%, compared to manufacturing growth of 0.9% in the whole of 2018.
So what of stock building? "Brexit stockpiling boosts economy (for now)" the headline in the Times today. "A deceptively strong start to the year" claims Howard Archer chief economic adviser to the EY Item club. "There was a major boost to first quarter growth as businesses looked to protect supplies in the event of a no-deal Brexit". Consumer stock piles of toilet roll may have helped expand GDP by as much as 0.7% in the quarter, the claim.
Ruth Gregory of Capital Economics is more sanguine. Stock building will have exacerbated the trade deficit. Any growth in stocks and output would have been offset be a deteriorating trade balance. The stock contribution to growth may have been as little as 0.1% as imports soared by 10% in the quarter. Export growth stalled up by just 1.5%.
The trade deficit accelerated to £17 billion in the first three months of the year. This compared to £24 billion in the whole of 2018. The £10 billion swing in the first three months of the year accounts for 0.5% of annual GDP and a not insignificant 2% of GDP in the quarter.
For the year as a whole, most economists are now penciling in a 1.5% expansion. Growth may moderate as fears for Brexit and Trade wars continue. Manufactures are exhausting working capital and storage space in the quest to second guess the next move on Brexit. Any reduction in stocks may hit output but would reverse the damage to the trade deficit in the first quarter. We expect growth to slow in line with the Bank of England forecasts. Yes we join the consensus this week.
The forecasts assume no further set backs on the Brexit story and some semblance of order in the White House approach to the trade conflicts with China ...
Trade Wars Escalate ...
"Your all time favorite President got tired of waiting for China to help out and start buying from our FARMERS!" tweeted Tariff Man Trump yesterday. "Tariffs will make our country much stronger. Just sit back and watch!"
The President hiked tariffs to 25% on an additional £200 billion dollars of imports from China this week. The impact will take four weeks to implement with every opportunity to secure a deal in the meantime. It doesn't seem likely given the drift between the two negotiating teams and the hard line approach from Beijing and Washington.
Two days of talks ended on Friday with no sign of agreement. The President continues to claim China will pay for the tariffs, much like Mexico will pay for the wall. This is a fabrication of course. The US Chamber of Commerce has made their views well known. Trade works, tariffs don't. American businesses and consumers are bearing the brunt of the global trade war, they say. "It is plain to see the tariffs are inflicting harm on the American economy. They will continue to do so unless the administration changes course. The US needs free and fair trade. Imposing tariffs to get there is the wrong approach."
US farmers are also unconvinced. In the Mid West, farm incomes have fallen, farm bankruptcies have increased. News from Washington of the next round of tariffs was another great setback to businesses, Businesses which had spent years developing markets in China are now seeing lucrative markets for soybeans and other crops disappear.
Despite the claims of the President, it is clear the American consumer is paying the price. The 20% tax on white goods has led to a 12% increase in retail prices for washing machines according to a study by economists at the Federal Reserve and the University of Chicago.
A tariff is a consumption tax. Americans will be paying higher prices on greater range of goods as a result of the President's policy. Farmers may be bankrupt before trade deals are secured.
Trump famously declared in March last year, "Trade Wars are good and easy to win". The President has yet to show he can strike a deal with China. Next up is Europe. Phillip Hammond warned this week, a further escalation of the trade wars would have serious consequences for Britain. If the President turns his attention to the trade deficit with Europe, the consequences will be all the greater.
Markets Feel the Pinch ...
Markets fell around the world as news of the tariffs and trade talks hit sentiment across all sectors. The Dow closed down 3% at 26,506. The FTSE closed down 180 points at just over 7,200. Our Nine index tracker fund was down by 3.4%. US stocks across the DOW, NASDAQ and S&P were down by 2.5% overall. Our European indices were down by 2.5%.
Markets in South East Asia fell by 5%. Worse hit was China falling by just over 5.5%. It could have been worse. Markets see sawed as news of the trade talks moved this way and that. Sterling fell against the Euro and the Dollar. Ten year bond yields slipped in the US and in the UK.
China is holding firm against pressure from the White House. It is also holding $1.3 trillion dollars of US debts. Should Beijing take a hard line on trade and ditch Uncle Sam's debt, the bond markets will see a big spike in US ten year yields. The all time favorite President may not be such a favorite after all.
That's all for this week, have a great weekend. We will be back with more news and updates next week!
Calls for Unity and New Leader ...
Local elections this week ... the Tories were flagging a loss of 1,000 seats, Labour a modest 400 seat gain. In the end Vince Cable was victorious with with a Lib Dem gain of over 700. Independent ranks doubled in size with a 600 plus gain.
For both main parties it was a setback. Corbyn's councillors lost 80 of their number. Conservatives lost over 1,300. Over forty councils were lost by the Tories, Labour shed but six.
For the Prime Minister, the end is nigh. "Shattered Tories tell May to set the exit date " the headline in the Times today. Graham Brady, head of the 1922 committee, will meet with the PM on Tuesday, to confirm the departure date.
It is clear that voters have lost faith in the Conservative Party. A party divided, with policy confusion apparent. it is the worst set of results for the "Blues" since the time of John Major in 1995. Time to recover? Brexit will continue to tear the Tories apart, no matter who occupies the Number Ten hot seat.
Theresa May in a speech to Welsh Conservatives suggested the electorate had sent a "simple message" to "just get on and deliver Brexit". Only the Prime Minister could consider a resounding poll set back, to be a mandate to push "her deal" through Parliament.
Lovers of a whodunit hoping for a revelation of "H" , got an early taster this week. Line of Duty? The fifth series of Line of Duty ends tomorrow. Superintendent Ted Hastings is in the frame with odds of 10-3 for the fit up. If so, it is a clear message crime doesn't pay. Hastings lives in a hotel bed sit with dodgy plumbing. Theee poor fella had to flog his lap top to make ends meet.
Real life drama was brought into focus this week. Who leaked the information on Huawei from the National Security meeting? Gavin Williamson was sacked by the Prime Minister. The Defence Secretary, a serial leaker, with a penchant for tarantulas was out. The Prime Minister had decided two days before the sacking the ambitious former Whip was responsible.
Strong enough to tell the Russians to "go away and shut up" or to push or brand new aircraft carrier through the South China seas, Williamson denies leaking information from the security meeting. Who could have thought Williamson could be the leaker? "Only those who knew him" the more cynical response ...
Forecasts Upgraded ...
The MPC decided this week to keep rates on hold and maintain the current level of QE. The Inflation report upgraded forecasts for growth in 2019 and in subsequent years of the forecast horizon.
Growth is expected to be 1.5% this year, rising to over 2% by 2021. Inflation is set to rise above the 2% target over the period. Unemployment is set to fall to 3.5% as earnings continue to rise.
In the first quarter, growth is expected to be 2% at the annualized rate. Stock building ahead of the March deadline contributed to the surge allegedly. Hence the fade in second quarter growth according to the Bank model.
The Governor issued a warning to markets. The current assumed path of future interest rate hikes is incompatible with current forecasts for growth and inflation. Markets are assuming base rates will rise by just 25 basis points by 2021.
The Bank now expects to rise "slowly and to a limited extent". Ben Broadbent Deputy Governor for monetary policy suggests the economy could absorb a 25 basis points rise in each and every year over the next few years. There is little expectation of a rate hikes before the Governor heads to pastures new at the end of January next year
Mark Carney has just to two more inflation reports to deliver. There was an element of end of term to the May Press Conference. The Governor derived great amusement from the projection of oil prices and the element of "backwardation" in oil price futures. Oh how we laughed ... what fun lies ahead in August and November.
Only two can "contango" but many will look on and enjoy the dance ...
Fed Holds Rates ...
In the US, the Fed held rates. The Committee noted "the labor market remains strong and economic activity continues at a solid rate". It is almost an understatement.
The economy expanded by 3.2% in the first quarter. US hiring rose at a brisk pace in April, according to data released on Friday. Non-farm payrolls rose 263,000, well above the median forecast of 190,000. Average hourly earnings increased 3.2 per cent year-on-year. The unemployment rate fell to 3.6 per cent.
The good news for the Fed ... inflation remains below the target 2% for now. Inflation increased to 1.9% in March from 1.5% a month earlier. A strong dollar and a moderating oil price are assisting the process. The Committee decided to maintain the target for the federal funds rate at 2.25% to 2.5%.
Markets rallied and bond yields moved higher. The Ten Year bond yield increased to 2.53% from 2.50%. The Federal reserve decided to ignore advice from the White House to slash rates.
Vice President Mike Pence, called on the Fed to lower interest rates saying the "economy's engine could handle more fuel". "The economy is roaring" Pence said on Friday in a CNBC interview. "This is exactly the time not only to not raise rates but we ought to consider cutting them. President Trump had called for a 1% rate cut. Then the economy can "surge like a rocket".
"Taking the punch bowl away just as the party gets going" has been the guideline for monetary policy over the ages. The White House wants to "turn up the music and dish out the shots". Fed Chair Jerome Powell has his hands on the liquor cabinet for now. Attempts by the President to stack the Fed with Trump acolytes have been thwarted for the moment. Herman Cain and Stephen Moore stepped back from the nomination process, a result of Senate resistance to the White House moves.
The yield curve no longer inverting. No talk of recession persists. The Fed may have to act before the year is out.
That's all for this week, have a great Bank Holiday 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.