 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
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 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.  It has been a tough week for the Prime Minister. David Davies resigned from Cabinet. Boris Johnson followed. It could hardly get worse or could it?
Donald Trump came to visit. I guess we have all made the mistake at some stage in our lives. Away on holiday you meet someone it would be great to see again. Or so you think. May met Trump and invited him to see the Queen! Shock horror. It was Benjamin Franklin who said "Fish and Visitors" stink after three days ... Trump managed to create a stink on the first day of his visit with NATO. An "ASBO in NATO" should have been the theme of the summit. Berating Western Leaders for not spending enough on US military arms and equipment. Germany came under attack for spending money with Putin on energy and gas supplies. Spend 2% of GDP immediately, no let's make that 4%, Trump demanded. Advisers and John Kelly squirmed as Tramp lectured over breakfast. It was all bluster for a domestic audience. By the end of the trip the US had reaffirmed a commitment to NATO, committed to the reinforcement of troops in Eastern Europe. Russia was the common enemy. Trump may have a chat with Putin next week. Smaller nations may be given discounts and an easy payment plan to bolster spending on defence. Lease Lend will return to Europe, to ensure the 2% targets can be met and quickly. "Trump offers lease lend to ensure 2% spending target is met" Then on to the UK and an interview with The Sun. Boris Johnson would make a great Prime Minister. Nigel Farage should become Foreign Secretary. May had botched Brexit. No chance of a trade deal with the USA. If only the Prime Minister had followed his advice and taken a hard line with Brussels, threatening to Nuke Belgium, that sort of thing. So much for the special relationship. Then Trump must have been warned he may not get to meet the queen after all if he continued in that vein. Melania intervened. The White House issued a statement. Sarah Huckabee Sanders said "The President likes and respects Prime Minister May very much. She 'is a very good person' and he 'never said anything bad about her.' He thought she was great on NATO today and is a really terrific person." Yep a "really terrific person". An "incredible woman", a "very tough" negotiator, a "very smart", "very tough", "very capable" person. "I would much rather have her as my friend than my enemy." Trump extolled. The problem with Trump is it's difficult to know the difference between having him as a friend or an enemy. Trump apologised for the article in The Sun, which was of course "Fake News". He awarded the "Highest Level of Special" to the "Special Relationship". "Am I allowed to go higher than that, I don't know". He looked forward to the trade deal soon. The chance to sell chlorinated chicken to the children of the UK an opportunity not to be missed. After Chequers he travelled to meet the Queen, "A great honour" but then she probably new that. Then off to play golf in Scotland, before meeting with Putin what fun awaits ... you can overdo contrition ... Is he still here? Yep but he will be gone soon ... Growth hopes fade in the UK ... US inflation hit 2.9% in June. US Growth will be around 3% this year. The Fed will continue with the rate hikes despite fears about trade tariff disruption. Markets rallied, the dollar moved higher. The trade deficit and government borrowing is increasing. The US economy is overheating. Still time to be long on the Dow and the Dollar for now. Back in the UK, the ONS released the monthly GDP tracker for the first time ever. Growth in the second quarter will be up by 1.2% or 1.3% in the three month period. Growth in the first quarter was just 1.2%. We have downgraded our forecast of growth for the year to around 1.4% as a result. With the lack of commitment to government spending on current expenditure and infrastructure, it is difficult to see a higher number. Anxieties about Brexit will continue to overhang investment in the private sector. "We have downgraded our forecast for the year to 1.4%" Manufacturing figures for the month of May were equally disappointing. Output in the twelve months increased by just 1.1% following a surge of 2.5% in the first quarter. We now expect growth of just 1.6% in the current year, following growth of 2.5% last year. Output remains 3.3% below the heady heights of February 2008. Ten years later, the sector has still not made a full recovery from the last setback before the next one, brought about by Brexit, is upon us. Will UK rates rise next month? I doubt that. Sir Jon Cunliffe, Deputy Governor at the Bank of England warned there was not enough evidence to support a move to hike rates next month. He has given a clear indication, he is unlikely to vote for an interest rate rise at the August meeting of the MPC. "Policy makers should react slowly to signs of recovery in uncertain times" he said ... The evidence on growth and output this week adds to the uncertainty about the immediate direction of monetary policy ... Monday Morning Markets ... This month we launched our Monday Morning Markets. It's a review we developed for Duff & Phelps some years ago. Time to bring it back now on our own book. The update will be 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 the nine indices we track were all trading up. The average across the territories of North America, Europe and South East Asia were up by 2%. We expect the bull run to continue despite the fears of world trade disruption and rising US rates. "Don't Miss Our Monthly Updates and the Monday Morning Markets" We also signed up with eToro to be included in the Monday Morning Markets Review. This social investment network is a great choice. It is FCA regulated. But you can start with a small portfolio of $1,000 dollars and trade without commission across a wide variety of stocks. We have set up our "Empires of the Cloud" Fund with a start value of $1,000 to $10,000 dollars. A similar fund we modeled in a presentation at MBS in 2011, would have converted $10,000 dollars into $86,000 dollars today. You can set up your own account on eToro, and match mirror or follow the fund. We will update every week our progress in the Monday Morning Markets review. We were up 4% in the first week. The rally continues with a 2% gain this week. We will follow the "Empires of the Cloud" Fund with a "Nine Index Tracker Fund" in due course. These are buy and hold funds, not short term traders. Use this link to sign up to eToro and we get a $100 dollar kick back, you also get a $100 bonus. Hurry, we only have ten deals available. Looking to cover school fees, a holiday next year or provide for a nest egg. Why not follow or match our fund? All trading involves risk. Only use capital you are prepared to lose. This is a high risk portfolio, just for fun. That's all for this week, we will be back next week, with more economics, Have a great weekend.  An offer you can't refuse ... the Prime Minister's proposal to Cabinet this week. Like a scene from a Godfather movie, the heads of the families were driven to a location, deep in the heart of the country. Mobile phones were immobilized, chauffeurs were locked in the kitchen and car keys were thrown into the centre of the room. No one leaves until the deal is done. Anyone resigning leaves on foot. It's a one mile walk to the local taxi firm. All local cab drivers had been vetted for security, confidentiality and a deep belief in the European Union. It would be a rough ride home. Tensions were high as the PM laid down the options.
Airbus boss, Tom Enders had warned this week, the government was clueless on Brexit. "Theresa May has “no clue” on how to pull off Brexit without severely damaging the UK" he said. It was the company’s "fiercest broadside yet against a floundering and bitterly divided Government" according to the FT. "Government is clueless on Brexit" says Airbus boss Enders had queried the outcome of the Chequers meet. "We can't be sure if there will be black smoke, white smoke or no smoke". He needn't have worried. In the end, it was another round of "Smoke and Mirrors". Agreement was reached on something Brussels cannot really agree to. Why should Brexiteers manifest dissent when Barnier will block the deal on their behalf. Preaching to the converted, a measure in pragmatism. Say yes and go home reunited with mobile phone, in a chauffeur driven limousine, playing Candy Crush Saga to ease down the adrenalin rush. Yep you may even get to dodge the meeting with Trump next week. Cabinet has agreed our collective position for the future of our negotiated position with Europe. Johnson will be fired if the deal is undermined. We have developed a "facilitated customs arrangement" said May. "It's crazy" said the Foreign Secretary. In a sense he is right. The deal allows a truly global Britain to set up independent trade deals with the rest of the world. Access to the single market will be secured by charging EU tariffs on goods to be traded into Europe. The UK will have separate tariffs for goods destined for the domestic market. Free movement of Labour will end but the introduction of a "mobility framework" will allow EU citizens to work in Britain. It's another fudge which fails to recognise the complexity of supply chains in an integrated manufacturing operation across Europe. It overlooks rules of origin. It ignores the fundamentals of the four freedoms on goods, services, capital and labour. Unipart boss John Neill had warned this week of the importance of friction-less trade for the UK car industry. 800 thousand jobs are dependent on a deal securing free trade and access to the single market. CBI boss Carolyn Fairbairn has made it clear, the Customs Union IS the solution until something better is on the table. An offer which cabinet cannot refuse is a proposal the EU almost certainly will reject ... we won't have to wait long ... Brexiteers will complain of obstructionist Brussels dogma ... when they have been so accommodating and pragmatic ... Largest trade war in history ... China complained to the WTO this week. The US is launching the largest trade war in history. The White House announced tariffs on $34 billion dollars of Chinese goods. Washington's 25 percent duties went into effect at midnight. China retaliated with tariffs on a hit list including soybeans, pork and electric vehicles. The US Chamber of Commerce condemned the move. "China, the EU, Mexico and Canada have already retaliated or announced plans to retaliate with billions of dollars in tariffs on American made products. Tariffs imposed by the United States are nothing more than a tax increase on American consumers and businesses, including manufacturers, farmers, and technology companies. Retaliatory tariffs imposed by other countries on U.S. exports will make American made goods more expensive, resulting in lost sales and ultimately lost jobs here at home. This is the wrong approach, and it threatens to derail our nation’s recent economic resurgence'" "Tariffs threaten to derail our nation's economic resurgence ..." Says US Chamber. The Fed warned against the trade war as did the WTO and the IMF. The last trade war in the 1930s didn't end well for the world or for the USA. In 1930, Congress passed the Smoot-Hawley Act. It was designed to protect farmers. Tariffs on many other goods were added to ensure support for the bill. Retaliatory tariffs followed. US exports of eggs to Canada fell from almost one million units to just 8,000 within two years. Across the board, US exports fell by 40% in the two years after Smoot-Hawley. Unemployment increased as the Great Depression hit home. Many factors contributed to the Great Depression. The Fed to blame in part. The trade wars ensured the American problems were exported around the world. This time the Fed is on the case. "Trade barriers are a dead end and destructive" said New York Federal Reserve President William Dudley this week. Yet the Fed is threatening to increase rates as the US economy continues to expand. 215,000 jobs were added to the payroll last month. The trend will deteriorate unless a truce is called in the march to anarchy ... Monday Morning Markets ... Last week we launched our Monday Morning Markets. It's a review we developed for Duff & Phelps some years ago. Time to bring it back now on our own book. The update will be 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. We have also launched the Monthly Round Up Page on The Saturday Economist web site. Here we publish our latest charts and data on the key indices of the UK economy. Next week the ONS will release their monthly GDP tracker for the UK economy. This will also feature on our round up page. It's a great source of data which we don't get chance to include in The Saturday Economist review every week. Our Quarterly Economics Review is also available to members of The Saturday Economist Club. We are enhancing our product offer with The Saturday Economist, Monday Morning Markets, Monthly Updates and the Quarterly Forecast Update. "Don't Miss Our Monthly Updates and the Monday Morning Markets" We have also signed up with eToro to be included in the Monday Morning Markets Review. Gaël Monfils revealed last week "I invest myself using the social investment platform eToro. I can use it while traveling. It gives me some independence with my money". Monfils was profiled in the Fame And Fortune page in the Money Section of the Sunday Times last week. I checked out the site. In a sense I have been looking for eToro for many years. eToro provides a suite of online investment solutions, regardless if you’re a newbie that is looking for a safe entry into the trading scene or an advanced trader that is looking for higher rewards. This social investment network is a great choice. It is FCA regulated. But you can start with a small portfolio of $1,000 dollars and trade without commission across a wide variety of stocks. We have set up our "Empires of the Cloud" Fund with a start value of $1,000 to $10,000 dollars. A similar fund we modeled in a presentation at MBS in 2011, would have converted $10,000 dollars into $86,000 dollars today. You can set up your own account on eToro, and match mirror or follow the fund. We will update every week our progress in the Monday Morning Markets review. We are up 4% in the first week. Use this link to sign up to eToro and we get a $20 dollar kick back. Looking to cover school fees, a holiday next year or provide for a nest egg. Why not follow or match our fund? All trading involves risk. Only use capital you are prepared to lose. This is a high risk portfolio, just for fun. That's all for this week, we will be back next week, Have a great weekend. John |
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