Economics news – lunch with the Governor and a trip to the Isle of Manchester

It has been an interesting week, lunch with the Governor of the Bank of England on Thursday before catching a flight to the Isle on Man to spend the day as a guest of the Government Economic Development Office. Lots of key meetings crammed into a 24 hour visit to understand more of the great opportunities for cross trade between Manchester and the Isle of Man. More on that next week.

As for the lunch with Mark Carney, you have to admire the new regime at the Bank. Pragmatic, approachable, with a real understanding of the banking sector. The governor is skeptical about QE, has allowed long rates to decouple from short rates, understands low rates do not of themselves lead to a surge in investment and depreciation will not, of itself, lead to a boost to exports.

Indeed in the Budget for Greater Manchester, many of our “Ten challenges to economic thinking at the Bank of England” have largely been confined to the dustbin of economics history. (Along with many of the old theories of Governor King). Yes we welcome the regime change at the Bank and we are also supportive of Forward Guidance. My thanks to John Young for the invitation.

What is it about FG?
The great thing about FG, is that it marks the end of QE. For this alone we should be grateful. Analysts and commentators are having real trouble accepting forward guidance. William Buiter writing for Citigroup, describes FG as a “pleonasm”. I had to look it up! Pleonasm, the use of more words or word parts than is necessary for clear expression. How absurd. It’s just two words after all. WB then goes on to describe over 17 pages, using 12,000 words in the process, why this is so, with a bit of obtuse greek econometrics thrown in for good measure.

What does FG offer? During the recovery, the Bank will not move to inhibit growth by an early increase in base rates before certain conditions relating to employment and inflation have been met. FG is not “carte blanche”. It is state dependent not time dependent. The MPC reserve the right to increase rates notwithstanding the forward guidance. For the moment, it offers reassurance to businesses. Investment plans can be brought back to the board table, with rate risk evaluated, as the economic outlook clears.

GDP and UK Growth
and clearing it is. The GDP stats this week did not change the view of the economy over the first half of the year but the outlook for the second half is improving radically. In the GM Chamber of Commerce Survey for Q3 to be released next week, The QES Composite Leading Indicator® surged higher in the latest survey suggesting strong growth in the third quarter of around 1.5% rising to trend rate 2.4% by the final quarter.

The index measured 28.3 from 18.9 in the second quarter, higher than the peak levels recorded in 2007. As a result of this, we are upgrading our forecast for GDP growth in the year as a whole, to 1.5% rising to around 2.5% next year.

Why so positive? The outlook for orders and deliveries were much higher in the quarter in both the service sector and in the manufacturing sector. Growth was positive in both the UK and export markets but particularly strong in domestic activity. Businesses are less worried about interest rates and are revising the investment plans!

In the wider economy, growth, jobs, inflation, government debt and borrowing are all heading in the right direction. Only the trade figures will continue to disappoint. The UK cannot grow faster than Europe and the USA without exacerbating the structural trade in goods deficit.

World trade is also recovering. Flat in the second quarter but up by 3.6% in July, for the year as a whole we expect world trade growth of just over 3% well down on the pre recession growth of 5.5% but a recovery nevertheless.

House Prices,
The Nationwide House Price index confirms house prices increased by 5% in September. The increases confined not just to the South East but across the UK. In the North West prices increased by over 3%. The housing market is also recovering but for the moment, the overall level of transactions is still well down on the “boom” years. No need to worry about another “Boom” just yet.

Is this the right time to introduce, Help to Buy Stage 2 in the New Year? Of course not. This week the Chancellor invited the FPC to exercise more control over the Help to Buy scheme. A bit like handing over car keys and credit cards before heading out for a night on the town. Enjoyable in the short term with a bad hangover in the offing, the bank will move to limit the damage with higher interest rate spreads and capital provisions forthcoming. The FPC will ensure money is “put behind the bar”, to pin the profligacy.

What happened to sterling?
Sterling moved up against the dollar and up against the Euro. The pound closed at £1.6150 from $1.5994 clearing the 1.60 level intra week. Against the Euro, Sterling closed up at €1.1935 from €1.1840. The dollar moved down against the yen closing at ¥98.2 from ¥99.3.The dollar euro cross rate at 1.353 was largely unchanged.

Oil Price Brent Crude closed at $108.63 from $109. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact.

Markets, slipped - The Dow closed at 15,258 from 15,451. The FTSE closed at 6,512 from 6,596. The Fed statement forgotten, markets are beginning to fret about the US debt ceiling. It creates volume if nothing else. What’s the problem with the ceiling? The plasterers will be called in to cover the cracks sooner or later, usually later.

UK Ten year gilt yields closed at 2.73 from 2.92, US Treasury yields closed at 2.63 from 2.79. The fed statement has now pulled long rates down by 25 basis points. Long rates are decoupling from shorts, returning to fair value. They are reluctant to leave, with pleas from the FOMC to “stick around” but leave they must.

Gold closed at $1,336 from $1,331. The bulls have it or do they? The news on tapering bought more upside gain but not much, we think gold will trade sideways for some time yet.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow.

Join the mailing list for The Saturday Economist or forward to a colleague or friend.
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John
© 2013 The Saturday Economist, #TheSaturdayEconomist by John Ashcroft and Company, Dimensions of Strategy.
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist.

Economics news – inflation falls, no boom in the housing market, good news on borrowing, Chancellor Osborne is ticking the right boxes this week ...

Inflation - Retail Prices
The rate of inflation slowed to 2.7% in August compared to 2.8% in July. We expect a further significant fall next month and by the end of the year the inflation rate should be around 2.4%. Thereafter prices could be a little sticky. Service sector inflation was 3% in August and goods inflation was 2.4% in the latest monthly data.

Inflation - Manufacturing Prices
The good news on inflation was also manifest in the manufacturing sector. Output prices increased by just 1.6% compared to 2.1% in July. Input costs for manufacturers also fell back from 5% in July to 2.8%.

Part of the reason for the slow down was oil and energy costs. The average price of oil in August was $111 dollars per barrel, slightly down on the same period last year. The rate of wages and earnings growth remains subdued, presenting a benign outlook for inflation over the short term. At close this week Brent Crude was trading at $109 dollars per barrel. The outlook for manufacturing inflation is pretty benign.

House Prices - ONS data
For those wary of a housing boom, the ONS also released the House Price Index in July. In the 12 months to July 2013 UK house prices increased by 3.3%, up from a 3.1% increase in the 12 months to June 2013. Signs of a national boom? Not really but certainly signs of a good recovery!

Annual house price increases in England were driven by London (9.7%) and the South East (2.6%). Excluding London and the South East, UK house prices increased by just 0.8%. In the North West, prices actually fell by almost 1%.

The RICS has made the call for a peg on prices around 5%. This to reflect a normalised earnings growth rate of 3% plus a supply side restraint adjustment to stimulate additional investment presumably.

Would this work nationally? Obviously not. But some consideration to mortgage rationing on a regional basis especially in the South East may gain political if not market traction.

Retail Sales August -
A further indication, the recovery is on track with no signs of a runaway boom in prospect...
Retail Sales in August were up by 2.1% in volume and 3.6% by value compared to August last year. Internet sales were up by 22% in the month accounting for 10% of all retail sales.  Trading is better but not that much. With online trends and large store consolidation, life for most retailers is tough.


Government Borrowing
Further good news for the Chancellor, the level of borrowing fell in August. We expect further significant falls before the end of the financial year.

In August 2013, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £13.2 billion. This was £1.3 billion lower than in August 2012 when it was £14.4 billion.

The Chancellor is on track for a significant fall in borrowing this year. We expect the level of borrowing excluding interventions and transfers to fall to around £105 billion compared to a revised £115 billion last year.

Car Manufacturing
Car output increased by 16% in August bring the year to date output growth to 3%. More good news but the August headline should be kept in perspective. The year to date total is the better trend guide and let’s not forget commercial vehicle output is down in the year by 17%.

Tapering USA  
Despite clear indications “Tapering” may begin in the Fall, the Fed decided to continue the process of QE, purchasing mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities at the rate of $45 billion per month, this week. What does this mean for US and UK interest rates? Not much in the short term. Check out the Saturday Economist Special Post
"No tapering, more tampering, leads to more questions than answers at the Fed".

Assessing market reaction over the week, Bernanke fires a blank would have a more appropriate headline.

What happened to sterling?
Sterling responded to the news on tapering, moving up against the dollar but down against the Euro. The pound closed at $1.5994 from $1.5871 having tested the 1.60 level intra week. Against the Euro, Sterling closed down at €1.1824 from €1.1940. The dollar moved little against the yen closing at ¥99.3 from ¥99.4

Oil Price Brent Crude closed at $109 from $111. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact.

Markets, rallied - The Dow closed up at 15,451 from 15,376 . The FTSE closed up at 6,596 from 6,584. The Fed statement this month was a mis fire non event. We still think the FTSE will clear 7000 within ten weeks and the DOW will press 16,000.

UK Ten year gilt yields closed at 2.92 from 2.94, US Treasury yields closed at 2.79 from 2.89. The fed statement this week pulled long rates down by just 12 basis points. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave, with pleas from the FOMC to “stick around”!

Gold closed at $1,331 from $1,312. The bulls have it or do they? The news on tapering bought some upside gain but not much, we think gold will trade sideways for some time.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow.

Join the mailing list for The Saturday Economist or forward to a friend
UK Economics news and analysis : no politics, no dogma, no polemics, just facts.

John

© 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy .
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.

No tapering, more tampering leads to more questions than answers at the FED. So much for forward guidance.

Despite clear indications “Tapering” may begin in the Fall, the Fed decided to continue the process of QE, purchasing mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities at the rate of $45 billion per month, this week.

The objective - to maintain downward pressure on longer term interest rates to support mortgage markets, a fragile housing recovery and to make broader financial conditions more accommodative in the short term, In that way, growth plans for the US economy are not derailed in the recovery phase.

The Federal Open Market Committee had been concerned by the rapid rise in ten year Treasury rates by 120 basis points and evidence of low inflation and slightly weaker jobs market. Furthermore, fiscal consolidation and a higher tax burden were likely to damage growth this year. The FOMC reduced their own forecasts for 2013 to around 2.1% from 2.4% in the July review, as a result of recent developments.

Should we be surprised by the decision?
Should we be surprised by the decision? Well yes and no. In July the mood was more optimistic about the economy. The US economy was expected to growth by almost 2.4% in 2013 and by 3.3% next year. Unemployment was expected to fall towards 7% this year, then down to 6.5% next. Inflation was expected to average around 1.5% next year, with no obvious inflation threat on the horizon. The surprising thing is the revised forecasts haven’t changed the medium term outlook over much. The US recovery is still on track. The growth forecasts have been reduced to a more realistic level for the current year. We still think the USA will struggle to hit the 2% mark but nothing has changed of late to alter that view.

So what’s changed?
So what’s changed. The FOMC committee has been disturbed by the rally in long rates and the rise in ten year Treasury yields towards 3%. The labour market has seen moderate growth but no reason of itself to step back from tapering. Bernanke’s phone line must have been ringing off the hook by calls from central bankers in emerging markets. Faced with the repatriation of hot monies to the USA, capital outflows and plummeting exchange rates, Brazil, India, South Africa, Indonesia, Turkey and more have confronted the realignment of the US yield curve to some semblance of normality but not without some considerable cost to their own domestic economies. The BISTO kids would have welcomed the continuation of the QE gravy train for now.

For the Fed and Bernanke, there is no fall back. They have to get the timing right to begin to tighten policy. “Monetary shocks played a major role in the Great Depression” said Bernanke in Essays on the Great Depression :Princeton 2000 and “Much of Japan’s [lost decade] can be attributed to exceptionally poor monetary policy making” writing in "Japanese monetary policy, A Case of Self Induced Paralysis Princeton in 1999. The Fed cannot be seen to move too soon and damage the recovery. Bernanke would rather hold the patient a little longer on life support, than allow the economy and the markets, to leave intensive care too soon.

Will a few months or so make much difference? Not really, sooner or later, and better sooner, QE must be drawn to a close in the USA.

What about Base Rates?

Despite the delay on tapering, the FOMC believe base rates will be on the rise in 2015 towards 1%. The labour market is likely to hit the 6.5% hurdle rate at some stage next year. The tapering process may begin by the end of the current year or may await the cosmic flip from Planet ZIRP to Planet Janet in January. (Assuming Janet Yellen takes over as lead astronaut at the Fed early in the New Year.)

By 2016, US rates are expected to rise to 2% on their way back to a 4% norm over the medium term. Indeed 20% of the fed votes would expect rates to be back at 4% by 2016.

So what does this mean for the UK. Our guideline is watch the US and add six months. Fed rates are expected to remain on hold until the end of 2014, rising in 2015 to 1%. By 2016, they may be at 2% or above.

In the UK, the MPC’s forward guidance suggests rates may be on hold for three years until 2016. That’s a long way off. For the moment, the decision not to taper but to continue to tamper, will please the markets but only in the short term. The traders will find a reason to test the Fed towards the end of the year. Tapering is coming and so are the rate rises in the USA and the UK.
Posted by John Ashcroft.

Keywords, Forward Guidance, Tapering, QE, FOMC, Bernanke. 
© 2013 John Ashcroft, The Saturday Economist, John Ashcroft and Company.
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.

Good news for the economy continued this week.
A fall in the rate of unemployment AND an increase in output and orders for the construction industry. Who would believe it was just a few months ago headlines were devoted to the risk of a triple dip recession? The year is becoming a tale of two halves with a significant pick up in activity and sentiment into the third quarter. Get ready, we are leaving Planet ZIRP.

Speed bumps in the housing market
It is a strange recovery with strange roles in evidence. The Bank of England is hoping to keep base rates on hold for three years. The RICS warned this week of the need to maintain a stable and sustainable path for house prices.

“We suggest setting an annual growth rate threshold in a national index, which if exceeded, triggers tighter macro prudential policy” said Josh Miller Senior Economist in the RICS report.

The RICS is advocating “speed bumps” to limit the rate of price increases. The Bank of England (in the form of the FPC) should intervene to regulate mortgage allocations of LTV ratios across the UK if prices moved over 5%. That sort of thing.

“Taking away the punch bowl as the party gets started” is the traditional role of the central banker. Now some of the heavy drinkers are suggesting, we dilute the hooch. How strange.

Most commentators have reacted badly to the suggestion. Why 5%? Is there a regional variation? Is it the same for maisonettes and mansions? Should the government confiscate revenues where prices exceed the guidelines? Are the RICS advocating a prices and incomes board, monitored by the RICS perhaps?

Graeme Leach at the IOD has suggested it is a “statist solution to a state created problem”. Calm down Graeme, it was just for fun and not to be taken too seriously. The FPC is to meet this week. Top of the agenda will be the need to limit loan to value ratios. The government “homes for heroes” scheme, (the scheme in which the tax payer underwrites high loan values for house buyers) will be on the agenda no doubt.

Unemployment
The unemployment rate ticked down in July to 7.7% in July. The claimant count fell to 4.2% in August. The number of claimants - down by 32,000 to 1.4 million. Further indicators the recovery is on track, towards trend rate of growth, into the final quarter.

What does this mean for forward guidance? The models still suggest it will be the end of 2015 at least before the 7% threshold will be reached. That is the rate at which the MPC will begin to think about base rate rises, (speed bumps and knock out drops aside).

The caveat about earnings continues. The recovery cannot be sustained without a change in household fortunes, either lower inflation or higher earnings growth is required. Plus, the UK cannot grow at a faster rate then Europe for too long, without the trade deficit coming under severe pressure. The trade deficit, of itself, “a speed bump or pothole”, where growth is concerned.
 
Construction
Good news on construction. Output increased in July by 2% compared to July last year.  Orders for new work, especially in the housing market, were up by 33% compared to the same time last year. This is an important change indicator for the sector.

Overall the growth in services continues. The recovery in manufacturing and construction will look much stronger into the final quarter of the year. The UK recovery is on track. It is just over eighteen months to the election. Buckle up, we are leaving Planet ZIRP. Gilts are already in low orbit.

What happened to sterling?
Sterling responded to the economics news, moving up against the dollar and also against the Euro. The pound closed at $1.5871 from $1.5627 and at €1.1940 from €1.1860 against the euro. The dollar moved up against the yen closing at ¥99.4 from ¥99.0

Oil Price Brent Crude closed at $111 from $114. The average price in September last year was almost $113. We expect oil to average $112 in the current quarter, with no real inflationary impact.

Markets, rallied - The Dow closed up at 15,376 from 14,923. The FTSE closed up at 6,584 from 6,547. The Fed statement this month will mark the larger DOW move. Still a good time to move in? The FTSE will clear 7000 within ten weeks and the DOW will press 16,000.

UK Ten year gilt yields closed at 2.94 from 2.95, US Treasury yields closed at 2.89 from 2.93. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave!

Gold closed at $1,312 from $1,388. The bulls have it or do they? Some still worry about tapering.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow.

Join the mailing list for The Saturday Economist or forward to a friend
UK Economics news and analysis : no politics, no dogma, no polemics, just facts.

John
© 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy .
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.

Economics news – don't get carried away with survey data ...

The week started well but ended on something of a whimper. The highly rated Markit/CIPS PMI® series reported this week with strong updates on manufacturing, construction and services. The manufacturing index hit a two year high of 57.2 as output grew at the fastest rate since 1994. The construction output index increased at the fastest rate since 2007 to a level of 59.1.The service sector grew at the fastest rate since December 2006, as the headline index increased to 60.5. The Saturday Economist weighted index closed at 60.0 suggesting strong growth, around trend rate, in the economy overall.

Good news? Of course but survey data should always be treated with a little caution. It’s hard to believe just a few months ago, markets were concerned about a triple dip recession, relying, as they will, on shot run runes.

OECD and NIESR
The OECD added to the impetus suggesting growth in the UK will  be 1.5% this year rising to 2.5% in 2014. The NIESR monthly GDP tracker for August released this week, implied the economy is growing at a rate of 1.5% in the third quarter.

House Prices
The Halifax House Price Index reported house prices increased by 5.4% in August. As Martin Ellis, Housing economist at the lender explained, “Economic improvement and low interest rates, supported by official schemes such as Funding for Lending and Help to Buy, appear to have boosted housing demand in recent months”. Quite!

Payroll Friday
It was all looking pretty good until “Payroll Friday”. The US jobs data proved something of a disappointment to markets. The US economy added 169,000 jobs in August as the unemployment rate remained relatively unchanged at 7.3%. Is that so bad? Not really, the US is on track for growth of almost 2% in 2013. It’s a recovery of sorts and probably just enough for the Fed to stop tampering and begin tapering later this month.

In the UK, a further setback for those who ever believed in the march of the makers, rebuilding the workshop of the world and rebalancing the economy in the process. Are there any left? Manufacturing output fell in July by just under 1% and the trade balance slumped to a deficit of just under £10 billion.

Hardly a recipe for strong growth this year. Manufacturing output will be better in the second half of the year but we see little contribution to output for the year as a whole. The deficit (trade in goods) will be around £106 billion, providing a significant drag on net growth.

For the moment we are sticking with our growth forecast of around 1.2% for the year rising to over 2% in 2014. The rate of growth in the second half will be stronger but the legacy of the first six months is a great drag on output for the year. It could be time to upgrade the forecast for next year towards trend rate 2.4%.

What happened to sterling?
Sterling responded to the economics news, moving up against the dollar and also against the Euro. The pound closed at $1.5627 from $1.5494 and at €1.1860 from €1.1719 against the euro. The dollar moved up against the yen closing at ¥99.0 from ¥98.1

Oil Price Brent Crude closed up at $116 from $114. The average price in September last year was  $113. We expect oil to average $112 in the current quarter.

Markets, rallied - The Dow closed up at 14,923 from 14,810. The FTSE closed up at 6,547 from 6,413. The Fed statement this month will mark the DOW move. A good time to move in? The FTSE will clear 7000 within ten weeks and the DOW will press 16,000.

UK Ten year gilt yields closed up at 2.95 from 2.79, US Treasury yields closed at 2.93 from 2.79. Long rates are decoupling from shorts, returning to fair value.

Gold closed at $1,388 from $1,394. The bulls have it or do they?

That’s all for this week,

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John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work.

The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist.