Strong UK Data in the UK ...
It was a week of strong economic data in the UK, which should have cheered markets. Headline inflation fell to 2.3% in November from 2.4% prior month. Producer prices fell as input costs slowed to 5.6% from 10.3%. Oil prices came under further pressure with Brent crude closing at $54 dollar a barrel. WTI was down below the critical $50 level at $45 dollars reducing pressure on prices across the globe. In the UK, inflation is falling (2.3%) as earning are rising (3.3%). The Bank Of England held rates in November. Real Earnings are rising with no threat to jobs or mortgage rates in the short term. Despite warning sounds from retail last week and stories of the "November Apocalyse" which will "Dash Retailers to Pieces", official data revealed retail sales were up by 5% in the month. Sales volumes were up by 3.6%, values were up by 5%. Online sales were up by 13% accounting for almost 22% of total transactions. It is the pattern of spending which is creating problems for retail, not the absolute level of spend. We expect a strong December to finish off the year. Retailers without a strong multi channel strategy may well be finished off. Strong spending is assisting the Chancellor of the Exchequer. Government borrowing fell to £7.2 billion in November, from £8.1 billion prior year. It was the lowest level of November borrowing for 14 years. Year to date borrowing was £32.8 billion down by 30% from prior year. Borrowing will fall to below £30 billion in the financial year, achieving a similar level next year. Official data confirmed growth was up by 1.5% in the third quarter, from 1.3% in the first half of the year. Household spending was up by 1.8%, government spending and investment fell. We expect growth of 1.4% this year and around 1.5% in 2019. "Fed Hikes Rates ..." US markets crashed again last week. The Dow and S&P fell by 7%. NASDAQ fell by over 8%. The 6,000 support level came under threat, the August high of 7,660 long forgotten. NASDAQ delivered a twenty per cent drop in the quarter. Ouch! Markets over reacted to the Fed rate hike. The 25 basis points rise an indicator of strong growth and earnings potential in the U.S.A. The hike should have led to a recovery in prices, contrarians take position as prices tumble. Fed Chair Jerome Powell lowered growth expectations for 2019 to around 2.3%, from 3% this year. Two further interest rate increases are now plotted in for the year ahead. Markets and the President were displeased. Trump has discussed with close allies the possibility of sacking the Chairman of the Fed. Let's hope not. The resignation of Mad Dog Mattis was a sufficient blow to White House credibility this week. "Mad Dog Mattis ... Resigns ..." John Kelly, now Mad Dog Mattis; the President has lost his Chief of Staff and now his Secretary of Defence in just a couple of weeks. The President decided to pull troops out of Syria and Afghanistan following a phone call with President Erdogan of Turkey. For Defence Secretary James Mattis this was all too much. He will resign at the end of February, sending a note to the President in which he made it clear, The President deserved a Secretary "whose views are better aligned with your own." The Mattis announcement came a day after the White revealed the U.S. would be withdrawing troops from Syria and halving the troop commitment in Afghanistan. Both moves have been met with opposition from the Pentagon and with members of the foreign policy establishment. The President is taking a wrecking ball to the pillars of foreign policy honed over the past seventy years. The threat to NATO is unacceptable to many, the apologist approach to the Kremlin, too much and too soon. "We must do everything possible to advance an international order that is most conducive to our security, prosperity and values." Mattis explained, "We are strengthened in this effort by the solidarity of our [traditional] alliances." The President continues to take briefings from Fox News and Foreign Presidents, ignoring the advice of Cabinet and Key institutions in the USA. This week sees a partial shut down of Federal Government faced with Trump obstinacy over funding for the wall. Here's hoping for a partial shut down in the White House and a rounding of opinion in the Oval Office in the year ahead! That's all for this week, have a great week-end. Have a great Christmas and New Year. I wish you and your families all the best for the holiday and the year ahead. We will be taking a short break from economics and markets! A chance to think about our plans for 2019. John
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I wandered lonely as a cloud ... just don't call me nebulous ...
Theresa May was back in Brussels this week, a modification to the Northern Ireland back stop sought. A sort of boundary to the back stop within an oval of consensus, outlined by a legal framework to be confirmed within a timescale as yet to be determined. Agreement was close but in the end denied. Jean-Claude Juncker was hand-bagged by the Prime Minister at breakfast. You called me "nebulous and imprecise" an outraged Prime Minister accused. I want to make this clear I am not nebulous (nor imprecise for that matter). A sheepish Juncker denied all. "I did not, I did not", the President of the European Commission cowered. "It was late at night and I had a few scoops", would have been an honest response. "Nébuleuse and Imprécis" the actual wording. Donald Tusk and others had seized the microphone before too much damage could be done. All too late, for want of a few, the deal was lost. The Prime Minister returned to London empty handed, full of hope, in a state of denial. The key vote promised last Tuesday, had been pulled at the last moment. Jacob Rees-Mogg and his turncoats of many colors were frustrated. In a fit of pique without strategy, the misnomered European Research Group submitted the 48 letters required to call the no-confidence vote. The renegades expected a drawn out debacle over days on main media. Instead, it was all over in 24 hours. Two suspended MPs were returned to the whip. Sext messages to barmaids overlooked in a time of crisis. The PM secured 200 votes to beat off the challenge to leadership.117 votes against, a clear democratic signal the Prime Minister should resign claimed the Mogg. A clear message to go on, claimed the Prime Minister, agreeing to step down as party leader before the next election as a sop to dissident remainers, So what happens next? Christmas first, then a possible vote on the May deal in the New Year. Just one vote, that's all it takes as we explained last week. No deal an option, an extension of the March deadline probable. A second referendum now in the running. Multiple choice for the electorate or simple in or out deal the first question. Or a general election ... there's always the chance of a general election. Business is in despair for lack of clarification as to what happens next. Labour remains silent watching with glee as the Tories tear themselves apart over Europe again. So what happens next, I have no idea. I want to make it clear I am not "nebulous" just totally confused about how we got into this mess ... Christmas Fears for Retail ... It is the season of good will and warnings of dire Christmas sales in the days ahead. Mike Ashley issued a warning to retail, Christmas shopping has been so bad it will literally dash them to pieces. November trading was the worst on record. Retailers cannot take that kind of November. Don't panic. John Lewis had warned of sluggish sales, Superdry issued a second profit warning in two months. Primark cautioned of sluggish trading conditions as fewer shoppers visited stores. Mike Ashley was so concerned about Debenhams, he offered a £40 million loan to see them through the winter crisis. Conditions attached to philanthropy, the loan would see the Sports Direct share stake increased to 40% and a potential merger with House of Fraser one step closer. Consumers are worried about Brexit the apparent story but is this really the case? With two week-ends of full trading before the 25th of December, there is still plenty of time to ring the tills ahead of New Year trials. This year Christmas is late! Lot's of time for sales and traffic to perk up before the end of year. Earnings on the rise ... ? The latest jobs data confirms employment remains high, unemployment is low and earnings are rising. Whole economy earnings were up by 3.3% in the three months to October. The 3% hurdle rate long anticipated, jobs compression is finally delivering the rise in pay we all expected. Private sector pay was up 3.4%. Public sector pay increased by 2.7%, (up from 1.7% in the same period last year). Construction pay was up by 3.5%, leisure sector pay was up by 3.6%. Vacancies increased to 850,000 with just 1.4 million unemployed. Recruitment difficulties most apparent in hotels, restauraunts, health and social work, the very sectors under challenge from government immigration policy. Real earnings are increasing as pay accelerates. In the month of October, whole economy earnings were up by 3.9%. Private sector pay was up by 4.2%. Pay should offset any Brexit concerns in the short term. The paradox will be presented to the Bank of England. The economy is expected to grow by just 1.4% this year. Inflation remains subdued. Earnings increasing towards the 3.5% threshold would normally force the MPC to act. Uncertainty over Brexit will forestall any increase in the short term, all eyes on what happens next when parliament returns in the New Year ... "Roll Up ... Pay Up ..." "Don't ring John Kelly" our headline last week. This week, President Trump confirmed Kelly is out. Budget director Mick Mulvaney will become acting White House Chief of Staff. Acting Chief of Staff, the President wants to remain some form of flexibility, according to White House Press Secretary Sarah Saunders. The President's first choice and several others had turned down the role. It all made for a difficult week for the White House. Michael Cohen former counsel to the Donald Trump was jailed for three years. "My weakness was a blind loyalty to Trump and a sense of duty to cover up his dirty deeds." According to Mr Cohen's lawyer, his client had the "misfortune" of being the president's personal lawyer, business partner and all-around fixer for more than a decade. When investigators began digging into his actions, they uncovered a variety of chargeable crimes. The President appears to be complicit in the crimes. Present in the room when payments were agreed to Stormy Daniels and others. Now concerns are expressed about the President's inauguration fund. President Donald Trump's inaugural committee is under criminal investigation by federal prosecutors in Manhattan for misspending some of the $107 million it raised from donations. Much of the funds were paid over to Trump businesses allegedly. The investigation, which is reportedly in its early stages, is also looking into whether some of the committee's top donors gave money to gain access to the incoming Trump administration. This would be a violation of anti-corruption laws. It will also make for a great story into 2019! That's all for this week, have a great week-end. Don't Miss Our Monday Morning Markets ... we expand further on market moves ... and assess the fortunes of our "Empires of the Cloud" tech fund ... John Just a few days to go before the critical vote in parliament. Theresa May's Brexit deal will be put to the Westminster elite on Tuesday. Junior ministers were sent out on a roadshow this week. The objective? To convince the party faithful of the merits of the deal. Time well spent? Not really.
A survey of 1,262 Tory members taken on Thursday, suggests 72 per cent reject the deal. They would like their MPs to do the same. Just 26% are in favour. It doesn't look good. Worse still, 62% think the Prime Minister should resign if the vote goes ahead and the deal is lost. Time and effort would have been better spent dealing with Tory dissidents and the DUP perhaps. MPs have been surprised by the lack-lustre effort of the whips in the house. Perhaps their hearts are not really in it. Graham Brady, Chair of the Back Bench committee tried to persuade the government to postpone the vote on Tuesday. A crushing defeat is the likely outcome. The government is committed to the timeline, warning of chaos at the ports and rationing of medicines if a hard Brexit ensues. The deficit could be as many as one hundred votes against, as Tory Brexiteers and Remainers unite with the DUP. A heavy defeat could lead to an end to May as Prime Minister, an end to the Tory government, a general election and the option of a Corbyn administration in power. Or we might even see a second referendum as MPs seek guidance and direction for the next big move, MPs are already hatching a plan, to dump May if the vote is lost this week. Labour will join with Tory dissidents and the DUP to bring about a vote of no confidence. Boris Johnson, may yet have another tilt at the Downing Street Windmill. Just one vote, that's all it takes ... rivals will get chance to sip from the poisoned chalice. The challenge ... to unite the Conservative party on Europe ... well good luck with that ... House Prices Falling ... ? House prices increased by 0.3% in the year to November according to the Halifax Building Society. Russell Galley, Managing Director, explained, "Although this is the lowest rate for six years, the outcome is within the expected 0% to 3% band for the year as a whole." Should we worry about the housing market? Not really. As earnings rise and house inflation slows, affordability is increasing. High employment, wage growth and low interest rates continue to underpin the market. In the three months to October, house sales were up by 2.4%. Mortgage approvals increased by the highest level since the start of the year. According to Nationwide, house prices increased by 1.9% up from 1.6% in October. Expectations remain of further growth in activity and prices next year. Concerns over Brexit cast aside for the moment. No need to worry about the 30% drop conditioned into the Bank of England stress test at all. Car Sales Falling ... ? Car sales last month were down by 3% on prior year. For the year as a whole, registrations were down by 7%. We expect total registrations to fall to 2.37 million from 2.54 million last year. Diesel remains the big story. Diesel sales were down by 30% in the first eleven months of the year. Petrol sales were up by 9% and alternative fuel vehicles were up by 22% taking a 6% market share. This year was not really about economics, it was the story of a market in transition. As Mike Hawes Chief Exec of the SMMT explained, "Model and regulatory changes conspired to affect supply and demand in 2018. The good news is that, as supply constraints ease, and new exciting models come on sale in the months ahead, buyers can look forward to a wide choice of cutting-edge petrol, diesel and electrified cars." "It’s now critical that a Brexit deal is secured to boost consumer confidence and provide a stimulus to the new car market as we enter the New Year." A yes Brexit, just one vote, that's all it takes to boost confidence in the car market. And what of growth ... ? We normally follow the market in housing and motors to understand the direction of travel and momentum for the economy as a whole. Despite the fears over Brexit, the UK is expected to grow by 1.4% this year and next. In the EU, the latest data suggests growth of 2% in 2018 and a similar level in the following year. In Poland and parts of Eastern Europe the EU will grow by an average 5% this year and next. In Ireland the economy is expected to grow by almost 10%! That's better than any BRIC and we know how to trade there. Lots of growth in our biggest trading block. Just one vote to remain in the customs union and the Free Trade Area ... you know it makes sense ... "Stop calling John Kelly ..." Market turmoil continued this week. The Dow fell by over 500 points wiping out gains for the year. Apparently, Trump is beginning to think he could be part of the problem! According to a CNBC report this week, Trump is glued to the television and the stock market fluctuations. He is asking advisors if the tariffs he has been imposing on China may have contributed to market unrest over the last two months. Imagine! The self described "Tariff Man" could be having second thoughts about his trade policy, if indeed there is such a thing. Someone should explain, arresting a senior exec from Huawei on the Canadian border, won't ease relations with Shanghai. Rex Tillerson former Secretary of State, explained life in the White House was difficult, “It was challenging for me coming from the disciplined, highly process-oriented Exxon Mobil Corporation to go to work for a man who is pretty undisciplined, doesn’t like to read, doesn’t read briefing reports, doesn’t like to get into the details of a lot of things, but rather just kind of says, ‘Look, this is what I believe,’” Tillerson explained in a discussion with Bob Schieffer of CBS News. "Trump would get frustrated when he could do something which was illegal!" It had never stopped him before, as the Mueller investigation will expose. Trump took it all in his stride "“Mike Pompeo is doing a great job, I am very proud of him,” Mr. Trump wrote on Friday afternoon, referring to the current secretary. “His predecessor, Rex Tillerson, didn’t have the mental capacity needed. He was dumb as a rock and I couldn’t get rid of him fast enough. He was lazy as hell." Dumb as a rock and lazy as hell! It was time for the Exxon exec to exit. Soon too the time for John Kelly to move on. He probably won't make it to carol singing in the Oval Office this year. "Stop Calling John" the President instructed staff this week. An ominous line! He has already lined up his successor. Nick Ayres, the Mike Pence top aide is the likely replacement. The Mueller investigation is closing in. The latest revelations, show that nobody can save Trump. Meanwhile the trade deficit is increasing, inflation is set to rise, the fiscal deficit is rising to $1 trillion dollars. The overall debt is set to increase over 100% of GDP. The White House is not concerned. "It will only become a big problem, long after I have left the White House", the President explains. It could be sooner than you think! That's all for this week, have a great week-end. Don't Miss Our Monday Morning Markets ... we expand further on market moves ... and assess the fortunes of our "Empires of the Cloud" tech fund ... John Another Day ... Another Minister Quits. Yesterday Sam Gyimah, the Universities Minister resigned. "It has become increasingly clear to me the proposed deal is not in the British national interest". Oh Dear. The new exciting Chapter for the British people may yet be unread.
"To vote for this deal is to set ourselves up for failure, we are surrendering our voice, our vote and our veto" claimed the minister. The deal leaves us "poorer and weaker". Jo Johnson, Transport minister resigned earlier in the month with a call for a second referendum. Sam Gyimah echoed the call. It now seems impossible for the Prime Minister's proposal to be accepted in just a few weeks time. The Prime Minister has succeeded in uniting Remainer and Brexiteer against the deal with the EU. The former, hope for a second referendum to overturn the 2016 decision. The latter quite happy to accept the no deal option, crashing out of the EU, the single market and the customs union in the process. Business is in favour of the deal because it provides continuity on trade within the customs union and the promise of a single market to follow. Given the option of a second referendum, with a remain vote the outcome, the CBI and others would gladly accept a return to the ballot box. Michael Gove warned back benchers this week, voting down the deal could mean Brexit would be "by no means guaranteed". The Times reports today, eight cabinet ministers including Michael Gove and Phillip Hammond have held discussions about joining the European Free Trade Area. The Prime Minister is in Argentina this week-end, reprimanding Mohammed bin Salman on the one hand and drumming up support for the EU deal on the other. Why bother? Back at home, confusion continues. We are heading for a second vote in Parliament and perhaps a second referendum in the country as a whole. The call must be for a FREE Vote in the house, only then may we discover what Labour party policy really is. Obligingly, the EU have offered to delay the Article 50 exit by several months. Why so? to accommodate the timetable for the second referendum of course ... why else? Canada Plus ... The Bank of England released the latest prognostications on life without Europe this week. A no deal scenario, could lead to GDP down by 8%, House Prices down 30%, Commercial Property down 50%. Unemployment up 8%,Inflation up 6.5%, Sterling down by 25%, to 90 cents on the dollar, Government Borrowing soars and interest rates rise to 5.5%. In other news, the Governor is obliged to stay in the job for a further three years, John McDonnell becomes Chancellor of the Exchequer and Theresa May is elevated to House of Lords. The good news, the banks and the banking system will be OK. Important to note, the projections are not forecasts. They are worst case scenario planning as part of the "stress test" for the banking system and the British people. Stress tests opportunely released, just ahead of the critical vote in the House of Commons. *Is the Governor biased ? "People think you just don't want to leave Europe" the Mark Carney challenge this week. "Rubbish" the response "Most days I regret moving over here. If it wasn't for Brexit I would be back home by now. As it is I just have a massive salary and the ability to print money to make up for it. *Extract from My Week Mark Carney in the Times today. This week, the Treasury released the long term economic analysis of the EU exit. It doesn't make for great reading. It's 90 pages long for one thing. A no deal scenario (with tariffs) could lead to an 8% drop in GDP, a Free Trade deal would lead to a GDP drop of 5%, and EEA deal would lead to a drop in GDP of around 2%. NIESR have suggested the proposed deal would lead to a drop in GDP of some 4% by 2030 at a cost per individual of £700 to £1,000 in each year. Either way the forecasts don't make for great reading. We will be substantially worse of leaving the EU in what ever form. There was never an economics case to leave the EU. There was never a business case to leave the EU. The social case was always about immigration. EU citizens are already making the decision to leave. The political case was always about "Who governs Britain" ... always a great question ... Trade hopes rise at G20 meeting ... The G20 leaders are in Buenos Aires this week-end. Trump made a great play of signing the NEW NAFTA agreement. It's a good-bye to the old NAFF NAFTA agreement. The US will be able to sell more chicken, eggs and turkey to Canada. More dairy products will head North. More car components will originate in the region. Higher pay levels in Mexican factories will result. The punitive tariffs on aluminum and steel will remain, imposing a price hike on US manufacturers and consumers in the process. Trump arrived in South America haunted by the Mueller investigation and the latest revelations from Michael Cohen. The former lawyer and advisor to Trump admitting to lying about plans to expand the Trump Tower empire into Russia. Discussions continued into 2016. The offer of a $50 million dollar apartment to President Putin included. Trump decided not to meet with the Russia President during the visit, allegedly because of latest transgressions in the Ukraine. Nothing to do with the latest confessions from Cohen of course. The President is due to meet with President Xi Jinping during the trip. In fact they plan to meet over dinner this evening. World leaders are hoping for a de-escalation of the trade tariff wars between the two nations. World trade is slowing. European exports are suffering. The Trade war is bad for all parties, the USA included. The problem of course, is Trump is so unpredictable and subject to mood swings. The more implacable leader of the People's Republic of China is far more adept about dealing with dissidents, Trump included. Let's hope for progress and trade peace in our time ... That's all for this week, have a great week-end. Don't Miss Our Monday Morning Markets ... we expand further on market moves ... and assess the fortunes of our "Empires of the Cloud" tech fund ... John |
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