This week - The Inflation Report. The Bank has upgraded the growth forecast for 2017 to 2.0%. Inflation is expected to peak at just below 3.0% in the first quarter of 2018. There will be little increase in the unemployment rate in the current year, despite earlier fears.
Higher growth and a rise in inflation, yet interest rates were kept on hold. The Bank considers, the rise in inflation is caused by the fall in Sterling. The fall in Sterling a casualty of the Brexit vote. Circumstances beyond "our" control, the Bank will see through the spike in inflation. Inflation is expected to settle at 2.4% within a three year period. The Governor continues to signal the next rate move could be up or down! Really?
The meandering "NAIRU" has taken another dip. The unemployment rate consistent with stable inflation rate is now considered to be 4.25% from 5% earlier. Some may remember "forward guidance" suggesting 7% - the hurdle rate for an increase in base rates. It would appear we will have to wait longer for indications of a rate rise, despite evidence of full employment and increasing earnings.
Last week we boosted our expectations of growth this year to 2.0% with an upside of 2.4%. We expect inflation to spike in the first quarter this year. Sterling is down by 13% compared to prior year, oil prices are up by 76% compared to February last year. Brent Crude sterling prices have more than doubled. The inflationary pressure is reflected in manufacturing input prices, transmitted to output prices and inflation CPI in short order. There will not be long to wait. This week NPower announced a 10% increase in prices. Cobb lettuce disappeared from the shelves. Inflation will spike in the first quarter, just in time for the earnings round. Inflation will spike, earnings will rise, the Bank will be forced to act, increasing rates in April ...
Economic news this week ... PMI Markit Data ...
Ben Broadbent, Deputy Governor for monetary policy, explained during the press conference, the Bank places great weight on survey data in preparing the short term forecasts. The Bank of England Quarterly model takes a back seat, as survey data prevails. Hence the forecast changes of growth in 2017 from 0.8% in August, 1.4% in November and 2.0% in February 2017. Not a great forecasting performance.
The January updates of the influential PMI Markit series were released this week. "Manufacturing makes strong start, despite the record increase in costs" the headline. We highlight costs pressures in the chart. Input costs are rising dramatically. Our own model suggests input costs for manufacturing will increase by over 30% this quarter. The transmission mechanism into retail CPI is in terms of months not years.
In other sectors, construction appeared to lose momentum in the month, yet still in growth territory. Construction growth eased slightly. The data is consistent with strong growth for the quarter and for the year ahead.
West Wing ... Whisky Tango Foxtrot ...
For lovers of the "West Wing", there can be no better drama than events unfolding in The White House. CJ in the press room has been replaced by Sean Spicer, the gum loving press secretary. Did you know, he chews and swallows 35 pieces of gum a day! This is as nothing to the b.s the press is forced to swallow during press briefings.
Sean Spicer denied the President had watched "Finding Dory" whilst ignoring the turmoil of the hastily drafted ban on muslims coming into the U.S. "Not a ban" said Spicer "it's extreme vetting". Reminiscent of the railing against the press during the Vietnam war ... "You keep talking about bombing, bombing, bombing" bemoaned the generals ... "It's not bombing it's air support". Big difference.
All in the perception, the President had the largest crowd in the whole wide world, watching the inauguration ceremony last month. A fact explained to Malcolm Turnbull, the Prime Minister of Australia before a cranky president broke off the call. "It had been a long day" according to a White House statement by way of explanation. Up early, the day for the President begins with "Fox and Friends". Policy inspiration and security updates in modern media format. Who needs the CIA and FBI.
The President is running out of allies. Attacks on Mexico, Canada, Australia and Europe in just two weeks. If you have a trade surplus with the U.S.A., your must be a currency manipulator. It is the only possible explanation. The list includes, China, Japan, South Korea and the E.U especially the Germans. You are all on notice, along with Iran and Ireland ... "The world is a mess" explained the President this week. "But don't worry, I can fix it". Yep, "nothing to fear but fear itself" as FDR explained. "Lots of it and with good reason" DJT expands. West Wing Whisky Tango Foxtrot signing off for this week ...
So what happened to Markets?
Markets, were steady the Dow closed at 20,057 from 20,090. The FTSE closed at 7,188 from 7,184.
Sterling was steady against the Dollar at $1.252 from $1.253 and down against the Euro to €1.161 from €1.171. The Euro moved up against the Dollar at 1.078 from 1.069.
Oil Price Brent Crude closed at $56.78 from $55.07 The average price in January last year was $32.18.
UK Gilts - yields moved down. UK Ten year gilt yields closed at 1.36 from 1.483. US Treasury yields fell to 2.44 from 2.50. Gold closed at $1,218 from $1,189.
That's all for this week. Don't miss the pro-manchester Business Conference in March. We focus on Digital Disruption and the Smart City Challenge. Our next economics presentation is next week - the 8th February in Manchester.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.