Base rates on hold, housing on the move

Economics news – Base rates on hold, houses are moving, manufacturing and construction - building on the recovery.

No surprise this week - base rates and QE were kept on hold following the meeting of the Monetary Policy Committee on Thursday. Guidelines on the Bank of England’s use of intermediate thresholds and forward guidance on monetary policy, will be released next week, along with the Inflation Report. It will be ground breaking, The Old Lady has a new cosmetic tool in the handbag.

Fashion is in all things, including monetary policy. The Federal Reserve has adopted forward guidance using inflation and the rate of unemployment (6.5%) as guidelines for the timing of any rate increases. Latest US data on growth (1.4%) and jobs (162,000) in July, pushed the unemployment rate down to 7.4%. Any change in US rates is unlikely until late 2014 at the earliest. US growth is still below trend rate 2.4%.

So what will the UK version of forward guidance look like? It won’t be pretty but it will be protracted. It could turn out to be more misdirection than guidance, if the MPC is behind the curve. Check out our Forward Guidance on Forward Guidance on The Saturday Economist web site this week.

The pace of recovery could catch many by surprise. Manufacturing and construction are staging a strong recovery. Markit/CIPS UK PMI® data in July, suggests, growth of UK manufacturing production and new orders “surged” higher in the month. An increase in domestic demand is the main driver of growth. The key index jumped to 54.6 in the month, marginally above the average rate prior to recession.

The construction index jumped to 57.0 in July from 51.0 in June. New orders and a “surge”  in housing activity led to a pick up in orders and positive sentiment about the future. Ah yes, the confidence fairy drives a mail van, stacked with orders.
 
So what is happening in the housing market? The Nationwide House Price Index suggested prices increased by nearly 4% compared to July last year. Prices are moving back to levels last seen in June 2008 and within 8% of the peak in late 2007. “The Homes for Heroes” campaign is helping to push prices higher. The level of transactions and new home building are beginning to respond. Our full report on the housing market will follow next month. Time to book the Pickfords van, the housing market is on the move.

The Prime Minister has installed Jim Messina, Obama’s major foreign policy advisor, as campaign strategy adviser ahead of the next election. As part of the new team line up, George Osborne will deliver growth, jobs and debt reduction in time for the hustings. The most successful Chancellor in history? Perhaps.

What happened to sterling?
Sterling slipped this week closing at $1.5284 from $1.5384 against the dollar and down against the euro to 1.1504 from 1.1581. The Euro dollar closed unchanged at 1.3279 and against the Yen, the dollar closed at 98.9 from 98.2.

Oil Price Brent Crude closed up at $108.95 from $107.2. The average price in July 2012 was $103 approximately, the average price in July was $108.5.

Markets, were up - The Dow closed up 15,658 from 15,558. The FTSE closed at 6,648  from 6,554. Markets continue to rally. This is the time to average in, steadily into August. The FTSE may clear 7,000 within ten weeks.

UK Ten year gilt yields closed at 2.42 from 2.34, US Treasury yields closed down at 2.60 from 2.56. Yields are set to move higher albeit against the wishes of the central banks. It really is time to pack up and leave Planet ZIRP.

Gold closed down at $1, 308 from $1,325. The ancient relic will be cast aside as markets focus on equities and bonds.

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

Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more!

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John

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.

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