Janet Yellen was speaking at the Economic Club of New York this week. Three big questions continue to dominate policy formulation at the Federal Reserve. Unemployment, inflation and factors which may push the recovery off track. Actually, that’s more than three but … According to the Fed forecasts, US unemployment is set to fall to around 5.5% by the end of 2016 and inflation will hover just below 2%. “The economy would be approaching maximum employment and price stability for the first time in nearly a decade”. That's NICE! And what of interest rates? “Economic conditions, may for some time warrant keeping short term interest rates below levels the Committee views as likely to prove normal in the longer run”. The markets reacted well. The Dow moved up and the dollar moved down. Sterling moved to $1.679. In March, the Fed chair had given a clear indication that rates would start to rise in the first quarter of 2015. Less than a month later, there was no such clarity. Rates will be on hold until the recovery is well established. As long as it takes. Unemployment rate, the measure of momentum that really matters, to the doves at the Fed. Exogenous Shocks Nowhere in the speech did the “Capsid Bug” feature. According to a report in The Times today, black pod disease and capsid bug infestations are ravaging cocoa crops in West Africa. This shock to supply plus the surging demand from Chinese Chocaholics is causing a cocoa pop. Cocoa beans have jumped in price from $2,680 per tonne in January to over $3,000 per tonne in March. There could be a 115,000 tonne shortfall in supply this year. By next Easter, we may well be eating smaller eggs which cost much more. So much for the threat of world deflation! Does this matter? Well yes. The collapse of the Peruvian anchovy crop in 1972/3 was claimed by many to herald the onset of the hyper inflationary episode of the seventies. OK, the Russian grain famine, the onset of OPEC and the quadrupling of oil prices assisted considerably. But the message is, exogenous shocks from commodity prices can have a greater impact on domestic inflation. Much greater than the Phillips curve paradigm, much beloved by the FOMC, provides. This is clearly demonstrated in the UK economics data released this week. Inflation is falling, employment is rising. World prices mitigated by the appreciation of Sterling are marking the price changes. UK Inflation Inflation CPI basis slowed to 1.6% in March from 1.7% in the prior month. Goods inflation fell to 1.0% and service sector inflation fell to 2.3% (2.4%). Oil related transport costs were dominant in the slow down. Manufacturing output prices increased by just 0.5% as input costs actually fell by 6.5%. The fall in crude oil prices, imported metals, parts and equipment largely explained the fall. Sterling appreciation assisted the process. Sterling averaged $1.66 in March this year compared to $1.51 last year. A 10% appreciation assisting the “deflationary process” significantly. [Oil prices Brent crude basis averaged $108 approximately in both months]. So what of employment? Unemployment figures - Jobcentres will be closing by the end of 2016 Unemployment fell to 6.9% in the three months to February to a level of 2.24 million. This is below the level originally outlined in the Bank of England Forward Guidance in August last year. 7.0% the level at which the Bank would begin to consider an increase in base rates. The claimant count fell by 30,000 to a level of 1.142 million. Over the last three months, the count has fallen by 100,000 and almost 400,000 over the last twelve months. If current rates persist, the labour market will fall to pre recession levels towards the end of the year. By the end of 2016, No one will be left on the list. So this is what they mean by full employment! Jobcentres will have to close! The implications for earnings are evident. Already in February, whole economy earnings increased by 1.9% and wages in manufacturing and construction increased by 3%. We expect a significant acceleration in earnings throughout the year as the labour market tightens considerably. As for base rates, Yellen is signalling the US rates will be kept on hold well into 2015. The Bank of England may well have no such luxury. The MPC will be reluctant to raise rates ahead of the Fed. If this were to happen, despite the inherent structural weakness on trade and the current account, sterling will continue to rise significantly. $1.73 the next target? So what happened to sterling this week? The pound closed at $1.679 from $1.673 and at 1.215 from 1.204 against the Euro. The dollar closed at 1.382 from 1.3389 against the euro and at 102.42 against the Yen. Oil Price Brent Crude closed at $109.76 from $107.70. The average price in April last year was $101.2. The energy kicker to falling prices may well be over. Markets, the Dow closed up at 16,408 from 16,086and the FTSE also closed up at 6,625 from 6,561. UK Ten year gilt yields closed at 2.70 (2.60) and US Treasury yields closed at 2.72 from 2.62. Gold moved lower to $1,293 from $1,318. The pattern is bullish for equities.. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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.
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UK Balance of Payments 2013 - Current Account Deficit could be a real threat to recovery. Download the full report. In 2013, overseas investment earnings collapsed and the trade deficit persisted. The UK current account deficit was over 4% of GDP. This has happened in only two years since the 1950s. The first time was in 1974 and the second time was in 1989. In each of the two years, UK base rates were hiked to 12% and 14% respectively. In 1976 the IMF paid a visit to assist with funding. We do not know as yet if the fall in investment returns last year was a blip or a statistical error which may be reversed in due course. We do know that if the trends in investment income continue, the UK will face a balance of payments problem of Tsunami proportions. Capital outflows would become difficult to finance - international investors already own 30% of the gilt market and over 50% of quoted stocks. Forward guidance would be of little value in the enforced knee jerk reaction required. International - not domestic developments would force base rates higher. The Bank of England would have to act to prop up sterling. “A new generation of economists will have to come to grips with the terminology of a balance of payments crisis, a run on sterling and the concept of the balance of payments as a constraint to growth.” In this short report, we analyse the UK balance of payments from 1955 to the current day. Developments in the current account, particularly in investment income, if continued, will present a real challenge to recovery and growth in the UK. Download a copy of the report here. Download a copy of the Keynote Files Here. UK march of the makers … Good news for the march of the makers this week, - manufacturing output increased by 3.3% in January compared to disappointing growth of just 1.9% in the final quarter of 2013. Still some way to go to restore the sector to positive growth. Output remains some 9% below the peak registered in the first quarter of 2008. Output of Investment and capital goods increased by 3.8%, continuing the strong trend since the setback in 2008. We expect manufacturing output to increase by 2.9% for the year as whole and around 2.7% in the following year. Consumer goods output remained weak with further declines in the month. For some sectors of manufacturing, the march of the makers is more like a retreat from Moscow, than a move across the Rhineland. The makers will fail to make a real contribution to the rebalancing agenda. So what of net trade … The trade figures for January were released this week. After the December aberration, a month in which the ONS appears to have lost some £2 billion of imports, the total trade balance returned to normality. A deficit of £2.6 billion compared to £0.7 billion last month. There was a trade shortfall of £9.8 billion on goods, partly offset by an estimated surplus of £7.2 billion on services. For the year as a whole, we expect the trade deficit in goods to increase to £114 billion, offset by a trade in service surplus of £85 billion. The overall trade in goods and services shortfall will be £29 billion. At less than 2% of GDP, the deficit will not pose a threat to the outlook for sterling, assuming investment capital flows recover. The trade deficit will fail to make a real contribution to the rebalancing agenda. And what of Construction … Good news in construction. Output increased by 5.4% in January compared to the same month last year. New work increased by almost 6% in the month, as repair and maintenance budgets also increased by 4.5%. For the year as a whole we expect construction growth of around 6%, with strong growth in housing and commercial property expansion fuelling growth. Prospects for the year … The OECD suggests the UK economy will grow by over 3% in the first half of the year, in line with the strong expectations from the Bank of England “Nowcasting” model, news of which was also released this week. The NIESR GDP tracker for February suggests growth may have slowed to 2.6% in February after strong growth of 3.2% in the prior month. For the year as a whole most forecasters are moving to a 2.7% growth figure. Seems reasonable for now. The recovery appears secure and sustainable. Growth up, unemployment down, inflation down and borrowing heading in the right direction. Just the trade figures will continue to disappoint as we have long pointed out. Charlie Bean on the North East Scene … Charlie Bean was in the North East this week, delivering a speech to the Chamber of Commerce. Further reassurance the MPC will be doing its utmost to ensure that recovery is not nipped in the bud. “When the time does come for us to start raising Bank Rate, we should celebrate that as a welcome sign that the economy is finally well on the road back to normality”. Excellent. Much of the rest of the speech was devoted to investment, productivity and net trade. As the deputy governor points out, the United Kingdom has run a persistent trade deficit of the order of 2-3% of GDP since the beginning of the century. So much for “rebalancing”. On investment, productivity, depreciation and “on shoring”, the speech demonstrates the lack of fundamental understanding of the real economy amongst policy makers at a senior level. We had hoped for better from the new regime. Charlie represents the old guard due to retire in June this year. Of The Treasury Select Committee … The Governor and members of the MPC were in front of the Treasury Select Committee this week. The protocol still eludes the new man. Governor Carney actually winked at Chairman Tyrie at one stage. It is difficult to imagine Governor King, managing a nod let alone a wink. It appears the meetings of the MPC are minuted and recorded. Then for good measure the tapes are destroyed. Lack of good recording equipment formed part of the explanation by the old guard. The solution to invest in better equipment seemed a little too obvious for the Chairman and the new Governor. Expect a rethink! Wink Wink. So what happened to sterling? The pound closed at $1.662 from $1.672 and at 1.196 from 1.205 from against the Euro. The dollar closed at 1.390 from 1.387 against the euro and 101.31 from 103.3 against the Yen. Oil Price Brent Crude closed at $108.34 from $108.86. The average price in March last year was $108. Markets, moved down concerned about China and the Ukraine - The Dow closed at 16,107 from 16,458 and the FTSE closed at 6,527 from 6,712. UK Ten year gilt yields closed at 2.67 from 2.81and US Treasury yields closed at 2.65 from 2.80. Gold loves a crisis, closing up at $1,378 from $1,338. That’s all for this week. No Sunday Times and Croissants tomorrow. All records of the tennis results will be recorded then destroyed. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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. UK rates on hold … No surprise this week - the MPC voted to keep rates on hold and maintain the size of the asset purchase programme at £375 billion. It will be some months yet before rates begin to rise. Our current assumption is that rates will begin to rise in the second quarter of 2015. 40% of respondents in the latest Bank of England/GfK Inflation survey expect rates to rise over the next twelve months. No worries for the future apparently. Once on the rise, over 70% expect rates to be less than 3% in five years time. So much for the madness of crowds. Clearly the general public have a much better grasp of the latest simulations of the “equilibrium real interest rate associated with a neutral monetary policy over the medium term” than is generally assumed. They must have been listening to the speech by David Miles last month. Asked about the current rate of inflation, the median answer was 3.5% down from 4.4% in November. Excellent. So much for the madness and the wisdom of crowds. US Payroll data up … In the USA, better than expected payroll data guarantees the Federal Reserve will continue to taper, with a further reduction this month to $55 billion. Employers added 175,000 more jobs in February. Movement in US futures suggest the markets attach a "higher probability to a US rate rise in the middle of 2015". Fed officials have said they are “comfortable with market expectations of future rate rises”. We think US rate rises could be on the agenda by the end of 2014 or early 2015. The implications for UK rate rises should be evident. Our mantra - watch the USA and add six months - may be a little more compressed in this cycle. UK survey data … This week the February Markit/CIPS UK PMI® surveys were released. The strong upswing in the UK manufacturing sector continued in February. Output and new business continued to rise at above-trend rates. The leading index at 56.9 was up from a revised reading of 56.6 in January. In construction, the pace of expansion continued to rise sharply. The leading index scored 62.6 in February, down from a 77-month high of 64.6 in January. Still a very strong performance. In the service sector, output continues to expand strongly in the month. The headline Business Activity Index recorded 58.2 during February, little changed on January’s 58.3 and indicative of a sharp rise in activity on a monthly basis. Overall, output in construction, manufacturing and services suggest the economy continues to recover across the board at a very strong rate. The latest NIESR GDP tracker suggest growth increased by 3.5% in January. The Bank of England expects growth of over 3.5% in the first quarter. For the year as a whole, the consensus forecast is for growth of 2.7% this year. We await the details of the latest GM Chamber of Commerce survey before raising our estimates of growth this year. The GDP(O) model is signalling growth of 3% for the year as a whole. The survey data is a little more tempered, I suspect. In the UK and the USA, growth is accelerating and the job market is “tightening”. The pay round will become more difficult by the end of the year. Earnings are set to increase significantly as critical unemployment levels are breached by early 2015. Household incomes are set to improve and the recovery in spending will continue. There will be no “rebalancing”, whatever that really means. Growth up, unemployment down, inflation down and borrowing heading in the right direction. Just the trade figures will continue to disappoint. If growth hits 3% this year, disappointment could turn to shock and alarm. Then all forward rate bets will be off. So what happened to sterling? The pound closed at $1.672 from $1.675 and at 1.205 from 1.213 against the Euro. The dollar closed at 1.387 from 1.381 against the euro and 103.3 from 101.7 against the Yen. Oil Price Brent Crude closed at $108.86 from $109.02. The average price in February last year was almost $116 falling to $108 in March. Markets, moved slightly - The Dow closed at 16,458 from 16,367 and the FTSE slipped closing at 6,712 from 6,809. UK Ten year gilt yields closed at 2.81 from 2.72 and US Treasury yields closed at 2.80 from 2.67. Gold lovers worship alone with a close at $1,338. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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. Revisions to GDP … The second estimates of growth in the UK and the USA were released this week. In the US growth of 3.2% in the final quarter of the year, was revised down to a more modest 2.5%. Janet Yellen, head of the Fed is prepared to dismiss recent soft economic data as possible result of the bad cold snap. For the year as a whole, US growth in 2013 was a respectable 1.9%. Most forecasters still expect US growth of 2.8% to 2.9% in 2014. In the UK, the second estimate of GDP was also released this week. Growth in 2013 was revised down to 1.8%. Oh dear, the UK is no longer the fastest growing economy in the developed world. Just as well, the balance of payments strain would have been too much. The outlook for the current year hasn’t changed overall. We still expect growth of 2.5% in the year, with the consensus forecast slightly higher around 2.7%. The right kind of growth? … But is it the right kind of growth? For the purists, probably not. For the pragmatic, what’s not to like? The service sector continued to drive expansion in the economy, with significant growth in the leisure sector along with business and financial services. Distribution, hotels and restaurant trades grew by almost 4% in the year, up by almost 5% in the final quarter. Business and financial services were up by 3% in the last quarter, up by 2.6% for the year as a whole. The service sector accounts for 80% of total output in the economy. The real driver of recovery. Good news in construction … The good news in construction continued with growth up by 4.4% in the last three months of the year. Developments in the housing sector providing foundations for recovery. Assuming we can make the bricks, growth should continue into 2014 with our forecast growth over 6% in the current year. The march of the makers … So what of the march of the makers? Growth in manufacturing output was revised down to less than 2% in the final quarter. This is particularly disappointing, since the prior year figure was a “nothing to beat number”. For the year, manufacturing output actually fell by 0.6%. Output is still almost 10% below the pre recession peak. We have to be realistic when formulating a policy for industry. We expect growth for the manufacturing sector broadly in line with total GDP this year but not much more. So what of rebalancing … Household spending last year was up by 2.5% accounting for over 60% of GDP. There is little evidence of rebalancing in the economy, either in terms of net trade or investment. Investment, accounting for 14% of total spending, actually fell slightly, despite growth of over 8% in the final three months. Was this a trend reversal, end of year? Possibly. We expect investment growth to continue into 2014 as the forward outlook clears and confidence returns to the board room. M & A activity, will assist the figures. Plus, 60% of investment is related to dwellings and commercial property. Investment in plant and machinery, the real capital stock within the economy, accounts for just 20% of total investment. With property resurgent, we expect investment growth of 8% in 2014. And what of base rates? … In the US, Janet Yellen affirmed the Fed commitment to continued tapering. QE could be eliminated by the Fall with a steady reduction of $10 billion per month. That could mean, a US rate rise could be on the agenda by the end of the year. The mantra for the UK remains watch the USA and add six months. The MPC cannot move ahead of the Fed without significant appreciation of sterling. When will UK rates rise? Martin Weale has suggested UK rates will rise in the Spring next year and could rise earlier if productivity fails to improve and inflation ticks up. Ian McCafferty a fellow MPC member suggests the rate rise may be held back because of the strength of sterling and the resultant mitigating impact on inflation. Either way, rates are set to rise, probably in 2015 but possibly after the May election. The banks are beginning to model affordability and pay back with a 5% base rate test. This may prove too severe for some years yet. The MPC would have us believe rates will be held below 2% until late 2017. David Miles in a speech to the Mile End group this week, suggests the “new normal” could include an equilibrium base rate of 2.5% to 3% over the long term. Imagine, we may never see the 4.5% base rate again! So much for 320 years of history, in which we have endured an average base rate of 4.5% to 5%. If only! New normals usually end up as the same old same olds. So what happened to sterling? The pound closed up at $1.675 from $1.664 and at 1.213 from 1.210 against the Euro. The dollar closed at 1.381 from 1.374 against the euro and 101.7 from 102.5 against the Yen. Oil Price Brent Crude closed at $109.02 from $109.67. The average price in February last year was almost $116 falling to $108 in March. Markets, moved slightly - The Dow closed at 16,367 from 16,143 and the FTSE closed at 6,809 from 6,838. UK Ten year gilt yields closed at 2.72 from 2.79 and US Treasury yields closed at 2.67 from 2.75. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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. We will not take risks with this recovery … The Bank of England will not take risks with this recovery, according to the latest statements from Mark Carney, Governor of the Bank of England. Base rates will remain on hold for some time yet. When they begin to rise, the increase will be slow and gradual. It will be many years before fair value base rates of 4.5% will be on the agenda, according to the guidelines issued this week. Markets anticipate the first rate rise may appear in the second quarter of 2015. Thereafter a rise to 2% may be possible but not until the end of 2016 or the beginning of the following year 2017. “The level of interest rates necessary to sustain low unemployment and price stability will be materially lower than before the crisis,” the more cryptic quote. The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began and the inflation rate is back at 2%. “The recovery has been underpinned by a revival in confidence, a reduction in uncertainty, and an easing in credit conditions”. Yes, Forward Guidance has been a success! The Bank of England expect the economy to grow by 3.8% this year and 3.3% next year assuming interest rates are held at 0.5% through 2014 and into 2015. Assuming rates follow the path outlined in current market profiles, growth will be a more modest 3.4% this year falling to 2.7% next. A recovery neither balanced or sustainable … No wonder the Bank consider the recovery is neither balanced nor sustainable. The recovery is dependent upon household spending, with a sluggish investment performance to date and a structural trade deficit, exacerbated by weak growth in Europe. Growth of 3.4% is significantly above trend rate and above most forecasts for the year. Consensus forecasts predict growth of just 2.7% in 2014 falling to around 2.5% next. The bank is very bullish on a recovery in earnings, consumer spending and investment. We shall see who is right in due course. For the moment, the Bank looks hot! So what of Forward Guidance … Forward guidance may have been a success but the single point reference to the unemployment rate has been beset with problems. The 7% guideline for unemployment will be breached in the first quarter this year. Hence the single point guideline is on the way out. It was too easy to understand. The Governor will not be allowed to make the same mistake again. The Bank collective has had its way. “To allow others to monitor how the economy is evolving relative to our projections, today we are publishing forecasts of 18 more economic indicators.” Excellent. Yes, now we will have eighteen guidelines to better understand policy. The output gap is back, as is the meandering NAIRU. Eighteen reasons why it will prove more difficult to pin the Governor in difficult interviews on Newsnight in the future. It was never clear why 7% was the correct number to choose anyway. The Americans bagged the 6.5% level first but the Governor admitted the long term NAIRU was more like 5% anyway. It was just a number but at least we could “see it” so to speak. Not so the “Output Gap”. What is the size of the output gap? What colour are the eyes of a Yeti? an equally productive debate. In a service sector economy with limited supply constraints, does it really matter anyway? Forward Guidance is a great step forward. Simplicity, part of the success, made the process just too transparent for some. Forward Guidance USA … Over in the USA, Janet Yellen, as the new Chair of the Fed provided assurances there would be policy continuance following the Bernanke regime. Accommodative monetary policy, with progressive tapering remains on the agenda. The US is expected to grow by almost 3% this year with inflation below 2%. Unemployment will fall below 6.5% through the year. So what of forward guidance, - markets believe a rise in base rates may be possible towards the end of this year or early next. So what happened to sterling? The pound closed up at $1.6730 from $1.6407 and 1.2220 from 1.2030 against the Euro. The dollar closed at 1.3690 from 1.3635 against the euro and 101.82 from 102.31 against the Yen. Oil Price Brent Crude closed at $108.56 from $109.57 The average price in February last year was almost $116. Markets, moved up - The Dow closed at 16,105 from 15,794 and the FTSE closed at 6,663 from 6,571. UK Ten year gilt yields closed at 2.80 from 2.71 and US Treasury yields closed at 2.74 from 2.69. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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 – UK recovery continues at pace in January ... According to survey data this week, [Markit/CIPS UK PMI® January], the recovery in the UK economy continues at pace into the New Year. Manufacturing, construction and services all continued to demonstrate strong levels of activity. In the manufacturing sector, the strong rebound continued with improved domestic demand and rising export orders suggesting robust growth in the month. Construction survey data suggests the sector is experiencing the sharpest rise in construction output since August 2007. Housing activity is increasing at the sharpest rate for over ten years. Service activity remains elevated with a headline index rate at 58.3 during January, down slightly from 58.8 in December. Service sector output is still at a very high level, anything above 50 suggests growth. The latest monthly NIESR GDP tracker suggests the economy grew by over 3% in January. This week, NIESR also upgraded UK forecasts for growth this year to 2.5% with projections of unemployment falling, inflation tracking the 2% target level and government borrowing continuing to reduce. In fact on current plans, according to the leading think tank, the public sector finances will be in surplus in 2018-19. So much for fears of prolonged austerity to come. So growth up, inflation down, employment up and borrowing down. Just the trade performance is expected to deteriorate with the external current balance increasing from a deficit of £54 billion in 2013 to £78 billion by 2015. ONS Data on Trade ... ONS data this week for trade was a little surprising. The trade deficit in December improved significantly compared to our forecasts. Seasonally adjusted, the UK's deficit on trade in goods and services was estimated to have been £1.0 billion in December 2013, compared with a deficit of £3.6 billion in November 2013. There was a deficit of £7.7 billion on goods, partly offset by an estimated surplus of £6.7 billion on services. Some £2 billion of imports appear to have been lost in the analysis. If domestic demand was as strong as the data suggests, the fall in imports for the month is illogical. In any case, don’t get to excited about the rebalancing agenda - for the year as a whole, the deficit trade in goods was £108 billion. US Payroll data ... Over in the US, payroll data upset the markets as jobs growth proved disappointing for the second month running. US payrolls rose a seasonally adjusted 113,000 in January after gains of just 75,000 in December. The unemployment rate continued to move down, to 6.6% the lowest level since December 2008 and perilously close to the Fed forward guidance hurdle rate. It is thought the latest data is unlikely to change the Fed stance on progressive tapering through 2014. Janet Yellen, the new chair of the Federal Reserve Board, makes her first appearance before Congress next week. Emerging markets will shudder as the adjustment in the stance of QE and tapering continues. Rate rises could be on the US agenda by the end of the year. So what happened to sterling? Sterling closed at $1.6407 from $1.6433 and 1.2030 from 1.2184 against the euro. The dollar closing at 1.3635 from 1.3487 against the euro and 102.31 against the Yen. Oil Price Brent Crude closed at $109.57 from $106.40 The average price in February last year was almost $116. Markets, steadied - The Dow closed at 15,794 from 15,698 and the FTSE closed at 6,571 from 6,5210. UK Ten year gilt yields closed at 2.71 from 2.72 and US Treasury yields closed at 2.69 from 2.65. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. John Join the mailing list for The Saturday Economist or why not forward to a colleague or friend? The list is growing as is our research and research team. Over ten thousand receive The Saturday Economist each and every week! © 2014 The Saturday Economist. John Ashcroft and Company. Experience worth sharing. 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. Employment surge will force rethink on forward guidance … The governor went to Davos this week and also appeared on the Paxman Show. He was asked about unemployment, forward guidance and Bitcoins! Excellent. Unemployment Unemployment fell to 7.1% in the three months to November according to the latest data from the ONS. Over 30 million were in employment up by 280,000 on the prior three months. Good news for the economy and a measure of the strong recovery in the UK, particularly in the second half of the year. The claimant count measure fell by 24,000 to a rate of 3.7%. The unemployed (claimant count) will fall below the one million mark by the end of 2014 based on our current forecasts. This would be in with levels last seen in September of 2008. No need then to worry about household incomes, earnings will begin to recover significantly as the job market tightens through the year. Forward Guidance So what of forward guidance? “Mark Carney has torn up his original low interest rate policy after completely misjudging the speed at which unemployment would fall” according to Phillip Aldrick writing in The Times today. Well not really. It is true the Bank of England model assumed the 7% hurdle rate would be triggered in 2015 rather then by the end of 2013! Nevertheless, the overall parameters of forward guidance remain in tact. The major concern of central bankers is conditioned by the experience of The Great Depression and the Lost Decade. Monetary policy will remain accommodating until the recovery and “escape velocity” from recession is secured. Even then, rates will rise slowly and gradually. It will be some years before a return to equilibrium base rates of 4.5% is achieved, the additional guideline. In the Inflation Report due next month, the bank will consider a range of options to update Forward Guidance. The simplest solution, an update to the unemployment hurdle rate from 7% to 6.5%. The challenge of a more complex hybrid may prove irresistible. As for escape velocity, tapering in the US is expected to accelerate. There seems little justification, if indeed there ever was, to continue to spend Fed dollars on US Treasuries and mortgage debt. 3% growth in the USA economy appears possible this year. That’s a faster rate than in the years leading up to the collapse in 2008. Borrowing Figures The UK Government borrowing figures were released this week. The government is on track to reduce the level of borrowing to between £105 billion and £110 billion this year. Receipts are rising faster than spending and the overall level of borrowing in the first nine months of the year is down by over £5 billion. Inflation down, borrowing down, unemployment down, earnings will begin to rise later this year. The platform for the election is well set. Just the trade figures alone will continue to disappoint as problems in Europe persist. So what happened to sterling? Markets were disturbed by the possibility of more tapering, undermining stock market strength in the USA and destabilizing international capital flows across developing economies. Poor readings from manufacturing data in China and Japan, plus problems with the Argentinian peso created the “perfect storm” for markets at the end of the week. The CBOE Vix volatility index shot up from 13.8 to 18.14 at close. Some way off the 55 level recorded in the depths of despair in 2010 but a measure of late volatility nevertheless. The pound closed at $1.6481 from $1.6422 against the dollar and 1.2041 from 1.2127 against the Euro. The dollar closing at 1.3681 from 1.3538 against the euro and 102.34 104.23 against the Yen. Oil Price Brent Crude closed at $107.88 from $106.48. The average price in January last year was almost $113, so no real threat to inflation from crude oil prices Markets, moved down - The Dow closed at 15,879 from 16,458 and the FTSE closed at 6,663 from 6,829. 7,000 on the FTSE a soft call for the near term, requiring a little more work in progress. UK Ten year gilt yields closed at 2.78 from 2.84 and US Treasury yields closed at 2.72 from 2.82. Yields will test the 3% level as tapering accelerates into 2014 but for this week, the flight to quality led the market. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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 – the spirit of Christmas present is a cheerful spirit ... The spirit of Christmas Past - should not be forgotten. The spirit of Christmas Present - is a cheerful spirit. The spirit of Christmas Yet to Come suggests that it is unlikely that equilibrium interest rates will return to historically normal levels any time soon”. Excellent. Don’t you just love a central banker with a Christmas message. Governor Carney was speaking in New York this week at the Economic Club of New York. The Governor is anxious to secure the message, interest rates will not rise any time soon. The recovery will not be put at risk. The UK will achieve escape velocity from a liquidity trap, avoiding secular stagnation in the process. Forward guidance is the new policy mantra, secular stagnation the new spectre on the blog. The UK is set for recovery, despite the prophets of gloom on either side of the Atlantic. Forward guidance is integral to the central bankers response to the recession and setback. FG reduces uncertainty, providing reassurance that monetary policy will not be tightened before the recovery is sufficiently established. Businesses will have the confidence to invest. Households will have the confidence to spend. A liquidity trap is avoided. A liquidity trap occurs when the short-term nominal interest rate hits the zero lower bound. Typically in a liquidity trap, inflation is low, the equilibrium real interest rate is negative, creating a persistent inability to match aggregate demand and supply. Businesses won’t invest and consumers are reluctant to spend, aggregate demand continues to fall and a deflationary spiral develops. Fiscal constraints ensure Government spending cannot bridge the output gap. In the UK, the financial crisis pushed the equilibrium real interest rate to the lower bound. With nominal interest rates stuck at zero, and inflation low, monetary policy was unable to push actual real rates to a level low enough to generate growth allegedly. “Pushing on a string, is no way to wag the dog”. I think Keynes said that. Hence the emergence of QE on Planet ZIRP. Allegedly, a way to stimulate liquidity AND activity. In reality, a great way to undermine the gilt curve and returns to savers and investors in the process. So what of secular stagnation? Larry Summers had recently raised the spectre of secular stagnation at the IMF meeting in November in honour of Stanley Fischer, guru of monetary theory at MIT. Secular stagnation, a concept first developed by Alvin Hansen in the 1920s suggested the “new normal” in the USA (post depression) was of lower growth, primarily a result of lower population growth and technological exhaustion. No new things to boost productivity, that sort of thing. Larry Summers, resurrected the term, suggesting the short term real interest rate consistent with full employment may have fallen to -2% -3% in the middle of the last decade. “The natural and equilibrium interest rates may have fallen significantly below zero”. “We may have to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their long run potential.” he said. In theory, the Fed funds rate can be kept at ZIRP forever but it is much harder to do “extraordinary additional stuff” forever” either in the form of QE, or government deficit funding perhaps. This said Summers, is “my” lesson from this crisis which the world has “under internalised”. Actually Summers went on to say “Now this may all be madness and I may not have this right at all”. Mmm. Stuck on Planet ZIRP, QE was introduced, the effect of which, was to ensure we were marooned on the planet for longer. ZIRP creates of itself a problem which is compounded by QE. In the UK, QE has lost intellectual credibility and momentum but in the USA the persistent purchase of Treasuries and Mortgages (CMBS) continues, achieving no more for Uncle Sam, than a monthly dispensation into a NASDAQ tracker fund. It really is time to begin tapering in the US, end QE and return the equilibrium rate of interest to a natural rate. A natural rate for gilts and treasuries, which reflects an inflation hedge and a real rate of return to risk. In his speech, Summers said, “we have learned one thing, finance cannot be left to the financiers”. Perhaps but then I have always felt much the same about monetary economics. We should begin to think how we can manage an economy in which the academics are confined to campus and not allowed near policy levers. The concept of a negative equilibrium interest rate, which may have fallen to -3% pre recession is as incomprehensible, as life on Planet ZIRP without oxygen. The escape from ZIRP and the beginning of recovery can only be accelerated by an end to QE. Let the free markets free and end QE - the cry. It is time to suggest “Schools out for Summers” and the MIT class of 14462. The US is set to grow by over 2.5% next year or has no one noticed. Back in the UK Back in the UK, as expected the march of the makers picked up the pace in October. Manufacturing growth year on year increased to 2.7% in the month. Construction output grew at over 5% in the latest data for October. The trade figures on the other hand continued to disappoint. The UK's deficit on trade in goods and services was estimated to have been £2.6 billion in October 2013, unchanged from September. The deficit of £9.7 billion on goods, partly offset by an estimated surplus of £7.1 billion on services. Yes, the march of the makers is picking up pace, momentum is “building”, investment plans will be brought back to the board room, just the trade figures alone will continue to disappoint, as the UK recovery gains pace. What happened to sterling? The pound closed at £1.6294 from £1.6346. Against the Euro, Sterling closed at €1.1856 from €1.1922. The dollar moved down up the yen closing at ¥103.2 from ¥102.8 and closing at 1.3740 from 1.3700 against the Euro. Sterling is on a rally which has led to a break out above £1.60, but €1.20 still presents significant overhead resistance. Oil Price Brent Crude closed at $108.83 from $111.61. The average price in December last year was almost $110, so no threat to inflation. Markets, US moved lower - The Dow closed at 15,755 from 16,020. The FTSE closed at 6,434 from 6,552. 7,000 FTSE now a tough call before Christmas. The markets still nervous until tapering finally begins. UK Ten year gilt yields closed at 2.90 from 2.91 US Treasury yields closed at 2.87 from 2.86. Yields will test the 3% level over the coming months but this will await the New Year. Gold closed at $1,239 from $1,231. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Monthly Markets updates coming in the New Year. John Join the mailing list for The Saturday Economist or why not forward to a colleague or friend? © 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. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. Economics news – you don’t have to be an optimist to see the glass is half full .. Yes it's the Inflation Report “You don’t have to be an optimist to see the glass is half full”, the opening remarks from Governor Carney’s Inflation Report presentation this week. The Governor went on to say, “the glass is half full and it will be filled”. A clear reference the recovery will be allowed to gain momentum before the Bank of England and the MPC will intervene “to take away the punch bowl” and begin the rise in base rates. The MPC are sticking with forward guidance. Rate rises will not even be considered until the level of unemployment hits 7% or even lower. [Subject to caveats on inflation expectations and market stability]. When will this be? In August the Bank assumed this would be in 2016 at the earliest. On Wednesday, the Governor admitted there was a 40% chance this could be by the end of 2014 with a 60% chance it would be by the end of 2015. Such has been the strength of the economics data over the last three months. Our own models assume the knock out unemployment rate will be hit by the third quarter of 2015. Thereafter rates may rise by around 50 basis points in short time. For the moment, the MPC are on a learning journey. The path of productivity, earnings, job creation and unemployment so unclear, we are all embarking on a “learning journey” suggested the governor. The £5m recently spent on the Bank of England model, of little value in the new world it would appear. Charlie Bean appeared most discomfited by the trip. Economics from Cambridge, a PhD from MIT and teaching at Stanford and LSE in the knowledge pack. One could be forgiven the reluctance to take the Mark Carney refresher course. But then why not? Having seriously failed to understand the impact of low rates on investment and depreciation on the trade balance, it is time to denounce the omniscient stance of the Oxbridge collective. Yes send them back to school. Martin Weale was indeed sent back to school this week. The MPC member was delivering a speech on the role of monetary policy and forward guidance to A-level students in London. “To cut a long story short, our job is to ensure that people buy coats when they need them”. Excellent. I am sure that cleared things up. Martin once worked in a shop apparently. Yes the black cloud gang disbanded, it’s back to school for all. Fill up your glasses, the punch bowl is on the table, the Carney Credit card is behind the bar. Inflation Good news for the Governor, inflation fell in October CPI to 2.2% from 2.7% in the prior month. Education hikes last year fell out of the index as we expected but the fall in transport costs pushed the index even lower. 2.4% CPI inflation was our call and still seems to be a reasonable target by the end of the year. Manufacturing prices suggest there is little cost pressure in the economy but retail energy prices are moving significantly higher. Retail Sales Retail sales figures in October were slightly disappointing, an increase of 1.8% in volume and 2.5% in value, slightly down on the averages in Q3. The demise of Barratts Shoes and Blockbuster a reminder, conditions remain tough on the high street as household real incomes remain under pressure. Internationally Janet Yellen, the new head at the Fed is still worried about the strength of the US recovery. Tapering may be postponed still later into the New Year. Growth in France and Japan in the third quarter a further warning the world recovery still requires accommodation. QE tapering US style is not the answer. Buying treasuries and Mortgage Backed Securities to support asset prices makes no sense. Blend a NASDAQ tracker fund into the purchase mix would follow the logic and demonstrate the folly. What happened to sterling? Sterling closed at £1.6113 from £1.6018. Against the Euro, Sterling closed at €1.1940 from €1.1982. The dollar moved up against the yen closing at ¥100.1 from ¥99.1 and closing at 1.3494 from 1.3368 against the Euro. Oil Price Brent Crude closed at $108.50 from $105.12. The average price in November last year was almost $110. We expect Brent Crude to average $110 in the month, with no material inflationary impact. Markets, pushed higher - The Dow closed at 15,962 up from 15,762. The FTSE closed at 6,693 from 6,708. UK Ten year gilt yields closed at 2.75 from 2.77 US Treasury yields closed at 2.70 from 2.75. Yields will test the 3% level over the coming months. Gold closed at $1,288 from $1,284. The bulls may have it may just have to wait for now. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Friday Financials Feature with Monthly Markets updates coming soon. John Join the mailing list for The Saturday Economist or please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. © 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. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. |
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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.
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