![]() The prospect of a UK base rate rise before the end of the year receded this week with the release of latest data on inflation and earnings … Retail Prices … Retail price inflation CPI basis slowed to 1.5% in August from 1.6% prior month. Falls in the prices of motor fuels and food provided the largest downward contributions to the change in the rate. Markets expect CPI inflation to average 1.7% over the final quarter of the year, significantly below the MPC benchmark 2% target. Don’t worry about deflation too much, service sector inflation actually increased to a rate 2.7%, as goods inflation fell to 0.6%. Manufacturing Prices … Manufacturing output prices actually fell in August, down by -0.3% compared to a fall of -0.1% in July. Input costs, price of materials and fuels bought by UK manufacturers, fell -7.2% in the year to August, compared with a fall of -7.5% in the year to July. Crude oil costs were down by 14% as price of energy and import costs generally benefited from the weakness of world commodity and trade prices. The appreciation of Sterling helped, up by 8% against the dollar in the month. Home food material costs were down by -10%. Evidence that weak food prices at retail level are not really attributable to supermarket food wars after all. For the moment, inflation, or lack of it, is always and everywhere an international phenomenon. World trade prices are weak. Oil price Brent Crude is trading below $100 per barrel compared to $112 last year. Sterling closed at $1.63 this week up by just 3% compared to September last year. A warning perhaps, the currency contribution may be eroding and the dramatic fall in manufacturing costs may soon be reversed. Unemployment data … The number of people unemployed, claimant count basis fell below 1 million in August, the actual figure was 966,500 and a rate of 2.9%. Over the last six months over 200,000 have left the register. At this rate, job centres will be closing by the end of 2017, there will be no one looking for work. Despite the surging jobs market, pay data remains remarkably weak. Average earnings increased by 0.7% in July. Surprising given the rate of jobs growth. Some evidence of compression is more evident in manufacturing pay, up almost 2% and construction, up by 4%. Retail Sales ... Retail sales rallied in August as volumes increased by 3.9% year on year and values increased by 2.7%. Online sales volumes were up by 8.3% accounting for 11% of all retail transactions. Households are spending and will continue to do so. The August ©GfK Consumer Confidence Barometer confirms households are more optimistic, feel better off and believe it is a good time to spend. So what of base rates …? Janet Yellen, head of the Fed, gave additional guidance on the direction of US rates this week. “The Committee currently anticipates that economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run”. “A highly accommodative stance remains appropriate”. There was no real change in the police stance. Markets rallied and the Dow closed above 17,000. Analysts do not expect a rate rise in the USA before June next year. So what does this mean for UK rates? Weak growth in Europe, monetary accommodation in the US, low inflation and earnings data in the UK, will push the increase in UK base rates into 2015. Despite the schism on the committee, the MPC will be reluctant to move ahead of the Fed. No escape from Planet ZIRP just yet, we may regret the delayed take off in the years ahead. So what happened to sterling this week? Sterling rallied against the dollar to $1.630 from $1.626 and well up against the Euro at 1.270 from 1.254. The Euro was down against the dollar at 1.270 (1.297). Oil Price Brent Crude closed down at $98.08 from $97.62. The average price in September last year was $111.60. Markets, move up. The Dow closed at 17,291 from 16,978 and the FTSE closed down at 6,837 from 6,806. UK Ten year gilt yields moved 2.55 from 2.49 and US Treasury yields closed at 2.62 from 2.60. Gold drifted lower at $1,218 from $1,227. 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. Economics, Strategy and Social Media ... Experience worth sharing. Disclaimer 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. 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![]() The Inflation Report Press Conference … Reassurance from the Inflation Report Press Conference this week. The Bank of England may be uncertain about what is happening in the economy but it is certainly not clueless. Excellent. £3.5 million spent on the economics model and 200 PhDs in the pot to stir up the data, not all is for nought. James Macintosh of the FT put the difficult question “It would appear you've been moving over the past five years from a fair degree of certainty towards a fair degree of cluelessness and currently - you are at the more clueless end of the spectrum.” Is this a fair point? Well perhaps. Larry Elliott of the Guardian had begun the challenge suggesting there's a wide range of views on the Committee about the likely degree of slack in the economy. There is uncertainty about the housing market, wages may go up, they may not go up. Guidance on the pace and extent of interest rate rises is an expectation not a promise … “I mean once you cut through all this doesn't it lead you to three conclusions - one, that the Bank hasn't really got a clue what's going on out there; two, that the MPC is divided about what's going on out there; and thirdly, any person thinking about taking out a mortgage on the basis of the Bank's forward guidance would be ill-advised to do so, because anything you say, has to be taken with a very large pinch of salt?” Oh dear ... The Carney honeymoon is over … Well one thing we can be certain about, this is not the questioning we would have expected under Governor King. For Governor Carney the honeymoon is over. So much for the open routine. The Emperor’s economics models are proving to be as insubstantial as the clothing. Perhaps it is time to return to the enigmatic, grumpy old professor emeritus routine, dismissive of those of a lower intellectual order including undergraduates and the press core particularly. Ed Conway now with Sky News, would occasionally rattle Governor King teasing about the accuracy of the inflation forecasts, (not actually forecasts of course) but Governor Carney,cast in the role as the unreliable boyfriend, is taking more and more hits. All a bit of a muddle … Clearly Asa Bennett From the Huffington Post rattled the Governor, sensitive to criticism of forward guidance, “I just wanted to ask Governor about the evolution of your forward guidance plan, particularly when it started with the sort of clear to understand unemployment threshold, and then the sort of output gap, and then this bolt on about pay growth. Do you wish you started with this at the beginning? Hasn’t it all been a bit of a muddle or is it a learning process? “Well you’re muddled I'm afraid”. The playground retort from the Governor of the Bank of England. So is that the best we can get? The Old Lady of Threadneedle Street - the Aunt Sally of Fleet Street … The Old Lady of Threadneedle Street is becoming the Aunt Sally of Fleet Street. It would help if Jenny Scott, Executive Director of Communications, chairing the press conference, appeared to know some of the names of the press corp, instead of jabbing a pencil in this or that direction, when it came to question time. Perhaps Jenny was trying to ward off evil spirits, waving the magic wand of oblivion, which Governor King carried so successfully in his cloak. For debutante MPC member Minouche Shafik, it was all too much. Shifting uneasily, apparently bored, struggling under the weight, not of office but of a voluminous hair style, the governor allowed Minouche one question response on Europe … Minouche : “It would be good for us if Europe grew faster since it’s our key trading market, but for the near term that doesn’t look very likely”. “That’s all we have time for”, said the Director of Communications and that was that. Well, we must hope there is much more to come. So what happened this week? GDP Estimate … The ONS second estimate of GDP was released this week. Growth in the UK Q2 increased by 3.2% compared to the prior estimate of 3.1%. Actually the numbers hadn’t changed, the statisticians were using a more accurate calculator this time round for the rounding. Our estimates of growth for the year are unchanged at 3% which makes the Bank of England estimates of growth (3.5%) all the more difficult to understand. Either the economy will grow at an eye watering 4% in the second half of the year or the Bank expects big revisions to the data in September as a result of the inclusion of drugs and prostitution in the national accounts. Who would have thought hookers had that much clout. We shall have to wait until the end of September for the update. Labour Market Stats … The jobs outlook just gets better. The claimant count rate fell to 3% in July at just over 1 million unemployed. 400,000 have found work in the past year. At the current rate of growth we will be closing the job centres at the end of 2016, there will be no on left on the register looking for work. The wider LFS data confirmed the trend with the unemployment rate falling to 6.4%. More people in work, unemployment rates falling, recruitment increasing, skills shortages heightening, which makes the pay data even more inexplicable. Earnings increased by less than one per cent in June. We would expect increases in line with inflation or more at 3% plus at this stage in the recovery. For this we have much sympathy with the models at the Bank of England, something strange is happening on Planet ZIRP. Maybe low rates are the problem and no the solution? So what of base rates … Growth and jobs data would push the argument for a rates rise before the end of the year. Inflation and pay data would suggest the rates could be kept on hold until 2015. The latest data from Europe confirms a rate rise is off the agenda for months if not years to come. The MPC will be loathe to act ahead of the Fed and not too eager to move in advance of the ECB. Markets assumed rates will be kept on hold as a result of the Inflation Report… So what happened to sterling this week? Sterling closed down against the dollar at $1.669 from $1.6774 and down against the Euro at 1.246 from 1.252. The Euro was down against the dollar at 1.246 (1.341). Oil Price Brent Crude closed down at $102.96 from 105.02. The average price in August last year was $111.28. Markets, rallied on the rates news. The Dow closed up at 16,637 from 16,554 and the FTSE closed up at 6,685 from 6,567. UK Ten year gilt yields were down at 2.41 from 2.55 and US Treasury yields closed at 2.39 from 2.49. Gold was largely unchanged at $1,303 from $1,305. 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. ![]() 1 Investment is increasing but the economy is not re balancing … In the first quarter of 2014, investment increased by almost 10% compared to the first quarter prior year. The rally in investment is welcome but investment remains some way off the highs of 2007. By the end of 2015, investment will account for just over 15% of GDP compared to 61% for household consumption. The economy is not re balancing Download - Modelling UK Investment 2 Investment isn’t always about productive capacity … In 2007, the largest share of investment was property related. Over 70% of investment is explained by dwellings and commercial real estate investment. Machinery and equipment, areas of investment we tend to associate with “productive capacity”, account for just 20% of total investment spending. 3 There has been no significant loss to productive capacity … Our capital stock model suggests productive capacity within the economy will return to normal by the end of 2014. We identify productive capacity as investment in plant and machinery with a four year capital stock model. There has been no significant loss to productive capacity and output potential 4 Low interest rates of themselves do not stimulate investment … The cost of capital is a relatively low element in the return on investment model. Recovery is the key to unlocking the growth in investment. 5 Investment will assist not lead the recovery … We are forecasting an increase in investment of 7.4% in 2014 and 6.5% in 2015. Our forecasts for UK growth overall are 3% in 2014 and 2.8% in 2015. The investment share of GDP is set to increase as a result. This represents recovery rather than re balancing of the economy. Investment will assist, not lead, the recovery. Download our full report on Modelling UK Investment together with latest forecasts ... |
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