“If inflation is the genie, deflation is the ogre that must be fought decisively...” Christine Lagarde head of the IMF was speaking to the National Press Club in Washington this week. With inflation below central bank targets in Japan, USA and Europe, the IMF believe the rising risks of deflation could prove disastrous for the world recovery. Western leaders, haunted by fears of the American Great Depression and Japan’s Lost Decade, are fearful of premature monetary tightening which could threaten the nascent recovery. In folklore, a genie is a supernatural creature who does the bidding once summoned. This may not have been the intentioned meaning by the boss of the IMF but Mark Carney Governor of the Bank of England, could be forgiven the interpretation. This week, the inflation figures for December were released by the ONS. CPI inflation increased by just 2%. For the first time in over four years, the genie returned to target, as would an obedient creature, undertaking the bidding of the new Governor of the Bank of England. The genie is working hard to obey. It has taken some time to get the message into the bottle and the genie back on message! Mission accomplished? With such success, it would be churlish to point out that in the same month, RPI increased from 2.6% to 2.7%, goods inflation actually went up and service sector inflation closed the year at 2.4%. For the moment the wild ride of the last four years has come to a close. As Christine Lagarde stated, “Optimism is in the air, the deep freeze is behind us and the horizon is much brighter.” In further good news, UK manufacturing prices increased by just 1% in December and input costs actually fell by just over 1%. Import prices of metals, parts and equipment fell, reflecting higher sterling values and lower world prices. For the moment, the inflation outlook for 2014 appears benign. Deflation is the ogre ... So what of ogres and deflation. Ogres are monsters in legends and fairy tales that eat humans and are particularly cruel, brutish or hideous. In the UK fears of deflation are not evident. We still expect inflation to hover slightly above target through the year. The ogre of deflation will be banished within the Kingdom. Particularly with earnings on the rise and a Chancellor of the Exchequer, as the handsome prince, up for re election, pledging an increase in the minimum wage to £7 an hour over the next couple of years. Inflation has fallen to target much faster than we had envisaged. The good news - as earnings rise, the boost to real incomes will lead to a sustained level of growth in consumer expenditure and retail sales. Higher but not quite as high as the latest UK data might suggest perhaps! Retail Sales the nymph spirit ... This week, the ONS released the retail sales figures for December. Sales volumes increased by 5.3% and values increased by 6.1% compared to December last year. Despite the fears of the major retailers, the consumer hit the high street with great gusto in the run up to Christmas allegedly. Internet sales, increased by 11.8% and small stores, experienced higher growth with sales increasing by just over 8%. Can retail sales have been so strong in December? Contractions in volume sales amongst food stores and petrols stations adds to the confused picture in the month. According to the ONS, in the three months prior to December, retail sales volumes averaged just 2%. So much for saving for Christmas. The surge in activity in December appears rather high and slightly at odds to the anecdotal evidence from retailers themselves. The BRC, British Retail Consortium suggests sales increased by just 1.8% in December as footfall actually fell. The BDO high street tracker reported sales down in the pre Christmas week with a recovery to 3.5% growth in the final week of the year. Debenhams, M & S, Morrisons and Sainsburys struggled in the Christmas period. Argos, Dixons, Halfords, Primark, Lidl and Ocado amongst the winners in the multi channel race. The 5% growth in volumes reported by the ONS appears to be a high call. So much for lies, damned lies and seasonal adjustment. Shrek shacking up with the Sleeping Beauty ... Ogres returned to the High Street this week as Sports Direct revealed a near 5% stake in Debenhams. Imagine Shrek shacking up with Sleeping Beauty, shudders must have swept around the Debenhams board room. The subsequent put and call option by Sports Direct, just added more confusion to the retail horizon. So what happened to sterling? The pound closed at £1.6422 against the dollar and 1.2127 against the Euro. The dollar closing at 1.3538 against the euro and 104.23 against the Yen. Oil Price Brent Crude closed at $106.48. The average price in January last year was almost $113, so no real threat to inflation from crude oil prices Markets, moved higher. The Dow closed at 16,458 and the FTSE closed at 6,829. 7,000 on the FTSE a soft call for the near term. UK Ten year gilt yields closed at 2.84 and US Treasury yields closed at 2.82. Yields will test the 3% level as tapering accelerates into 2014. 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 and 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.
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Economics news – news from Washington and Beijing ... Washington Good news from across the Pond, a Washington truce has been achieved. The US government has returned to work, Yosemite National Park is open, international creditors will be paid. The debt crisis is over. A twenty week truce has been secured. Markets rallied, the dollar slipped, Google shares breached the $1,000 level and the S&P 500 hit a new high. What more could we ask? Beijing In China, growth continued at 7.8% into the third quarter up from 7.5% in the second. For those fearing a hard landing, crash landing, soft landing, end of the world scenario, it is time to stop shorting the markets and buy in, the world is not coming to an end any time soon. London - Mortgages In the UK, mortgage lending increased by 32% in the third quarter compared to Q3 last year. FLS and Help to Buy are boosting the market. We expect house prices to rise by 5% this year and almost 8% next year before a normalized escalation returns. Prices are beginning to rise across the UK. Yes Prices will move across the UK, like a tidal wave across the flood plain. Check out The Saturday Economist Housing Market Review for more information. Inflation Tuesday, the ONS released the latest inflation figures for September. CPI inflation was unchanged at 2.7% as RPI moved down slightly to 3.2% from 3.3%. We expect a further fall in CPI inflation around 30 basis points next month, as education fees drop out of the data series. Thereafter prices will be pretty sticky around 2.5%. Energy costs are set to rise and service sector inflation at 3.4% up from 3.0% last month will create problems for policy makers. As we have long pointed out, service sector inflation has averaged 3.7% for the last twenty years. Manufacturing prices Manufacturing Prices, on the other hand, have averaged around 1% over the same period, boosted by falls in clothing and footwear specifically. The immediate outlook for manufacturing prices is pretty benign, Output prices increased by just 1.2% in September and input costs increased by 1.1%, down from 5% in July. Retail sales Retail sales were also released this week. Retail sales volumes were up by 2.2% in September and by 2.4% in the third quarter. Sales values increased by almost 4% in the three months boosted by on line sales and department store sales. Is the housing market stimulating footfall? Quite probably. We expect the volume of housing transactions to increase significantly this year, boosting sales of carpets, furniture durables and DIY goods in the process. Employment The employment figures were also released this week. The claimant count fell by over 40,000 in September to a rate of 4% compared to 4.2% last month. The wider FLS count fell in the three months to August, to 2.87 million, a rate of 7.7% from 7.8% last month. Lagging as it does, the broader unemployment rate could fall to around 7.5% by the end of the year. The Bank of England “knock out rate” under forward guidance at 7% could be in sight by the end of 2014. So what of base rates? Interesting Spencer Dale the Bank of England’s chief economist was on Twitter this week in a hashtag #AskBoE “open hour” adventure. The telling tweet - a rate rise in 2014 was unlikely. Just as unlikely as a rate rise in 2016 no doubt. The markets expect a move in 2015 but will it wait until after polling day? We will have to ask next time the bank is online, perhaps using Facetime or Skype? What would Governor King have made of it all! So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. The first estimate of GDP in Q3 will be released next week. We expect growth year on year to be over 1.5% rising to trend rate in the final quarter of the year. Inflation is falling, employment is rising, even the debt figures due next week will look much better. Energy costs may provide a problem for households but “wear a jumper”, the ministerial advice could keep bills down and boost retail sales in the process. What happened to sterling? Sterling moved up against the dollar and against the Euro as the dollar slipped. The pound closed at £1.6174 from $1.5954. Against the Euro, Sterling closed at €1.1816 from €1.1772. The dollar moved down against the yen closing at ¥97.7 from ¥98.5 and closing at 1.3682 against the Euro. Oil Price Brent Crude closed at $109.94 from $111.28. The average price in October last year was almost $112. We expect oil to average less than $112 in the month, with no inflationary impact. Markets, pushed higher - The Dow closed at 15,399 up from 15,237. The FTSE closed at 6,623 from 6,487. The US debt deal is done. The rally is on. UK Ten year gilt yields closed at 2.72 from 2.74, US Treasury yields closed at 2.58 from 2.69. Gold closed at $1,313 from $1,270. The bulls have it, at least for the week. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. 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. John © 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 If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below. If you enjoy the content, why not forward to colleague or friend. Economics news – inflation falls, no boom in the housing market, good news on borrowing, Chancellor Osborne is ticking the right boxes this week ... Inflation - Retail Prices The rate of inflation slowed to 2.7% in August compared to 2.8% in July. We expect a further significant fall next month and by the end of the year the inflation rate should be around 2.4%. Thereafter prices could be a little sticky. Service sector inflation was 3% in August and goods inflation was 2.4% in the latest monthly data. Inflation - Manufacturing Prices The good news on inflation was also manifest in the manufacturing sector. Output prices increased by just 1.6% compared to 2.1% in July. Input costs for manufacturers also fell back from 5% in July to 2.8%. Part of the reason for the slow down was oil and energy costs. The average price of oil in August was $111 dollars per barrel, slightly down on the same period last year. The rate of wages and earnings growth remains subdued, presenting a benign outlook for inflation over the short term. At close this week Brent Crude was trading at $109 dollars per barrel. The outlook for manufacturing inflation is pretty benign. House Prices - ONS data For those wary of a housing boom, the ONS also released the House Price Index in July. In the 12 months to July 2013 UK house prices increased by 3.3%, up from a 3.1% increase in the 12 months to June 2013. Signs of a national boom? Not really but certainly signs of a good recovery! Annual house price increases in England were driven by London (9.7%) and the South East (2.6%). Excluding London and the South East, UK house prices increased by just 0.8%. In the North West, prices actually fell by almost 1%. The RICS has made the call for a peg on prices around 5%. This to reflect a normalised earnings growth rate of 3% plus a supply side restraint adjustment to stimulate additional investment presumably. Would this work nationally? Obviously not. But some consideration to mortgage rationing on a regional basis especially in the South East may gain political if not market traction. Retail Sales August - A further indication, the recovery is on track with no signs of a runaway boom in prospect... Retail Sales in August were up by 2.1% in volume and 3.6% by value compared to August last year. Internet sales were up by 22% in the month accounting for 10% of all retail sales. Trading is better but not that much. With online trends and large store consolidation, life for most retailers is tough. Government Borrowing Further good news for the Chancellor, the level of borrowing fell in August. We expect further significant falls before the end of the financial year. In August 2013, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £13.2 billion. This was £1.3 billion lower than in August 2012 when it was £14.4 billion. The Chancellor is on track for a significant fall in borrowing this year. We expect the level of borrowing excluding interventions and transfers to fall to around £105 billion compared to a revised £115 billion last year. Car Manufacturing Car output increased by 16% in August bring the year to date output growth to 3%. More good news but the August headline should be kept in perspective. The year to date total is the better trend guide and let’s not forget commercial vehicle output is down in the year by 17%. Tapering USA Despite clear indications “Tapering” may begin in the Fall, the Fed decided to continue the process of QE, purchasing mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities at the rate of $45 billion per month, this week. What does this mean for US and UK interest rates? Not much in the short term. Check out the Saturday Economist Special Post "No tapering, more tampering, leads to more questions than answers at the Fed". Assessing market reaction over the week, Bernanke fires a blank would have a more appropriate headline. What happened to sterling? Sterling responded to the news on tapering, moving up against the dollar but down against the Euro. The pound closed at $1.5994 from $1.5871 having tested the 1.60 level intra week. Against the Euro, Sterling closed down at €1.1824 from €1.1940. The dollar moved little against the yen closing at ¥99.3 from ¥99.4 Oil Price Brent Crude closed at $109 from $111. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact. Markets, rallied - The Dow closed up at 15,451 from 15,376 . The FTSE closed up at 6,596 from 6,584. The Fed statement this month was a mis fire non event. We still think the FTSE will clear 7000 within ten weeks and the DOW will press 16,000. UK Ten year gilt yields closed at 2.92 from 2.94, US Treasury yields closed at 2.79 from 2.89. The fed statement this week pulled long rates down by just 12 basis points. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave, with pleas from the FOMC to “stick around”! Gold closed at $1,331 from $1,312. The bulls have it or do they? The news on tapering bought some upside gain but not much, we think gold will trade sideways for some time. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 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. Economics news – for a further week, the good news keeps on coming ... falling inflation, a fall in unemployment plus a boost to retail sales in July ... Inflation figures were reported on Tuesday. The CPI inflation index fell to 2.8% in July from 2.9% in the prior month. By the end of the year we expect inflation to fall below the 2.5% threshold but the 2% target will be elusive for many months if not years ahead. In October the hefty tuition fees will fall out of the index providing a drop of 20 - 30 basis points. The 2% target will be a challenge - goods inflation averaged 2.4% and service sector inflation averaged 3.1%. Bad news for rail travelers, the rail fares will be indexed to RPI plus 1%. A 4.1% increase in fares is in prospect for 2014, placing additional pressure on retail prices and disposable incomes. The unemployment picture continues to improve, for those who can find work at least. The claimant count fell by 29,000, to a rate of 4.3% in July. The wider LFS data suggests a more modest fall in the three months to June. The rate of unemployment at 7.8% was unchanged, still way above the 7% threshold that may signal a change in monetary policy. Retail sales volumes increased by 3% in July as sunshine and consumer confidence provoked a spending rush, stimulated by sunny weather, a Murray win at Wimbledon and the Royal baby allegedly. Sunny weather boosted sales across a range of products including food, alcohol, clothing and outdoor items. By value retail sales increased by almost 5%. After a slow start to the year, the retail outlook has improved in the summer months. Will this continue? Why not! Employment is increasing and earnings are improving. A further 400,000 are in work compared to this time last year and earnings increased by 2% in the three months to June. We expect the retail rally to continue, though perhaps not at the 3% rate for the rest of the year. Housing - The big story continues to be the housing market. Prices are rising, mortgage activity is increasing, the help to buy scheme is providing a boost to first time buyers. New home build is set to increase by almost 30% this year. The housing market is on the move, time to lock up your fixed rates, as prices rise, the real cost of borrowing is zero, capital appreciation - the bonus. So what does this mean for the year? Our forecast is for growth of around 1.2% plus, rising to 2% in 2014. The economy has turned, the real risk - monetary policy is behind the curve. It is difficult to believe rates will be kept on hold until 2016, watch the US and add six months the best guide as always. Markets were equally sceptical, gilts and treasury yields are rising - gold is beginning to glitter again. What happened to sterling? Sterling responded to the economics news, moving higher. The pound closed at $1.5633, from $1.5505 against the dollar and at €1.1713 from €1.1617 against the euro. The dollar up against the yen closing at ¥97.5 from ¥96.24 Oil Price Brent Crude closed up at $110.40 from $108.22. The average price in August last year was almost $115. We expect oil to average $112 in the current quarter. Markets, were troubled - The Dow fell to 15,081 from 15,425. The FTSE closed down at 6.499.99 from 6,583. It’s a chance for market makers to clean out the bear pit. A good time to make a move. We still think the FTSE will clear 7000 within ten weeks. UK Ten year gilt yields closed at 2.72 from 2.45, US Treasury yields closed up at 2.83 from 2.58. Yields are moving higher, despite the wishes of central bankers. The name is Carney not Canute after all. Gold closed up at $1,377 from $1,315. Still waiting for the next big move but which way? Last week we said, the arguments are building for the bulls. It looks like they have made a decision. 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! Join the mailing list for The Saturday Economist or forward to a friend to let them share the fun! John John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work. 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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