The Manchester Index™ confirms the UK recovery is on track with growth continuing around 3% into the second quarter of the year. The index fell slightly to 33.6 from 35.1, still much higher than pre recession levels. The preliminary results from the GM Chamber of Commerce QES data were available this week. The survey suggests strong growth in manufacturing continues, with slightly more moderate growth in the service sector. The results are in line with our forecasts for the full year - available in the June Economic Outlook. The full results and presentation on the influential Chamber of Commerce QES survey for Q2 will be available on the 4th July. Don’t miss that! Public Sector Finances off track … The strong performance in the economy is slightly at odds with the Public Sector Finances for May, released this week. The UK economy is expanding by just over 3% in the first half of the year. We would expect an improvement in borrowing given the strength of the recovery. Two months into the year and borrowing is off track compared to last year and to plan. In the first two months of the year, total borrowing was up at £24.2 billion compared to £23.2 billion prior year. Strong VAT revenues contributed to a 9% growth in total receipts but expenditure increased by almost 6%, despite a fall in interest payments. Last year’s borrowing figure has been revised to £107.0 billion for the financial year. Good news for the Chancellor but revenues will have to improve and expenditure will have to be contained, if this year’s OBR forecast is to be met. Strong Retail sales in May … Strong retail sales are contributing to the VAT receipts. In May retail sales volumes were up 3.9% compared to last year. This is down on April’s staggering 6.5% growth but we still expect growth of 4.6% in the current quarter and 4.3% for the year as a whole. Internet sales were up by 15%, now accounting for 11.4% of all activity. The online disruption continues. Sales values were up by just 3.2%, contributing to deflation and retail concerns in the High Street. Inflation slows in May … And so it was with the inflation figures. Inflation CPI basis slowed to 1.5% in May, down from 1.8% in April. Service sector inflation was 2.2% and goods inflation held at 0.9%. Falls in transport service costs, notably air fares, provided the largest contribution to the decrease in the rate. Other large downward effects came from food, drinks and clothing. The fall came as something of a surprise, we still expect inflation to track near target (2%) for the year as a whole. Producer Prices no pressure on inflation … No pressure on inflation is evident in the producer price information, released this week. Output prices in May increased by just 0.5% as input costs fell by 5%. Import prices of fuel, oil, food, metals, chemicals, parts, equipment and materials the real story. It is a story of weak international growth in GDP and trade, with slow growth in commodity prices, assisted by the strength of sterling, closing the week above the critical $1.70 level. Monetary Policy and Minutes of the MPC ... So why is Sterling so strong? Statements from Governor Carney that rates may rise “sooner than markets expect" are contrasting with the “Business as Usual” stance from the Federal Reserve. The Fed reduced the forecast GDP 2014 outlook for the US economy to just 2.2% from 3% earlier. Tapering is set to continue but guidelines suggest interest rates will not rise until the second quarter of next year. In the UK, we expect rates to rise in the final quarter of the year. Inflation and earnings suggest that strong growth of itself will not precipitate the rise. The Sterling genie is removing the $1.70 stopper. Who speaks for Sterling? We asked in March last year as the pound headed to the $1.50 level. Sterling look set to test $1.74 in the months ahead unless rate fears are calmed. So what happened to sterling this week? The pound closed up against the dollar pushing through resistance at the $1.70 level. Sterling closed up at $1.7010 from $1.696, steady against the Euro at 1.252 (1.253). The Euro strengthened against the dollar at 1.358 from 1.353. Oil Price Brent Crude closed up at $114.70 from $113.07 on Middle East concerns. The average price in June last year was $102.92. The inflation impact cannot be ignored if the a-seasonal pattern persists. Markets, closed up. The Dow closed down at 16,945 from 16,776 and the FTSE was also up at 6,825 from 6,790. UK Ten year gilt yields held at 2.77 and US Treasury yields closed at 2.63 from 2.77 on interest rate trends. Gold moved higher on geo political fears at $1,314 from $1,274. That’s all for this week. Visit the revamped web site. Download our Quarterly Forecast. 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. 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. 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. About the Manchester Index™ … The Greater Manchester economy correlates highly with trends in the national economy. The Manchester Index® is an early indicator of trends in both the Manchester and the UK economy. The index is derived from the GM Quarterly Economics Survey which forms part of the British Chambers of Commerce National Survey. Greater Manchester is the largest contributor to this important business survey. We poll 5000 businesses every quarter. As the principal national business survey and the first to be published in each quarter, the results are closely monitored by HM Treasury and the Bank of England Monetary Committee. The GM survey data has a high correlation with the national data. In other key indicators, the unemployment claimant count for example, has a high correlation (over 99%) with the national data set. Our business investment tracker utilises data from capacity and investment intentions to forecast investment in the UK economy. We lag capacity by four quarters and investment intentions by two quarters to model spending.
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The first rate hike - it could happen sooner than markets expect … speaking at the Mansion House this week, Mark Carney gave a clear indication UK rates could be hiked this year. “It could happen sooner than markets expect”, the exact wording. A bit tough on the markets, they had placed great confidence in forward guidance. So much for the “unemployment trigger” or the “eighteen indicators” - “watch my lips”, the Governor’s new condition precedent. Last week we suggested - UK rates would have to rise sooner than forward guidance implied. We didn’t have long to wait. The Governor made the move. The markets now believe rates may rise in the final quarter of this year. October would be a fair bet. UK data continues to suggest rates should rise in the Autumn … Construction output increased by a revised 6.7% in the first quarter of the year and by 4.7% in April. We are forecasting growth of almost 6% this year and 5% in 2015. Our forecast for GDP growth is upgraded slightly to 3% from 2.9% this year, as a result of the revisions to the construction data. [Our forecast is unchanged for 2015 - 2.8%]. Manufacturing output increased by 4.4% in April following growth of 3.6% in the first quarter. A strong performance in capital goods output was supported by growth in consumer durables. The march of the makers is picking up the pace but output remains just over 7% below the peak level of 2008. We continue to forecast a recovery with growth of 4% this year. Jobs Data - another strong performance revealed this week. The claimant count fell by 27,000 to 1,086 thousand in May. The reduction over the last three months was 86,000. The average claimant count from 2005 to the middle of 2008 was 880,000. If current trends persist, the pre recession levels will be achieved by the end of the year and job centres will be closing by the end of 2017! The number of vacancies increased to 637,000. This is higher than the average pre recession levels of 634,000. The UV ratio fell to 1.7 from a peak of 3.8 in 2009. The average 2005 - 2008 was 1.4. 33 million are in work [DYDC], an increase of over one million over the last twelve months. Our estimate of spare capacity is 0.6%, compared to the estimates of 1% - 1.5% within the Bank of England. The margin is wafer thin. The “gap” will be exhausted by the final quarter of the year. The labour market is tightening. Rates should be set to rise towards the end of the year. So what happened to sterling this week? The pound closed up against the dollar following the comments from the Governor, encountering resistance at the $1.70 level. Sterling closed up at $1.696 from $1.679, up against the Euro at 1.253 (1.231). The Euro softened against the dollar at 1.353 from 1.364. Oil Price Brent Crude closed up at $113.07 from $108.48. The situation in Iraq and the Middle East pushed prices higher. The average price in June last year was $102.92. The inflation impact cannot be ignored if the a-seasonal pattern persists. Markets, closed down on fears of the rate hike in the UK and in the USA. The Dow closed down at 16,776 from 16,899 and the FTSE was also down 6,790 from 6,858. UK Ten year gilt yields rallied at 2.77 (2.63) and US Treasury yields closed at 2.77 from 2.55 on interest rate trends. Gold moved higher on geo political fears at $1,274 from $1,250. That’s all for this week. Visit the revamped web site. Download our quarterly forecast. 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. The MPC left rates on hold this week. We will have to wait a few weeks to find out if the vote was unanimous. For the moment the consensus view is likely to have held. But for how long will this be the case? Forward Guidance is already becoming confused by statements from Martin Weale and Charlie Bean. By the Autumn, the Bank may adopt Dr Doolittle’s pushmi.pullyu animal as a mascot. So thin - the margin of spare capacity - for consensus. The timing of rates is likely to become more polarised amongst MPC members. Who will make the first move? The “Wad is on Weale” to be the first to break ranks. UK data suggest rates may rise sooner … The UK data continues to suggest rates may have to rise sooner than forward guidance implies. Car sales in of May were up by almost 8% in the month and by 12% in the year to date. According to Nationwide, house prices increased by 11% in the twelve months to May. The Halifax House Price data suggested house prices increased by almost 9% over the same period. According to Stephen Noakes, Halifax Mortgages Director : “Housing demand is very strong and continues to be supported by a strengthening economic recovery. Consumer confidence is being boosted by a rapidly improving labour market and low interest rates”. Christine Lagarde and the IMF squad were in the UK this week. The IMF has warned that house prices pose the greatest threat to the UK recovery. It called on the Bank of England to enact policy measures "early and gradually" to avoid a housing bubble. The Fund's annual health check, suggested the UK economy has "rebounded strongly” confirming growth would "remain strong this year at 2.9%”. The IMF also suggested growth is becoming “more balanced” but … Trade deficit deteriorates … There was no evidence of rebalancing in the trade figures for April. The trade deficit in goods increased to £2.5 billion in the month as the deficit (trade in goods) increased to almost £10 billion. OK, someone forget to include all the oil data in the month, which may have under stated exports by £700 million but this is a minor detail. We expect the deficit (trade in goods) to be between £112 billion and £115 billion offset by a £50 billion service sector surplus this year. No rebalancing on the trade agenda, as we have long explained. Markit/CIPS UK PMI® Survey Data The Markit/CIPS UK PMI® survey data was also released this week. “The UK manufacturing upsurge continued”. The Manufacturing PMI index was 57.0 in May, down slightly from 57.3 in April. The survey noted strong growth in output and new orders. There was also a sharp rise in construction output. House building remained the strongest performing area of activity. The headline index was signaling growth for the thirteenth successive month at 60.0, compared to 60.8 prior month. The headline service sector index continued in positive territory at 58.6 compared to 58.7 last month. Service sector employment growth increased at the fastest rate in 17 years. Interest rate outlook … The strong growth in consumer spending, retail sales, car sales and the housing market continues. The outlook for output remains strong in construction, manufacturing and the service sector. We expect investment activity to increase this year. The unemployment rate will continue to fall, placing greater pressure on wage settlements, leading to an increase in earnings into the second half of the year. The trade deficit will continue to deteriorate albeit at a rate which is offset by the strength of the service sector surplus. Sterling will probably hold at current levels for the rest of the year. Inflation, will remain around target, such is the weakness of international energy and commodity prices for the near future. With such a strong outlook for the domestic economy, rates should probably be on the rise by the Autumn of this year. However the MPC will be reluctant to move ahead of the Fed and the ECB. USA and Europe ... In the USA, Friday’s strong jobs report confirmed the economy is improving following the slight setback in the first quarter. Non farm payroll increased by over 200,000 as the unemployment rate held at 6.3%. For the year as a whole, the Fed may downgrade the growth forecast to around 2.7% from 3% currently. For the moment, forward guidance suggests US rates may begin to rise in the second quarter of 2015 but the outlook may be shortened, if the job trends continue. In Europe, the ECB is heading in another direction. The growth forecast within the Eurozone is just 1% this year but officials are concerned about the prospect of deflation. The latest HICP figure confirmed prices increased by just 0.5% compared to 0.7% prior month. The ECB decided to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.15% and the rate on the marginal lending facility by 35 basis points to 0.40%. The rate on the deposit facility was lowered by 10 basis points to -0.10%. To support bank lending to households and business, excluding loans for house purchase, the ECB will be conducting a series of targeted longer-term refinancing operations (TLTROs) valued at €400 billion over a four year period. The scheme follows the success of the UK Funding for Lending Scheme. So what of forward guidance … Domestic considerations suggest UK rates should be on the rise towards the end of the year. For the moment, forward guidance in the UK and the USA suggests rates will be held until the second quarter of 2015. This may change, if the trends in job growth continue here and in the USA. In Europe, forward guidance is more concerned with the prospects of deflation and a “lost decade”. An increase in rates is not on the “horizon” nor even in the appendix. So what happened to sterling this week? The pound closed up against the dollar at $1.679 from $1.675 and unchanged against the Euro at 1.231 (1.230). The dollar closed broadly unchanged at 1.364 from 1.362 against the euro and at 102.53 (101.80) against the Yen. Oil Price Brent Crude closed down at $108.48 from $109.35. The average price in June last year was $102.92. It is summer after all. Markets, the Dow closed up at 16,899 from 16,682 and the FTSE moved up to 6,858 from 6,852. UK Ten year gilt yields closed at 2.64 (2.56) and US Treasury yields closed at 2.55 from 2.46. Gold held at $1,250 from $1,251. 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. The Bank of England Inflation Report - May - So when will rates rise? Q2 2015 still the best bet. The final whistle not for some time yet! The Bank of England Inflation Report was released this week. It was all so predictable. The Governor’s opening remarks explained, “The overall outlook for GDP growth and inflation in this report is little changed from February. The UK economy continues to perform strongly. Having increased by more than 3% in the past year, output is now close to regaining the pre-crisis level. 700,000 more people are in work than a year ago and inflation is below, but close to, the 2% target. And so it proved. The strong labour market performance continued into April. The claimant count rate fell by 25,000, to a rate of 3.3%. The wider LFS data (to March) also reflected the improvement with a fall in the overall rate to 6.8%. On current trends the job centres really will be closing in 2017! The MPC expectations are for growth to increase by 3.2% in the second quarter and by 3.4% for the year as a whole, with continued expansion in household spending. Spending will be supported by an increase in real wages as inflation remains close to target and earnings increase moderately, with a gradual improvement in productivity. The MPC obsession with spare capacity continues. “While there is a range of views on the Committee, the best collective judgement is the margin of spare capacity is around 1% to 1.5% of GDP.” Charlie Bean is not entirely convinced about the “fuzzy concept” of spare capacity. “There is a real danger of spurious precision and the pretence of knowledge in this area” said the Deputy Governor. Quite so. That and many others perhaps! Does spare capacity impact on inflation prospects? Not so much. International inflationary pressures are key to current price trends and for the moment remain subdued. “The global picture is consistent with muted external inflationary pressures which, coupled with sterling’s appreciation, will moderate CPI inflation in the near term” said the Governor. Inflation has fallen sharply since the Autumn and the outlook for inflation in the medium term remains benign. A benign inflation outlook which will avoid undue pressure, in the short term, to increase rates, despite the strong growth figures and the buoyant housing market. So what of rates? The strength of the recovery has moved the economy “closer to the point at which interest rates will have to rise”, the official statement. So when will rates rise? In February, the MPC were happy to attach some credence to the market view that rates would begin to rise in the second quarter of next year. If anything the view in May is slightly more “dovish” or certainly more obtuse. “Our guidance is giving businesses and households confidence that we won’t take risks with price stability, financial stability, or the incipient expansion. It will promote the recovery in business investment, productivity and real wages, that a sustained expansion demands.” Rates are still unlikely to move until the second quarter of next year, the implication. As we explained last week, the MPC will be reluctant to move ahead of the Fed and the ECB. Forward guidance then lapsed into sporting analogy as the governor explained : “Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement but not the ultimate goal. The real tournament is just beginning and the prize is a strong, sustained and balanced expansion.” Yes the the Governor is laying out his team formation for the tournament ahead . “A flat back four with growth, inflation, unemployment and borrowing all heading in the right direction. Two strikers up front, household spending, with support to come from business investment. Some confusion in mid field from the housing market but no mention of exports and rebalancing. So expect the odd own goal from the trade performance, errant on the wing, as we move into the final stages of the competition. The Governor, for now, is not “taking away the punchbowl as the match gets going”. Far from it, you may continue to consume alcohol on the terraces, well into the final stages. Base rates are not expected to rise anytime soon. Q2 next year still the best bet. The final whistle will not be blown for some time yet.” So what happened to sterling this week? The pound closed broadly unchanged against the dollar at $1.683 from $1.685 and up against the Euro at 1.227 (1.224). The dollar closed at 1.370 from 1.375 against the euro and at 101.54 (101.18) against the Yen. Oil Price Brent Crude closed up at $109.91 from $108.16. The average price in May last year was $102.3. Markets, the Dow closed down at 16,447 from 16,544 but the FTSE closed up at 6,855 from 6,821. The markets are set to move, the push before the summer rush. UK Ten year gilt yields closed at 2.56 (2.68) and US Treasury yields closed at 2.51 from 2.62. Gold moved up slightly $1,293 from $1,287. 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. UK … This week, the Bank of England’s Monetary Policy Committee voted to maintain Bank Rate at 0.5%. The Committee also voted to maintain the stock of QE assets at £375 billion. No real surprise, UK rates are expected to remain on hold until the second quarter of 2015. For the moment, UK policy is relatively clear cut. USA … Over in the USA, matters became a little more diffuse. Tapering is expected to continue, concluding the asset purchase programme in September or October this year. But then what happens next? In March, Janet Yellen head of the Fed, gave a clear indication US rates would begin to rise within six months of the end of tapering. Markets reacted badly and the FOMC was minded to recant. This week, testifying before the Joint Economic Committee of the U.S. Congress, Chairman Kevin Brady pushed pushed Yellen for more clarity on when the FOMC would raise interest rates. The Fed chair would not be drawn on this occasion. “There is no mechanical formula for when that would occur” - the somewhat mechanical and evasive response. Oh yes, a month is a long time in the formulation of monetary policy. Europe … In Europe, Mario Draghi, President of the ECB, faced the opposite dilemma. With modest growth forecast for Euroland this year, inflation below target at less than 1% and a Euro strengthening against the dollar ($1.375), the Italian banker is under pressure to alleviate European monetary conditions still further. Playing for time, Draghi stated policy makers at the bank were comfortable with action in early June. Action awaits the “staff projections” for growth and inflation next month, before considering the next step. Draghi must hope forecasts are revised upwards. Having promised to “do what it takes” to stimulate growth, the President is clearly at a loss, as to what can be done next. A reduction in base rates to the zero floor would have little economic impact. Experimentation with negative rates is a high risk strategy. The move would thrill academic economists but cause trauma in the markets. This is no time for experimentation with central bank novelties. QE is muted as a possibility but with German and French long rates at 1.45% and 1.9%, there seems little cause to push rates lower. Ten year bond rates in Spain and Italy are this week trading within 25 basis points of UK gilts. MPC Dilemma … So here in a way is the dilemma for the MPC. The UK economy is growing at 3% a year, unemployment is falling at such a rate, we may have to close the job centres in 2017. Inflation is below target but as Mario Draghi pointed out this week, it is the weakness in international commodity prices, oil, energy and food, the real determinants of low inflation. Low inflationary pressure exacerbated or assisted by the rise in the Euro (and Sterling) against the Dollar. The UK is caught in the Dollar Euro vortex, with basic economics pushing monetary policy in opposing directions apparently. The MPC cannot move ahead of the Fed or much in advance of Europe for that matter without pushing Sterling still higher. Deflation the illusion - OECD World Forecasts This month the OECD forecast a recovery in world growth this year to 3.4% in 2014 and almost 4% in 2015. The Euro area is set to grow by 1.2% and 1.7% over the period. Euro inflation is set to rise above 1.2% next year. Commodity prices (base metals) are demonstrating a price basing action, Oil Brent Crude basis is trading ahead of last year. The international price profile can change quickly and dramatically. The threat of deflation - an illusion - which may quickly dissipate. A strong ECB president should do nothing. The US must accept rates will rise within six months of the end of tapering. This would leave the MPC free to begin the inevitable rate rise in the second quarter of next year. Want to here more, don’t miss the quarterly economics presentation on Wednesday at DWF next week. The multi media roadshow rolls on! So what happened to sterling this week? The pound closed unchanged against the dollar at $1.685 from $1.687 and up against the Euro at 1.224 (1.217). The dollar closed at 1.375 from 1.377 against the euro and at 101.18 (102.23) against the Yen. Oil Price Brent Crude closed at $108.16 from $108.50. The average price in May last year was $102.3. Markets, the Dow closed unchanged at 16,544 from 16,542 and the FTSE also closed up at 6,821 from 6,814. The markets are set to the move, the push before the rush. UK Ten year gilt yields closed at 2.68 (2.72) and US Treasury yields closed at 2.62 from 2.72. Gold moved down $1,287 from $1,296. 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. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. Next week the ONS will release the first estimate of GDP for Q1 2014. Expectations are for growth in the UK to be between 3% and 3.3% for the first three months of the year. The UK will be the fastest growing country in the developed world. A soggy start to the year may have damaged hopes in Washington to a claim on the title. Our own forecasts, realised last month, are at the bottom end of the range at just 3%. The Chancellor is creating a great platform in the run up to the election. Growth up, inflation down, employment up, borrowing down. Just the trade figures will continue to disappoint. The Osborne model for “austerity in recovery” may provide the textbook examples for the revisionist theory in the years to come. Four out of five rabbits ain’t so bad! The good news continued this week … Car Manufacturing According to the SMMT, car manufacturing picked up the pace in March as home and export markets improved significantly. UK car production rose 12% in the month to 142,158 units, bringing year to date growth to 2.9%. Good news for the UK’s volume manufacturers as European demand for cars strengthens. Not so good for the balance of payments. The growth in output will do little to offset the strength in domestic sales. New car registrations increased by 14% in the first three months of the year. Government Borrowing Better news on borrowing. Public sector borrowing totalled £107.7bn in the financial year. The out turn is £7.5bn lower than the £115.1bn borrowed in the prior year. Receipts were up by 4% with expenditure increasing by just 1%. The trend is heading in the right direction. The OBR expect borrowing to fall to £95 billion over the next twelve months and £75 billion in the following year. At the end of March 2014, public sector debt excluding temporary effects of financial interventions was £1,268.7 billion, equivalent to 75.8% of gross domestic product. Net debt has doubled since the end of the 2008/9 financial year. Retail Sales Even better news. Retail sales in March increased by 4.2% in volume and by 3.9% in value terms. Average prices of goods sold in March 2014 showed deflation of 0.5%. Fuel once again provided the greatest contribution to the fall in prices. The figures are consistent with the latest CPI data. But as we warned last week, oil prices Brent Crude Basis are now tracking ahead of last years levels for April and May. The deflationary shock may well be over. Domestic earnings are rising and world commodity prices are turning as the world and European recovery particularly, gathers momentum. Online sales were strong once again. The amount spent online increased by 7.1% in March 2014 compared with March last year. On line sales now account for almost 11% of total sales with a marked growth in food sales on line, increasing by almost 14%. Corporate Strategy Series Watch out for our Amazon case study coming soon. Over the Easter holidays, we released the second in our international corporate strategy series. The LEGO case study, follows on from the Apple Case Study originally developed for the Business School in Manchester. The third in the trilogy, Amazon will be released next month. Amazon is a great case study in how to grow (or how not to grow) an online business. Amazon with losses in 2000 of $1.4 billion on sales of $2.8 billion is probably the greatest example yet of a turnaround from burn rate to earn rate. How long can the Amazon model continue to grow? Is there much point in delivering salads in Seattle as part of the Amazon Fresh programme? Watch out for news of the release date.] So what happened to sterling this week? The pound closed up against the dollar at $1.681 from $1.679 and unchanged at 1.215 against the Euro. The dollar closed at 1.382 from 1.382 against the euro and at 102.15 (102.42) against the Yen. Oil Price Brent Crude closed at $109.54 from $109.76. The average price in April last year was $101.2. Markets, the Dow closed down slightly at 16,370 from 16,408 and the FTSE also closed up at 6,685 from 6,625. The markets will have to rally soon, if we are to sell in May and go away! UK Ten year gilt yields closed at 2.66 (2.70) and US Treasury yields closed at 2.67 from 2.72. Gold moved up to $1,301 from $1,293. 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. 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. The week of the budget … “I have never shied away from presenting difficult truths to the British people. And one difficult truth the British people must confront, is that by this time next year, I may well appear to be the most successful Chancellor in UK history.” Well it would have been a great start to the budget speech - and yes it could well be true! Growth up, inflation down. Employment up, borrowing down, just the trade figures will continue to disappoint. Construction will be much higher. Investment and real earnings will be rising by the second half of the year. The Tories could not hope for a better economic platform to pitch at the hustings next year. The Budget 2014 simply enhanced economic prospects for the year ahead. Proclaimed as a budget for makers, doers and savers. The savers did particularly well but above all else, it was a budget for voters. The Chancellor offered a prudent budget with fiscal constraint and an obvious eye on the electorate. “Fixing the roof whilst the sun is shining” the mantra. It is clear the Bullingdon boys are fixing the roof in Downing Street, intent on a prolonged stay beyond May 2015. For a more comprehensive note on the budget itself, check out the full post here. It was a budget which 24 hours later was considered (by the IFS and others) to be more expansionary than at first thought. It was a clever budget. Hard to think it came from the same stable as the "omni shambles" just two years ago. The polls have Labour just 3 to 4 points ahead of the Conservatives. Tory analysts will have an eye on the 1986 rally. A fifteen point swing in just twelve months, to enable the Thatcher administration to stay in power. The Lib Dem vote has collapsed, the UKIP vote will evaporate. The Chancellor has created a winning platform. It will be difficult, but not impossible, for Prime Minister Cameron to slip from the podium. Borrowing … The borrowing figures for February were released on Friday. At first sight the figures appear disappointing. Borrowing in the month was £9.3 billion, slightly up from £9.2 billion in the prior year. Heading in the wrong direction? Not really. The prior year figures were enhanced by the £2.3 billion sale of 4G licences. For the year as a whole the OBR projections assume borrowing of around £108 billion in the year down from £115 billion last year. Over the next four years, assuming the budget forecasts for spending are achieved, borrowing could be eliminated within four years. Entirely plausible. Then the real task of reducing the £1.5 trillion debt can begin. Unemployment … The good news on employment continued with further news this week. The claimant count fell by almost 35,000 in February to a rate of 3.5%. Over the last twelve months the count has fallen by 360,000 to a level of 1.175 million. Over the last three months, the count has fallen by 100,000. On current trends, assuming growth of around 2.7% in the year, the unemployment level could fall below 1 million by the end of the year, hitting the critical 2.5% rate by the middle of next year. Why so critical? This would be the best performance since the beginning of 2008. A 2.5% claimant count rate is consistent with earnings of 4% - 5%. Far more than current achievements of 1.5%. “Spare capacity” could become a scarce resource, sooner than we think. Base rates are set to rise in the first half of next year. The rate rise could be sooner and thereafter faster than we are currently led to believe. Rate rise USA … Janet Yellen as the new head of the Fed gave a clear indication, US tapering will continue with a possible elimination of the whole QE programme by the Fall. Thereafter Yellen made clear, US rate rises are likely to follow within six months. Watch the UK and add six months, our mantra modified to perhaps three months, the guideline last week. On current job trends, we caution, watch the US and don’t blink. The UK rate rise - much sooner than you think. So what happened to sterling? The pound closed at $1.649 from $1.662 and at 1.1956 from 1.196 against the Euro. The dollar closed at 1.379 from 1.390 against the euro and 102.27 from 101.31 against the Yen. Oil Price Brent Crude closed at $107.37 from $108.34. The average price in March last year was $108. Markets, the Dow closed at 16,410 from 16,107 and the FTSE closed at 6,557 from 6,527. UK Ten year gilt yields closed at 2.76 from 2.67 and US Treasury yields closed at 277 from 2.65. Gold loves a crisis, the crisis is over as the metal moved lower to $1,3358 from $1,378. That’s all for this week. No Sunday Times and Croissants tomorrow. All records of the tennis results - 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. Experts in strategy. 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. Economics news – "The recovery is not yet secure" says the Chancellor ... The recovery is not yet secure and our economy is still too unbalanced. The Chancellor made use of a visit to Hong Kong this week to warn on the perils of the recovery. Just as well the Governor Mark Carney has stated the MPC will not take any risks with the rally. The Chancellor is concerned about the strength of the recovery. It is not yet secure, we are not making enough and we are not exporting enough, the continued claim. Hence in four weeks time George Osborne will deliver a budget that supports investment, manufacturing and exports. “A budget that ensures around the world, you can't help but see “Made in Britain”. A budget that lays the foundations for long term economic security". Excellent. Investment incentives and export support are both welcome. But we must ensure policy is founded on economic reality. We don’t need subsidies for the Spinning Jenny and a ban on homespun cotton from ancient empire. A strategy for investment and manufacturing, has to be grounded on firm foundations, fit for the 21st century. Christine Lagarde - the age of multilateralism As Christine Lagarde, pointed out in the Dimbleby lecture earlier this month, we live in the age of multilateralism. A world of integrated supply chains, where more than half of total manufactured imports and more than 70 percent of total service imports, are intermediate goods or services. “A typical manufacturing company today uses inputs from more than 35 different contractors across the world” according to the leader of the IMF. It is not so much as “Made in Britain” as assembled in Britain. It is not so much a question of exporting but “re-exporting”. Manufacturing exports are dependent on imports for raw materials, energy, processed goods, semi manufactures and finished components. The good news a strong currency will improve cost inputs, mitigating any re sale price effect. The bad news, any improvement in net trade in goods will be elusive. The Chancellor claimed “We cannot rely on consumers alone for our economic growth and we cannot put all our chips on the success of the City of London.” The fact is the recovery is driven by growth in the service sector, accounting for 80% of total output. Leisure, retail and financial services are leading the recovery, meeting the needs of an ambitious household sector accounting for two thirds of demand in the economy. We need a successful city of London, to generate the service sector surplus to offset the trade in goods deficit. As the Chancellor announced in Hong Kong, the UK is the first country in the G7 to agree an Renminbi swap line with the People’s Bank of China. London investors will have the confidence to expand their RMB activities. We may have in due course a RMB clearing bank in London. Chinese banks will be able to set up wholesale branches in the UK. This is all good news for the Banking, Financial and Professional services sector - essential for growth in the age of multilateralism. A policy dependent on the “March of the Makers” rebuilding the workshop of the world is neither balanced nor sustainable in the 21st Century. We shall see, just what the budget delivers next month. So what happened in the economy this week … A raft of economic data, confirming the recovery is on track for growth this year. Inflation, CPI basis, fell to 1.9% in January, pushed lower by a fall in goods inflation (1.4%) as service sector inflation remained steady at 2.4%. Unemployment fell, with a strong fall in the claimant count to 1.2 million, a rate of 3.6%. The wider LFS unemployment count, also fell in the month, albeit with a rate slightly up in the month to 7.2%. Earnings increased towards the end of the year. Retail sales were up in January by 4.3% in volume terms and 4.5% in value. The government borrowing figures for January at first sight, were a little disappointing with repayment in the month at £4.7 billion down from £6.3 billion last year. Tax receipts were significantly lower in the month, which is surprising given another 400,000 are in work with earnings are increasing. The figures will look better by the end of the financial year. We still think borrowing will be around £105 billion for the year as a whole. Heading in the right direction to eliminate the deficit in due course. So what does this all mean? The recovery may be unbalanced but probably is secure. Growth up, inflation down, employment up, borrowing down, just the trade figures will continue to disappoint, as we have long pointed out. So what happened to sterling? The pound closed down at $1.6640 from $1.6730 and at 1.210 from 1.222 against the Euro. The dollar closed at 1.3740 against the euro and 102.499 against the Yen. Oil Price Brent Crude closed at $109.67 from $108.56. The average price in February last year was almost $116. Markets, moved up - The Dow closed at 16,143 from 16,105 and the FTSE closed at 6,838 from 6,663. UK Ten year gilt yields closed at 2.79 from 2.80 and US Treasury yields closed at 2.75 from 2.74. 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. |
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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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