Central Bankers Hold Fire For Now ...
Drama in the air ... Donald Trump held back on a missile attack on Iran this week. "We were cocked and loaded, ready to retaliate" tweeted the President, "When I asked how many will die, 150 was the answer. Ten minutes before the strike, I stopped it."
The Iranians had shot down a US unmanned drone earlier in the week. The President considered 150 deaths would be disproportionate to the loss of a $250 dollar flying machine. Capable of many things, the Iranians claimed the drone was flying in Iranian air space. Not so, according to Trump, the drone was flying in "international waters".
A "submersible" flying drone, versatile indeed. "We had the evidence" said Trump "it was scientific evidence, not just words". The Iranians had the evidence, bits of the RQ-4 Global Hawk drone were on parade.
There was some suggestion the shooting was executed by a rogue command rather than a regime call. Hence the Trump reprieve. US protocols have been amended to ensure the death toll is assessed before launch buttons are pushed next time.
In similar news, central bankers were "Cocked and Loaded" but decided to hold fire for now. Mario Draghi received a standing ovation. He told the European Union that additional monetary stimulus and a much more expansionary fiscal policy may be needed to overcome persistent economic weakness. The President of the EU Central Bank promised once again, to do whatever it takes to support the growth objective.
In the UK, the MPC voted to keep rate changes on hold. Noise from the hawks, including Ben Broadbent and Andy Haldane, was offset by the UK inflation slow down, announced earlier in the week. Headline inflation CPI basis slowed to 2%. Andy Haldane's call, to nip inflation in the bud, appeared premature for now.
In the US, the Fed also held rates but signaled the possibility of a rate cut later in the year. The first cut could appear as early as July. The Fed appeared to forego the pledge to be "patient" in formulating interest-rate policy. The Fed Chair Jerome Powell appears to be promising to cut rates if need be, to extend the recovery into 2020.
Markets rallied, bond yields fell. Stocks rose to records, bonds surged, oil prices jumped and gold rose above $1,400 dollars an ounce. The fundamentals in the US economy remain strong. The risk of the Trump trade policy remains the chief threat to growth this year ... in the US and around the world.
Retail Sales ... Blowing in the wind ...
In the UK, retail sales growth slowed to 2.3% in May. Cold wet weather kept shoppers from the high street. Clothing and footwear sales fell by 4.5% the biggest drop since July 2015. Online sales growth slowed to just over 8% accounting for almost 20% of total sales in the month. The pressure on the high street continues.
Some slow down was to be expected. Total sales volumes had averaged 5% in the first four months of the year. Consumer confidence remains firm. Real income growth continues as the inflation data demonstrated this month. We still expect overall growth of around 3.5% this year.
The level of inflation CPI basis eased back to 2% in May from 2.1% prior month. Service sector inflation fell back to 2.6%. Goods inflation increased slightly to 1.5%. Inflationary pressures remain subdued. Oil prices remain weak, despite the slight rally to $65 dollars Brent crude basis this week.
Manufacturing prices fell in the month. Input costs pressures fell significantly. Cost price rises slowed to 1.3% from 4.5% in April. Output prices slowed to 1.8%. No pressure on the Bank of England to increase rates for the moment. The MPC will await developments in the Brexit debacle before making any significant move.
Borrowing figures for the first two months of the fiscal year were released this week. Public sector borrowing was £5.1 billion in May, £1 billion higher than during the same month last year. In the first two month, borrowing was £1.8 billion up on prior year. Markets expect an increase in the current financial year to around £30 billion from £24 billion last year. The result is broadly in line with expectations.
Tax receipts rose by £1.9 billion, or 3.5 per cent, to £56.7 billion on the back of higher income tax revenue and national insurance contributions. VAT receipts rose by £500 million over the same period. Corporation tax revenue fell by 0.8 per cent. Expenditure, in the month increased by £2.5 billion, or 4.2 per cent, to £61 billion.
The task of the Chancellor made more difficult as austerity eases slightly.
Global Economic Growth is Slowing ...
Around the world further evidence appears of a slow down in global growth. Trump’s trade war is damaging business investment, confidence and trade flows across the world.
The slow down in Europe and elsewhere, coincides with Trump’s intensified trade fight with China and other partners. A further escalation of tariffs on Chinese goods or levies on EU autos, could slow global growth to a crawl. French wine came under attack as the President railed against protective tariffs in the EU.
Weakness in China, driven in part by fallout from the trade war, has damaged the economies of Germany, Australia and the Asian block. Exports from Singapore fell by 16% in May as sales to China and Hong Kong fell by 25%. Japan, South Korea and Taiwan are “highly exposed” to the Chinese economy, supplying goods for the mainland market and re-export.
Trump may think "tariffs are a beautiful thing" but others including US business are not so sure. Retaliation is inevitable. India imposed higher customs duties on a raft of U.S. goods this week, in response to similar measures taken by Washington.
Apple has warned the tariff war with China could harm the company’s international standing and reduce its contribution to the American economy. Imposing an import tax on the iPhone and other products assembled in China, will “weigh on Apple’s global competitiveness”.
Toy makers, telecom officials, port workers and shoemakers kicked off a seven-day hearing in Washington this week. The warning is simple. Trump’s plan to impose tariffs on nearly all Chinese imports would raise costs for consumers, disrupt supply chains and potentially force them to lay off employees or go out of business.
Trump may think the Mexicans will pay for the wall and China will pay for the tariffs. Tariffs are in effect a domestic consumption tax, impacting on US growth. Tariffs and trade wars are a real threat to world growth. Just as Brexit is a clear and present danger to UK and European business.
In the UK frustration at politicians has morphed into outright anger in the three years since the referendum. Companies continue to lose customers and delay investments, it is said.
“It’s not that the Brexit uncertainty and fear of no deal is going to have an impact in the future, it’s having it right now,” said Carolyn Fairbairn, director general of the Confederation of British Industry.
Trump launched his election campaign this week. It was much of the same. "Build that wall, drain that swamp, lock her up". Make America Great Again has been updated to "Keep America Great". It may not be so easy.
Good news for the White House. The President may soon have friends in Downing Street to help the cause. Johnson is set to walk in to Number Ten. A snap election, followed by a deal with the Brexit Party could then see Farage next door as Chancellor ...
That's all for this week, have a great weekend. We will be back with more (Shock) news and updates next week ...
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
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.