Chancellor Osborne - ticking the right boxes

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.

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