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Saturday 20th August 2016
Hi Friend,
Has the bank made the move too soon to cut rates ...?
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This week the ONS announced a raft of “hard data” about the economy. Inflation is rising, unemployment is falling, government borrowing is down, consumers are continuing to spend, Confidence has bounced back! Has the Bank of England moved too soon to cut rates? Has the Governor jumped the gun ...
There has been no immediate impact on the economy as a result of the referendum vote. The maxim for business - business as usual. Better for corporates, to wait until something really happens before reacting to Brexit. It could take years yet before we enact Article 50! Then will follow many years of talks.
It looks as if the MPC has moved too soon to cut rates. There really is no justification to increase QE and certainly no need to meddle with the corporate bond market. For institutions and investors, the search for yield is tough enough. The current account deficit is increasing, the kindness of strangers is under threat. The Fed is debating a further rate rise before the end of the year placing greater pressure on Sterling. Better to have waited for some hard data before blowing up the ammunition dump.
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Life on Planet ZIRP ...?
One
day we will realise, low rates are the problem. If savings equals
investment and low rates inhibit savings, low levels of investment will
ensue, damaging productivity growth. The Bernanke experiment leaves us
trapped on Planet ZIRP, drifting closer into the NIRP crevasse with no
hope of escape.
Has the power of central banks reached the
limit? If it has, it is a result of the abuse of power. Mis
priced capital, distorting markets, is the legacy of monetary policy on
Planet ZIRP. Ten year gilt rates at 0.6% are the manifestation of the
problem. No provision for real return, Fisher must be turning in his
grave.
Impact of Brexit ... tough negotiaions ...
It is true tough negotiations
are already taking place as a result of the referendum vote. For the
moment they are confined to inter departmental turf wars between the
Brexit trio, Johnson, Davies and Fox. Staff poaching, office filching,
difficult days are head in Whitehall, as mandarins get to grips with the
enigmatic truth of Brexit means Brexit. When elephants fight, the grass
(and policy) gets trampled. Article 50 may be shredded or simply set
aside in the process.
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Inflation CPI ...
Back in the UK this week ... Inflation
CPI basis increased to 0.6% from 0.5%. A modest attribution to the
weakness of Sterling perhaps as fuel and travel costs increased
slightly. Service sector inflation eased back to 2.7% as the rate of
goods deflation moderated to -1.4% from -1.6%.
More inflation is
on the way as oil prices continue to increase year on year. Producer
input costs increased by 4.4% in the month. A clear portend of price
increases to follow. In the final quarter of the year, Sterling
denominated oil prices will be up by 35% year on year and up by 50% in
the first quarter of 2017. Our producer price chart clearly marks the turn for manufacturers. Inflation will rise above target soon!
Employment …
Unemployment is
falling … the claimant count figures fell in July to 763,000 a fall of
over 8,000 than prior month. The number of vacancies was slightly lower
at 741,000. There were 1.6 million unemployed according to the
wider LFS data in June. The rate of unemployment was 4.9%, lower than
the pre recession record levels. Average earnings were 2.4%, real
earnings adjusted for inflation were just under 2%.
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Consumer Confidence …
Confidence
among British households has bounced back according to the Markit
household finance index. The August reading showed a strong rally
following the July lows. Consumers anticipate a broadly stable financial
outlook in the year ahead according to Tom Knowles writing in The Times
mid week.
Retail Sales ...
Retail Sales increased by 5.9% in
volume and by 3.6% in value in July. On line sales increased by 16.7%
now accounting for 14.2% of all retail sales volumes. Conventional
retail is under pressure as Amazon expands the distribution network in
the UK and Asda sales come under pressure.
Government Borrowing ...
Public
Sector Net Borrowing fell by £3.0 billion in the four months to July.
Overall borrowing was £23.7 billion compared to £26.7 billon prior year.
In the current year we expect borrowing to be around £65 billion based
on the first four months data. This compares with the £75.3 billion
outturn in the last financial year. Lower growth may put pressure on
forecast revenues. The Autumn statement will reveal any relaxation in
spending plans.
Next month we will update our quarterly economic
forecast for 2016 and 2017. We remain optimistic in comparison with the
consensus views. The full forecast is available to members and sponsors
of The Saturday Economist Club. Join us and help us to improve the
coverage of the UK and World Economy.
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| So what happened to Markets?
Markets, were mixed - The Dow closed up at 18,598 from 18,548. The FTSE closed down at 6,854 from 6,916.
Sterling
moved up against the Dollar to $1.3125 from $1.2910 and moved up
against the Euro at €1.159 from €1.156. The Euro moved up against the
Dollar to 1.132 from 1.117.
Oil Price Brent Crude closed at $50.89 from $46.85. The average price in August last year was $46.52.
Gilts
- yields moved up. UK Ten year gilt yields closed at 0.56 from 0.52. US
Treasury yields moved to 1.55 from 1.49. Gold closed at $1,347 from
$1,350.
John
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