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Saturday 16th September 2017
Hi Friend,
Vlieghe Flop, Flips Sterling Fortunes ...
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The MPC voted to keep rates on hold this week. Just two members voted to hike rates. Seven members voted to keep rates on hold. No change from prior month.
So when will interest rates rise? It's like waiting at the bus stop, for a bus that's two days late. You know it's going to come eventually. You just can't be sure when.
We have been waiting at the bus stop in Threadneedle Street for some years now. Churlish to talk of forward guidance and the 7% unemployment trigger rate. That bus passed by with the "out of service" sign some years ago.
So why the excitement this week? Sterling rallied against the euro/dollar as market expectations of an increase in base rates heightened. Despite the decision to hold rates on Thursday, Sterling is trading at over $1.35 against the dollar and testing €1.20 against the Euro.
It all began with the closing statement from the Governor on Thursday. "Monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations". Traders arose from slumbers, to go long Sterling. It doesn't take much to wake up the queue. The bus is coming, it could be here within the hour.
The came the speech on Friday from Gertjan Vlieghe at the SBE Conference in London. "The appropriate time for a rise in Bank Rate might be as early as in the coming months". Crikey. A dove squawked in SE1. The bus is around the corner. Check your tickets and grab a ride. The push to parity is off the trading floor. Sterling is the currency of choice at least for now. Well certainly for the week-end. The rally looks a little over extended to say the least. The bus may be a bit later after all.
In the U.S. sluggish retail sales in August could push any Fed move into 2018. The rally in Sterling may just be enough to take the edge off prices in the short term. The Bank expects inflation to rise to over 3% CPI basis before Christmas. The unreliable boyfriend may just be flirting with the markets again. The push to parity against the Euro, was too much even for the normally indifferent Old Lady of Threadneedle Street..
Gertjan Vlieghe may talk of a rate rise in the coming months ... let's not forget there are many months to come! Don't bank on a ride before Christmas ...
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So what of inflation ...?
Inflation CPI basis hit 2.9% in August up from 2.6% prior month. RPI inflation was 3.9%. Do we really think such high levels of inflation are compatible with base rates on hold at 0.25%?
Goods inflation CPI was up to 3.1%. Service sector inflation was 2.7%. Producer prices rose slightly to 3.4%. Input costs edged up to 7.6%. The shock from the oil price rally, compounded by Sterling depreciation should be working out of the system by now. The August data suggests there is more inflation in the pipeline. Our models suggest the worst of the short rise is over. The Bank expects prices to peak at over 3% in the coming months. Does this mean the bus is coming after all? No time to leave the queue. Maybe time to push back in the queue, if you are over a few pounds over weight this weekend.
Strong jobs data, weak earnings ...
The latest data on employment was released this week. Almost 400,000 jobs have been created over the last twelve months. The unemployment rate fell to 4.3%. The ratio of unemploymemt to vacancies hit 1.9. Recruitment difficulties are increasing. Earnings continue to defy economics. The latest data suggest pay growth of just over 2% overall with real incomes under pressure as prices rise. The release of the public pay cap will lead to an increase in overall pay levels. The augmentation of pay will exacerbate underlying price pressure. A pay rise for every one is another "omnibus" around the corner ...
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| West Wing WTF ... The fickle finger of ...
The fickle finger of the President is pointing both ways in Congress and Senate. "He likes us, well he likes me anyway" said Democrat Senator Chuck Schumer this week.
The Senator had just outlined a proposal on immigration and DACA to cut a deal with the White House. Schumer and Nancy Pelosi had a private dinner with the President. Crispy beef along with Trump's principals were on the table. Republicans were not at the banquet.
House speaker, Paul D. Ryan, and Mitch McConnell, the Senate majority leader, were excluded from the dinner. The president was sending the message. He was "willing to exclude the leadership of his own party
in the interest of scoring fast legislative victories", according to the New York Times.
The softer line on DACA alienated the alt right in the Trump support camp. Bernie Sanders called Trump “the most destructive president” in modern history. Sanders was attacked on Twitter, a few strong words on immigration were added to appease the right. Uncertainty on the conversations over dinner confused the left. The GOP takes umbrage at the political shape of the Oval Office.
Getting things done may be difficult. Who would have thought politics could be so complicated. The President ate a Chinese meal as another Korean missile flew over Japan. Kim Jung-un has vowed to achieve military parity with the U.S. The goal - "to establish the equilibrium of real force with the US, so US rulers dare not talk about a military option for the DPRK [North Korea]". No talk of military action for the moment. Diplomacy and sanctions the solution in the short term. Sending the people of North Korea food and videos of life in the West may be more productive then hell fire and destruction.
That's all from the West Wing Whisky Tango Foxtrot this week. Off to catch a bus ... and to play tennis!
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| | | | | Don't
Miss the Economics Conference on the 13th October. Our theme is the
Economics of Greater Manchester. We will be talking about the Inclusive
Growth Challenge, Balancing the Books and the Sectors Driving Growth in
the City Region! Another Great Conference in the pro-manchester series . We have a great line up of speakers announced this week. Book Now Don't Miss Out ... |
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John
That's all for this week. Have a great week-end ...
John
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