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Most eyes were on the US last week, with dealers unwilling to take out positions until Janet Yellen had made her headline speech at the gathering of the great and the good at Jackson Hole last week. For those attendees from Europe, listening to a central banker discussing when to tighten monetary policy must have sounded like something from a bygone age. What emerged in the speech seemed to go down the well-worn route of talking up the potential of rate hikes in the relatively near future, but with this always being dependent on the ‘incoming data’.
Unfortunately, this guidance is hardly helpful. At any given time, it is always possible to pluck one economic statistic that can be used as the rationale for staving off taking any action. While many perceive that Yellen may be running out of ammunition on this front, few would bet very much against a rate normalisation being delayed until the new year. What Yellen has managed to generate is a diverse level of expectation. The market appears to perceive that a rate hike at the Fed’s next meeting on 21 September is only a 23% likelihood, while anticipation of a rate increase before the end of the year struggles to climb much above the 50% mark.
While the fine-tuning around managing monetary policy in the US can be judged around a relatively limited number of factors (other than when the Fed starts to consider the Chinese economy or Brexit as additional reasons for delaying the normalisation process), those trying to manage the UK economy have a most unenviable job. Quite simply, nobody has the slightest idea what is going on, and the lack of knowledge around what type of fiscal policy the new Chancellor is likely to pursue only compounds the confusion.
Economic data in the UK basically falls into two categories. Firstly, there is data produced by the ONS, such as GDP, inflation and labour market statistics, which are primarily based on ‘hard’ figures. Then, we have the data generated by various surveys, most notably the Markit/CIPS monthly survey of the manufacturing, construction and service industries. To date, since the referendum result, the ONS numbers and those produced by survey evidence are at opposite poles. The actual figures have, almost without exception, been well ahead of predictions from market forecasters. The latest example of this was July’s sales figures, which showed a month-on-month increase from 4.3% to 5.9%. Forecasters were confidently expecting a reduction, given that June’s figure had been regarded as surprisingly strong. Both call into question the survey evidence from the GfK consumer confidence that emerged with a desperately depressing -12 reading at the end of July which was down from only -1 the previous month. Quite clearly, these do not marry up. Nor did a range of other figures, including unemployment coming down having been expected to go up and inflation which was rather higher than expected.The old headline rate has also risen to 1.9%.
Mark Carney made clear at the last MPC meeting that the monetary loosening he announced was heavily influenced by the CIPS surveys, which were uniformly awful and seemed to be early indicators of a return to recession. Having been berated by several economists who had their noses put out of joint by the failure of the MPC to act immediately after the referendum, it would probably have been a bit too much to expect the MPC to hold their nerve and wait until the Brexit decision had more time to bed down and more reliable evidence was available.
Our problem with most of the initiatives taken by the MPC at their last meeting was that the favoured recipes seemed rather Delia Smith vintage and, may bring about exactly the opposite result to that intended. It was noticeable that Mark Carney was keen to parade Andy Haldane, the Bank of England Chief Economist, as the designer of the package – a man who has had no experience of working in the wider world, having joined the Bank of England straight after leaving university. We suspect that few people would have had any objections to the Bank purchasing corporate bonds, the only real quibble being that the amount is so limited as to be irrelevant. Nor are they likely to have many reservations on the latest Term Lending Scheme, although how well this will work, with no apparent reward to the banks in passing on the low rates directly to borrowers, is currently difficult to comprehend.
Andy Haldane suggested that the decision to cut the base rate to 0.25% would save hundreds of thousands of jobs. It would be interesting if he could provide some detail to justify such a claim. We have spoken to several of our corporate clients, none of whom considered the base rate cut to have any relevance to employment levels. The previous Governor, Mervyn King, is equally dismissive of any claim that, when rates are already at minimal levels, a further miniscule adjustment is going to make any impact on corporate employment strategy. It will, of course, have a major impact on those pensioners who are reliant on interest income for their economic survival. Perhaps the GfK consumer confidence index includes an overly high percentage of pensioners.
If the validity of the rate cut is suspect, the rationale for another chunk of QE is much more questionable, which is probably why three MPC members voted against it. The original tranche of QE may have had a beneficial effect in encouraging corporates to invest. Since then however, all it has done is flatten the yield curve so that 10 year gilts now trade at 0.67%. QE has simply produced round-tripping so that the gilts sold by the institutions have been replaced by the purchase of other assets bearing long-term income such as property. There is absolutely no sign of QE promoting capital investment by corporates (which is its avowed purpose); it just increases the wealth of those who are already resource-rich. This is just asset bubble growth, which does not translate into real economic growth for the UK.
In a dull week for economic information, the UK will release the latest money supply figures today. Tomorrow will see the latest GfK consumer confidence survey released, which is expected to fall back from last month’s – 12. Similarly, the Markit/CIPS surveys for manufacturing and construction are out on Thursday and Friday respectively. The market is expecting a particularly strong reaction to last month’s manufacturing figures, with a rise from 48.2 to at least 49 and, just possibly, a return to positive territory.
At the end of the day, whatever country you look at, monetary policy is almost at the end of its ability to dictate economic policy. Sensible and effective fiscal policies are well overdue.
All views expressed in this bulletin are the author’s own and are based on information available at the time of writing
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