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What have we been up to


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A succession of UK economic releases this week

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The Dodd-Frank bank reform act became law in 2010 in order to insure against the total collapse of the banking system, so narrowly avoided only two years earlier. Amongst other things, it effectively prevented US banks from risking their capital by playing around in markets regarded as overly speculative and risky, such as private equity. It also introduced a raft of regulatory requirements that customers are required to go through before undertaking any sort of financial transaction.
In one of the lesser-reported Trump tweets, it would appear the Dodd-Frank is to be reviewed. Fortunately the reaction has been rather more muted than to some of his other edicts. While Mario Draghi described the decision as being “very worrisome”, there are probably more good reasons to welcome Trump’s proposals on this occasion than to get wound up about them. Over the past few years, the amount of paperwork has grown out of all proportion to the risks being undertaken. It is now relatively common, when we are putting a hedging structure into place for a client, that the ‘on-boarding’ process with the proving bank takes longer than the analysis, strategy formulation and eventual completion in determining the actual hedging instrument.
There will, of course, be concerns that Trump’s action on Dodd-Frank raises the question, again, of what one does about the ‘too-big-to-fail’ banks. However, we suspect that Trump’s ambitions are much more modest: “empower Americans to make independent financial decisions” as a mission statement seems a long way from reducing capital constraints imposed on the banks. We suspect that Trump is well aware, on this occasion, that looking to remove a few clauses that lead to unnecessary costs on the retail investor/borrower is rather more manageable than removing a whole chunk of legislation.
Another event that occurred last week was the Brexit procedure successfully negotiating its passage through the House of Commons. One would assume it will have equally little problem in going through the Upper House. Why Theresa May and the Brexiteers had so much problem with Article 50 having to go through this parliamentary/constitutional process was difficult to understand. Anyway, some in the media seem to think that that is that – for the next two years anyway. I take a very different view. Up until now, both sides have felt free before, during and after the referendum to claim pretty much anything that supports their cause. Those days are now drawing to a close, and if this country wants to have a successful result from the negotiations, it had better wake up and start to have a serious discussion on some of the key issues.
By far and away the most important issue to be addressed is immigration. Anybody reading about the plight of the NHS over the past weeks will be well aware that the problems are not just about money, as some politicians would have you believe. The UK has a chronic shortage of staff which it is desperately trying to address through Health Trusts sending recruiters throughout the EU and Asia. This situation is only likely to get worse in the near future, as the number of students applying to get degrees in nursing is down 25% from last year. All the large GP practices in large towns and cities have enormous problems in maintaining their resourcing at adequate levels and operate an almost permanent recruitment policy. If we are really going to try to bring the NHS back from the brink of a complete permanent crisis, it will require a surge in immigration, as there are too few qualified UK nationals available. Without a greatly expanded recruitment programme, this situation will prove permanent. The same problem exists in many other areas, with the new housing programme likely to be the next scheme where the UK is almost entirely dependent on importing labour in order to meet the government’s housing requirements.
This week sees the release of several key statistics. First up tomorrow will be the latest inflation figures. The CPI number is expected to rise about 0.5% in the month, thus bringing the annual rate up to 1.9%. However, this is a trend with no early end in sight. Next month will probably see the 2% target rate breached, with no obvious reason to expect that it will halt anywhere short of 3% during the course of this year. It is unlikely to find much comfort from the producer price data (also out tomorrow). Here, the annual input prices are still cantering away in the mid-teens (and maybe more), and these rising input prices will have seen many of the firms who have benefitted from the weaker pound taking an offsetting hit to their margins. Even so, the output figures are unlikely to disturb the prospect of testing the Bank of England on its definition of putting up with exchange rate driven inflation for a ‘short period’.
Wednesday sees the release of the latest labour market data. The rise in the workforce is likely to see the unemployment rate increase marginally to 4.0% as the actual employment figures are not expected to reflect the much better than expected level of GDP growth. Meanwhile, average earnings are expected to remain unchanged at 2.8%, representing a rapidly shrinking margin between take-home pay and inflation. Finally, Friday sees the release of the latest retail sales figures. These are always difficult to predict. The median forecast shows a rise of 1%, which would bring the year-on-year figures back to around 3.5%. However, last month’s figures were very poor, with the monthly figure coming out at negative 1.9%, and the median forecast is probably based on some sort of bounce-back from that depressed level.
With the Bank of England having confirmed that it will ‘look through’ almost anything rather than admit its reaction to the Brexit vote was both premature and wrong, it is difficult to see what in this week’s economic figures is likely to have much of an effect.              

All views expressed here are the Author’s own and are based on information available at the time of writing.




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