The outlook for UK inflation does not warrant an interest rate rise any time soon, according to Kristin Forbes, one of the Bank of England’s nine policy-setters, writes Katie Allen.
US economist Forbes has released a speech on the UK labour market in which she highlights a mixed picture: a low unemployment rate but slow pay growth. That echoes the tone of the minutes from the Bank’s latest policy meeting when the monetary policy committee (MPC) voted 8-1 to leave interest rates at their record low of 0.5%. Only Ian McCafferty voted for a rate rise.
Forbes says the UK labour market appears to be almost back to normal but that the drop in global oil prices has given the MPC a bit more time to judge if the tighter labour market would boost wages and help inflation return to the Bank’s 2% target from 0.2% now.
Her message seems to be that labour costs are slowly building but they are not yet at a level where policymakers can be confident UK inflation will hit 2%.
Here are key quotes from Forbes speech, entitled “A tale of two labour markets: the UK and US”, released today but to be delivered tomorrow to the Henry Jackson Society in parliament:
“With slow wage growth, inflation currently at 0.2%, and downward price pressure from cheaper energy and sterling’s past appreciation, there appears to be little risk of inflation suddenly spiking to well above our 2% target in a way that would require increasing interest rates soon.”
“A close look at the UK and US labour markets suggest that they are stronger and tighter than the most popular headline wage figures suggest. After a severe crisis and prolonged recovery, they have largely returned to normality.
“In the UK, however, wages and labour costs have not yet gained enough momentum to be consistent with inflation reaching our 2% target. Tightening monetary policy today would require faith that our forecasting models will work and the tightness in labour market quantities and measures of labour market churn will soon translate into stronger wages and then higher inflation. But, unfortunately, these models have not been working very well recently. Therefore, although I still have faith, I would like to see a bit more upward movement in these wage and cost measures to build confidence that the normal chain of tight labour markets feeding through into higher wages is still intact. In other words: trust, but verify. The most recent falls in oil prices, by delaying the recovery in inflation, provide the luxury of a bit more time to build this confidence.”
Is the gloom about a slowdown in China overdone? Julian Jessop at Capital Economics thinks so:
According to the official GDP data, China’s growth was 6.9% in 2015, which would be the slowest since 1990. Our own China Activity Proxy (CAP) suggests that the true growth rate has been much weaker, perhaps as low as 4.3% in 2015. However, while sluggish by China’s recent standards, even 4.3% would still be a respectable pace of growth anywhere else. Our CAP also suggests that the worst of China’s slowdown is now in the past.
Indeed much of the recent gloomy commentary about the impact of slower growth in China on the rest of the world misses a number of other key points. First, it was never likely that China could maintain double-digit growth as incomes caught up with those in West. Some slowdown was both inevitable as the economy matured, and desirable as part of rebalancing away from over-investment towards consumption.
Second, China’s slowdown is nothing new. Growth peaked in 2007 and had been on a clear downward trend since 2011. Crucially, this has not prevented advanced economies from picking up, or global growth from stabilising.
Third, the much larger size of China’s economy means that even much slower rates of growth can deliver big increases in demand from year to year and maintain a high contribution to global growth. Indeed, on the official data at least, the increase in China’s GDP in 2015 was practically the same as in 2007, even though the annual growth rate had more than halved. (The differences would be larger using our CAP estimates, but the essential point still stands.)
To be clear, there are valid concerns over the medium-term outlook for China, including high and rising levels of debt and the damage to credibility caused by botched interference in the equity market and by the poor communication of changes in currency policy. But despite some genuine risks, China’s economy is not collapsing. Nor is there much to justify fears that the turmoil in China’s equity or currency markets will cause major problems in the rest of the world.
And on the Dallas Fed survey:
New US manufacturing survey shows slump
The Federal Reserve raised interest rates at its December meeting on the basis the US economy was strong enough to cope.
But a Dallas Federal Reserve manufacturing survey tells a different tale, with the business activity index coming in at -34.6 compared to -21.6 in November and a forecast of just -14. This marks a six year low, with companies hit by the strength of the dollar. The Dallas Fed said:
Texas factory activity fell sharply in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index—a key measure of state manufacturing conditions—dropped 23 points, from 12.7 to -10.2, suggesting output declined this month after growing throughout fourth quarter 2015.
The Federal Reserve meets again this week to unveil its latest rate decisions although there is no press conference. One Dallas Fed respondent said:
I expect the Fed to recognise the weakness in the economy and the fact that we are in recession and drop interest rates again.
That is unlikely to happen but there is a growing feeling the rate rise in December could have been premature.
Speaking of the snow, US government offices are shut today:
…But this week’s Fed meeting goes ahead as planned:
Wall Street opens lower
The drop in oil prices has led to an initial fall in the US markets which, despite the storms hitting the east coast, have opened on time.
The Dow Jones Industrial Average is 66 points or 0.44% lower, while the S&P 500 has slipped 0.2% and Nasdaq is down 0.3%.
Oil prices continue to slide, losing much of the gains made during Friday’s rally.
In a speech in London Abdalla el-Badri, secretary general of Opec, said both members and non-members of the oil producing group (like Russia) should tackle the problem of oversupply together. He put some of the blame for the glut of crude on smaller oil-producing countries. He said:
It is vital the market addresses the issue of the stock overhang. As you can see from previous cycles, once this overhang starts falling then prices start to rise.
Given how this developed, it should be viewed as something Opec and non-Opec tackle together.
Yes, Opec provided some of the additional supply last year, but the majority of this has come from non-Opec countries.
It is crucial that all major producers sit down to come up with a solution to this.
At the moment Brent crude is down nearly 4% at $31 a barrel.
Greek economy contracted 0.2% in 2015 – central bank
Greece’s economy is expected to have contracted by 0.2% last year, according to Bank of Greece governor Yannis Stournaras.
The country is likely to stay in recession in the first half of 2016, he said in a speech to Hellenic American Chamber of Commerce, but it could rebound over the course of the year.
He called for the first review of its economic reforms by creditors to be completed quickly, saying a failure to do so would be destabilising.
Unilever makes some of Britain’s most popular snacks, including Magnum, Ben & Jerry’s, and Cornetto ice-creams.
The full story is here:
A referendum could be held in June this year, provided prime minister David Cameron reaches a deal at next month’s EU summit, reckon Credit Suisse:
Ministers have calculated that roughly four months are required between the announcement of the referendum and the referendum. Our base-case scenario is for the referendum to be held in June 2016, but any delays in the renegotiation could push it out further.
The final outcome of the renegotiation and the deal that Prime Minister Cameron manages to secure is important, in our view, for the result of the referendum. Opinion polls so far show a lead for the remain campaign with 45% voting to remain in the EU versus 39% voting to leave, if we take an average of the opinion polls in December 2015. The lead of the remain campaign has narrowed though across all polling companies, with a few polls even showing the leave campaign in the lead. The share of don’t knows is still quite significant, i.e., on an average 15% of the voters are undecided. Since the lead of the remain campaign is narrow, the undecided voters will be key for the outcome of the referendum.
But the bank adds (wisely):
It is also important to be cautious while interpreting these opinion polls, given that in past events such as the UK 2015 general election they were not completely reliable. They are also likely to move once the deal with the EU is finalized as we discussed above.
Here is Credit Suisse’s possible timeline of events:
CS: Brexit could be boost for Corbyn
Brexit would also have long-term implications for the UK’s political landscape, Credit Suisse points out in their new report.
For example, what if Scotland largely votes to stay in and seizes on the overall exit decision as a reason to hold another referendum? Or what if Brexit creates a recession painful enough to allow the opposition Labour Party under supposed ‘radical’ Jeremy Corbyn to benefit from a surge in opinion polls?
This could mean that investors are less willing to hold UK assets. including government debt and shares in British companies.
A significant risk for the UK would be selling by foreign holders of UK assets.
Credit Suisse: Brexit would trigger immediate economic shock
Britain’s EU referendum was a big issue at Davos last week.
Now Credit Suisse, the Swiss bank, has weighed in, saying Britain’s exit from the EU could be an “immediate and simultaneous economic and financial shock” for the UK economy.
It would wipe 2% off GDP, they believe, triggering a snap recession. Brexit would also dent business confidence, weaken the pound, hit real incomes, and deter foreign investors from putting money into the UK .
The report is called “Brexit: Breaking up is never easy, or cheap”.
If the UK votes to leave the EU, it is likely to entail an immediate and simultaneous economic and financial shock for the UK.
We can expect a drop in business investment, hiring and confidence. A sudden stop of capital flowing into the UK could make the large current account deficit difficult to sustain and lead to a sharp fall in sterling. In its most extreme that could mean a level drop in GDP of 1%-2% in the short term due to the toxic blend of depressed business confidence, tightening financial conditions, higher inflation and falling real incomes.
A freeze on capital flowing into the UK would be problematic, given the size of Britain’s trade deficit.
Given that these capital flows finance the large current account deficit in the UK (roughly 4.0% of GDP), this will make the current account deficit difficult to sustain. A vote to leave the EU could be the catalytic event that turns the UK’s current account deficit from “something to worry about” to “a problem”.
This table outlines its predictions:
One key issue is what relationship the UK would have with Europe, if it left.
Credit Suisse reckons Britain is unlikely to duplicate any existing models used by, say, Switzerland.
In our view it is more likely to be a unique relationship tailored specifically for the UK, resembling a free trade agreement for goods with restrictions for services.
Over in Greece, prime minister Alexis Tsipras has marked the first anniversary of his famous election victory – which prompted so much drama and discord during 2015.
The milestone comes amid widespread criticism and protests against the third bailout deal he signed last summer, as street protests against proposed pension reforms and tax rises mount measures.
From Athens, Helena Smith reports
In what many saw as an exercise in damage limitation, Alexis Tsipras the Greek prime minister marked the occasion with a speech last night in Athens under a giant banner proclaiming: “one year of the left, one year of struggle.”
“We are proud that we fought these historic battles, that we gave [Greeks] a breath of dignity, that we clashed with a conservative establishment in Europe,” he declared.
The battle isn’t over. It is still in front of us. Europe, a year later, is not the same. The seed that we sowed is fertilising and we already have the first fruits of this development.”
Many, starting with farmers, might not agree with that. With creditors signalling that the government’s proposed pension reforms are far from adequate – not least because they fail to cover a fiscal gap of €1.8bn this year alone – Tsipras more than ever is caught between a rock and a hard place.
He’s meeting with union leaders representing doctors and lawyers today, in an attempt to rebuild relations.
A meeting with a committee representing farmers will likely follow later this week with the finance ministry saying it is also examining ways of reducing taxes for those who earn less than €9,500 a month. Piling the pressure on Tsipras’ two party coalition, the union of public sector employees, Adedy, announced this morning that it will be staging a protest rally in Athens tomorrow.
Back in the City, shares in DIY chain Kingfisher have slumped to the bottom of the league table today, down 4%.
Investors don’t seem impressed by its new strategy, announced this morning, which includes returning £600m to shareholders.
David Hellier has taken a look, and explains:
There are nine separate operating companies within Kingfisher that the group said last year it would bring together. The idea is that the combined operation will benefit from economies of scale in its buying power and hopefully help create a more unique Kingfisher product range.
Kingfisher has costed the plan at about £800m, knocking £50m off profits in year one and £70m-£100m in year two.
The company’s chief executive, Veronique Laury, who is due to meet analysts and investors in London on Monday, said the aim was to “leverage the scale of the business by becoming a single, leveraged company”.
UK factory gloom as orders stagnate
More downbeat news from UK manufacturers this morning, who continue to struggle with a tough export market, according to a survey from business group CBI.
Its latest snapshot of industry for the three months to January showed both domestic and export new orders were near-flat, although that did represent an improvement on the previous quarter when orders fell.
Manufacturers do expect some growth in domestic new orders and output over the next quarter, but export new orders are expected to remain flat and optimism about the overall business situation declined a little further, according to the 465 firms surveyed.
But in the CBI survey, 25% of firms said they expected employment to increase in the next quarter and 17% expected it to decrease, giving a balance of +8%, marking a turnaround from October’s net balance of -8%.
Rain Newton-Smith, CBI director of economics, said:
“Manufacturers have seen a flat start to 2016 but while we have seen real problems in some industries in the last few months, there are signs that orders and production are stabilising overall.
“Uncertainty around the prospects for global growth, uncompetitive energy costs and the strength of the pound have all played their part in UK manufacturers finding conditions tough when trying to sell overseas.
“Over the longer term, strong investment in innovation and skills is vital to boosting our performance in exports, so it’s great to see firms planning to invest more in training and products over the next year.”
JP Morgan’s weekly healthcheck of the global economy shows that growth remains modest:
The patient isn’t flat on the floor, but it isn’t ready to run the 400 metres either.
The recent market turmoil has left many traders and analysts gasping for a G&T or two (or three).
And swanky tonic provider Fever-Tree may be feeling the benefits.
Shares in the company have surged 5% this morning, after it told the City that it expects sales growth of 77% for the second half of 2015.
The company has been riding the new boom in mixology and exotic spirits, since its founders toured the globe to source ingredients for a tonic that (they say) is a rather better match for gins than your standard fair.
IFO’s top economist, Klaus Wohlrabe, has told Reuters that German businesses are “frightened at the start of the new year”.
Here’s some reaction to this drop in German business morale this month (see last post)
German business morale declines
Morale among German business leaders has taken a thump this month, as concern over the global economy builds.
The monthly survey of German economic sentiment from the IFO think tank shows that business leaders are less optimistic about the future.
IFO’s ‘current assessment’ index dipped to 112.5, down from 112.8, while the expectations index fell to 102.4 from 104.6.
Holger Sandte, analysts at Nordea markets, says the German manufacturing is suffering from problems in overseas markets.
He also tweeted this graph:
Russia’s economy shrank 3.7% last year
Ouch. Russia’s economy has suffered its deepest slump since the dark days after the collapse of Lehman Brothers.
New data shows that Russian GDP shrank by 3.7% in 2015, the biggest annual decline since 2009.
That show the impact of the slump in the oil price, which has hit Russia’s energy revenues. The sanctions imposed by Western governments following the Crimea and Ukraine crisis have also hit the Russian economy, restricting exports and access to capital.
Today’s action in a Bloomberg nutshell:
FXTM Research Analyst Lukman Otunuga warns that economic fundamentals are still weak:
Anxieties around slowing global growth, ongoing China woes, and emerging market weakness continue to weigh heavily on global sentiment, while the extended decline in commodity prices have sabotaged most major central banks inflation goals.
Oil price hits European markets
The selloff in oil is gathering pace this morning, and pushing European markets lower.
Brent crude has now lost 3% this morning, and is now down at $31.20 per barrel.
There seem to be five factors driving oil down this morning, reversing some
Iraq saying its production hit a record in December
Saudi oil giant Saudi Aramco has said it won’t cut investment in new production
The spike caused by Storm Jonas, which hit the East Coast of the US last week, is fading
Indonesia has said that only one OPEC member wants an emergency meeting (probably Venezuela)
Traders are taking profits after seeing the oil price surge on Friday.
That’s now weighing on European markets, pushing commodity stocks down.
This could be a tricky day for investors, warns Conner Campbell of SpreadEx.
It’s the final week of 2016’s dreadful January, leaving the markets with a few more days to mitigate the disastrous losses that have plagued the start to the New Year.
Not that the morning’s trading is inspiring much hope so far…
With the European indices already losing whatever green glow their futures had acquired, failing to capitalise on last Friday’s week-rescuing surge, it looks like investors are in store for another long day.
The seemingly fretful nature of investors this morning is likely to only be exacerbated by a general lack of data, with the day’s main event, a speech from Mario Draghi in Frankfurt (with the markets likely hoping for a few more stimulus hints from the golden-tongued ECB President) not arriving until the early evening.
Draghi will be speaking at Deutsche Börse New Year’s reception, at 7pm local time (6pm GMT).
European markets open higher….oh hang on
Trading had begun in Europe, with the main stock markets gaining around 0.3% to 0.5%.
We’ve got a rather troubling start to the European session with crude oil having sold off quite sharply over the last hour or so.
We remain well up on the prices posted at the middle of last week, but this weakness could unsettle equity markets which soared last week as oil prices appeared to find something of a foot-hold.
The oil price is rather frisky this morning.
Brent crude hit $32.81 per barrel in early trading, a two week high. But it couldn’t hold such giddy heights for long, and is now down 1% at $31.85.
Why? Well, the blizzards in America has been pushing energy prices higher, on predictions that demand for heating will rise.
But a few minutes ago, Reuters reported that Iraqi oil production hit a record high in December. That could push up the oil glut, and give traders a reason to sell.
But as one wise City head points out, the data doesn’t always make a clear story:
Analyst: More trouble ahead?
Investors would be wise to treat today’s market rally with some caution.
China’s slowdown, and the knock-on effect on emerging markets, means 2016 is going to be a turbulent year.
Angus Nicholson of IG sees trouble ahead:
It’s difficult to know how long this little resurgence in risk appetite will last. China is about to go offline for Chinese New Year beginning 8 February; this could remove the destabilising force of the Chinese equity markets for a while. But China’s Q1 data is set to be very weak, and, when this starts filtering out in March and April, that could really turn global sentiment (and oil) as soon as the data hits.
And despite last week’s rout, shares don’t look terribly cheap on a historical basis, he adds:
Historically, markets are still trading at relatively elevated levels according to Shiller’s CAPE, with the S&P 500 still trading higher than one standard deviation above the long-term average.
Asian markets rally
Hopes that world central bankers will act again to stimulate growth and ward off a global downturn drove markets higher across Asia.
In Japan, the Nikkei gained 152 points, or 0.9%, to close at 17,110. Australia’s S&P/ASX 200 rallied by almost 2%.
And China’s Shanghai composite index, which has experienced so much volatility this year, was a model of calm restraint. It closed 0.5% higher.
So why the rally? Because, despite the waves of angst this year, traders haven’t quite lost their faith in central bankers to do ‘whatever it takes’ to keep the show on the road.
Last Thursday, European Central Bank chief Mario Draghi was pretty clear that the ECB will take fresh action in March. And on Saturday, Bank of Japan governor Haruhiko Kuroda told Davos he believes there are no limits to the BoJ’s tools for fighting deflation.
However… Japanese stocks are still down 10% this year, and China has lost 16% (!), after recent heavy losses.
Introduction: Markets to bounce back
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
After chasing corporate chiefs and world leaders around Davos last week, it’s back to business as usual today. And after a week of global market turmoil, Monday could be a little calmer.
There’s already been a decent rally in Asia overnight (more in a moment), and European markets are expected to rise when trading begins at 8am GMT, extending Friday’s rally.
There’s not much corporate news in the diary, but Kingfisher – the owner of DY chain B&Y – is publishing a strategic update. And Fevertree, which makes swanky tonic waters, is releasing results too….