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Saturday 15th April 2017
Hi Friend,
Inflation jumps to 2.5%, Vacancies Rise to Record High ...
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Goods inflation jumped to 2.5% in March up from 1.9% prior month. The headline rate of inflation CPI held at 2.3% due to a surprise drop in service sector inflation. Service sector inflation fell from 2.8% in February to 2.1%. It's hard to see why. A 23% drop in air travel costs assisted the fall but doesn't explain the overall drop. Had service sector inflation held at 2.8%, the overall inflation rate would have been 2.6%. That's well above the Bank of England target. We expect a bounce back in prices in the next couple of months towards our 3% forecast.
Producer output prices increased by 3.6% in March and input costs eased slightly to 17.9% from 19.4% in February. The inflationary combination of rising oil prices and the fall in Sterling is beginning to ease as the first quarter 2016 lows in Brent Crude Oil work out of the year on year comparison. The Bank of England remains relaxed about the rise in inflation. The expected acceleration in earnings is not evident in the latest data for February.
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More economic news this week ...
Earnings in the three months to February increased by just 2.3% according to the latest ONS data. The real level of earnings reduced to zero as CPI inflation hit the same level. Should we worry about household spending in the second half of the year? Maybe! Household incomes may be squeezed if inflation continues to rise but then again earnings may rise to offset the price increases. Worth pointing out perhaps retail sales values increased by 6.4% in the same month. No sign of a spending or activity slow down just yet.
Last week our headline "Strong growth continues into the first quarter caused a few comments. Asked to commit to a number for growth, we expect growth to be between 2.3% and 2.5% in the first quarter. Inset is our estimate of GDP(O). It is not rocket science, more simple arithmetic. Assuming no radical revisions to the ONS data already released, output is likely to have increased by 2.5% in the first three months of the year.
Unemployment fell to 1,559 thousand in February down from 1,584 prior month. It is at the lowest level since Q3 2005 when inflation was 2.8% and base rate was 4.5%. The unemployment rate in February was unchanged at 4.7%, the number of vacancies increased to 767,000. At peak in February 2008 and immediately before recession, the level was just below 700,000. Recruitment difficulties are increasing, the pressure for pay increases is rising, the tide is set to turn in the earnings market.
Growth
2.5%, inflation 2.5%, unemployment falling, vacancies at a record high,
now is the time to begin the process or rate normalization. The absurd
process of corporate bond purchases should be abandoned. The market is
thin, the products heterogeneous, do we really believe Apple and IBM
need assistance to reduce the cost of borrowing?
In the US Trump may place some pressure on Janet Yellen to avoid further rate hikes. The weak jobs growth in March may assist. Inflation is muted, retail sales growth is slowing, forecasters are trimming US growth expectations for 2017. Markets still expect two more rate rises this year. In the U.K. the Bank should act to cap the spread against the green back ...
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The hand of friendship strategically placed ...
As predicted last week, things did get worse for Steve Bannon. Thrown off the National Security Council, the Chief Political Adviser to the President is clinging to office despite having been "thrown under a bus" by his boss . Speaking of the conflict between son-in-law Jared and Bannon, the President said "Steve is a good guy but I told them to straighten it out or I will".
Clearing the air in the White House is a priority. It is the only clean air act the President is likely to enact in his term in office. In an interview with The New York Post's Michael Goodwin, Trump went on to say, "I like Steve, but you have to remember he was not involved in my campaign until very late". Ouch, a cruel blow and significant distortion but Trump has form, as Michael Flynn can attest. "Thrown under a bus and reversing it backwards", the disheveled ultra right Bannon is to be made scapegoat for the failure of policy reform in the first 100 days in office.
This week we discovered why Trump launched 59 Tomahawk missiles into Syria. The security briefings from the FBI, The NSA and the CIA have been reformatted into big print with video and pictures. Even so, Trump prefers to secure his security briefing from Fox News and CNN. CNN photos of victims of the gas attack including the "beautiful babies" meant the Assad regime had crossed the red line. Trump was swayed by the heartbroken Ivanka apparently and pushed the button to strike where Obama had been to afraid to go.
But how did the President of the U.S.A. inform the President of China of this reversal of policy on Syria and escalation of the conflict. All was revealed in an interview with Fox news later this week. "I was sitting at the table we had just finished dinner and we are now having dessert. We had the most beautiful piece of chocolate cake you have ever seen and President Xi was enjoying it. I was given the message from the generals that the ships are locked and loaded. We made a decision to do, and the missiles were on their way.
I said to President Xi, I want you to know that we've just launched 59 missiles headed toward Iraq." Headed to Syria" Fox news journalist Maria Bartiromo corrected, "Yes toward Syria" Trump amended the story, detail never a strong point. So what did he say, did he choke on his chocolate cake? "No" said Trump "He asked his interpreter to repeat what I had said and then he said it was OK. I think he was talking about the missile strike but he could have been talking about the chocolate cake." The Chinese so inscrutable you know.
The President acted decisively but what happens next? In one move the rapprochement with Russia is aborted, the Iranian hostility restored. Tillerson is sent to Moscow to confirm relationships are at an all time low. The number of Russian warships in the Med is at an all time high. NATO is no longer obsolete. The Carl Vinson strike group is fleet is sailing to North Korea. Kim Jong-un is prepared to fight back with nuclear weapons. China is not a currency manipulator, it's the dollar that's too high. Janet Yellen may stay on but should stop raising rates. It is all part of a "Policy at Pace" turnaround in the White House.
For China, the leaders are guided by Sun Tzu, "Ultimate excellence lies in not winning every battle but in defeating the enemy without ever fighting". The guiding hand of friendship, strategically placed. President Xi's has a preference for peaceful resolution in the Middle East and North Korea. The US and Trump mentality is to strike first then think what next. "Mission accomplished" said Bush in 2003. Job done claims Trump in 2017. But what really does come next? A real chance for Russia, China and US co-ordination in the war against the common enemy of terrorism has been lost for now. The Mother of All Bombs has been dropped in Afghanistan as a message to many. Trump's unpredictability is a strength and a weakness. If he can be goaded into action easily and predictably, it is dangerous.
The Chinese have a flair for "GO" the ancient game of strategy. Played on a 19 by 19 matrix, over 350 pieces can be played to secure victory. The game has more play variations than the number of "atoms in the universe". A game of two players, the objective is to secure the whole board, not to be too distracted by small conflicts in various regions of the board along the way. Compare the game with chess. Played on an 8 by 8 matrix, just sixteen pieces either side have a linear objective to capture the king. The importance in developing strategy, to think at least three moves ahead. Sacrificial plays feature in both games.
In the world of international relations, President Xi is playing "GO", President Putin is playing "CHESS" and President Trump is playing "SNAP" at cards, a special version combining "Happy Families" in the White House. Not for Trump the studies of Sun Tzu, Clausewitz and Machiavelli. Of no value the warnings of President Xi and the Thucydides trap. Nothing worse than a leader drawing a line in the sand. It was too many straight lines in the sand, following the collapse of the Ottoman empire, which now contribute to conflict in the Middle East. What next for North Korea, Pyongyang and Kim Jong-un as tensions escalate? We pray for peace this Easter week-end.
That's all for this week from The West Wing, Whisky, Tango, Foxtrot ... You can check out the series of blog posts here
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So what happened to Markets?
The Dollar slipped on the Trump call. The Dow closed at 20,453 from 20,711. The FTSE closed at 7,327 from 7,349.
Sterling was up against the Dollar to $1.253 from $1.238 and was up against
the Euro to €1.179 from €1.1168. The Euro moved up against the Dollar to 1.062 from 1.059.
Oil Price Brent Crude closed at $55.64 from $55.19 The average price in April last year was $41.58.
UK Gilts
- yields moved down. UK Ten year gilt yields closed at 1.05 from 1.07. US
Treasury yields moved down to 2.23 from 2.32. Gold closed up at $1,286 from $1,255.
John
That's all for this week. Don't miss our economics update at PwC Manchester on the 18th May.
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