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Saturday 25th March 2017
Hi Friend,
Inflation on the rise ...
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Inflation on the rise this week! Inflation CPI basis increased to 2.3% in February compared to 1.8% prior month. Service sector inflation increased to 2.8%. Goods inflation jumped to 1.9% from just 1.1% in January. So what happens next? We expect a further rise in headline inflation to 3% over the next few months. Price increases should then ease back towards the second half of the year to around 2.5%.
Transport, education and the leisure spend bore the brunt of the increases in February. Service sector inflation evident and well above target, the big jump in goods inflation is attributed to oil prices and the weakness of Sterling. The recovery in the world economy, world trade and commodity prices will ensure the underlying pressure on import prices will continue.
Manufacturing output prices increased to 3.7%. Input costs increased by over 19%. The big story is oil and imported metal prices. In February last year the average price of Brent Crude was $32 per barrel. Sterling traded at just under $1.45. Compare that with a rise in oil to $55 dollars in February 2017 and a fall in Sterling to $1.25, this explains the near 90% increase in petroleum costs.
The good news, all things being equal, the oil price impact slows to 64% in March and to 35% in the second quarter. This is why we expect the inflation pressures to ease through the year. It is also the reason the MPC choose to "see through" the transient trend and keep rates on hold. It is a mistake.
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Of retail sales and borrowing ...
The 2.3% rise in earnings in January has been wiped out by the 2.3% increase in prices in February according to the latest ONS data. Fears the income squeeze would damage household incomes and spending were assuaged by the February retail sales figures.
The income squeeze hypothesis is driving fears for growth this year and conditioning monetary policy. Hard to explain the 6.4% increase in retail sales values in the month and the 3.7% increase in sales volumes. Internet sales increased by 20% accounting for over 15% of all transactions. Household goods stores increased by almost 4% in the month. We expect the growth in household spending to continue, a result of a strong jobs market and growth in the economy of between 2.0% to 2.4%. Time to normalise base rates and hike rates from the August low.
Good news for the Chancellor this week. Borrowing in February was just £1.8 billion down from £4.6 billion prior year. For the year as a whole, borrowing was down by almost £20 billion to £47.8 billion. The OBR forecast for the financial year of £52 billion is well on track compared to £72 billion prior year. At 2.7% of GDP, the task of deficit reduction is still work in progress. The £1.7 trillion public sector debt - a measure of the job yet to be done.
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West Wing ... Whisky Tango Foxtrot ...
It has been another tough week for the President. The travel been blocked in the courts, the health care act pulled from Congress at the last moment. "We just don't have the votes", explained Paul Ryan, speaker of the house. Trump will blame the Democrats but his own party couldn't find consensus. The Bill was hastily and badly drafted. Even Trump wouldn't put his name to it. Just as well, he appeared to have little or no idea what was in it. Abolishing the Obama legacy the primary focus, all was on the table to secure assent. There is no art to this deal. Broken campaign promises on Medicaid and coverage were implicit in the GOP draft. For the moment Obamacare remains in place. What fun will be head on the Trump budget in the months ahead! Dead on arrival the view of many in the house.
Trump's approval ratings have dropped into the 30's according to the latest fake news from Gallup. "I can't be doing so badly" explained the leader of the free world in an interview for Time magazine, "I am President and you're not". Yep we all know that. The good news - "Repeal and Replace" for healthcare, was never part of the plan anyway according to Trump. Now who knew that!
As Ryan struggled to garner votes, the President pretended to drive a truck on the White House lawn, honking the horn and clenching his fists. Jared Kushner, senior advisor was in Aspen, taking the powder. As Sean Spicer explained the President was "all in" on this one. Stuck in a truck, honking the horn, going nowhere.
Trump's credibility is becoming a real problem, The Wall Street Journal asserted, "Trump's falsehoods are eroding trust at home and abroad." The claim "Just found out Obama had my wires tapped" was blown away by FBI and NSA testimony before Congress this week. "No evidence, Trump clings to the claim like a drunk to an empty gin bottle" claimed the WSJ. "If President Trump doesn't show more respect for the truth, most Americans may conclude he is a fake President".
Time magazine's Nancy Gibbs was equally critical. During the 2016 campaign, 70% of Trump statements were untrue, according to a review by Politifact, just 4% were true. Check out the interview with Trump in Time on truth and falsehoods. The President is rambling and incoherent.
Rex Tillerson explained this week, he didn't really want the job at state. Looking forward to retirement at the ranch, his wife told him he had to do it! God hasn't finished with you yet and neither has Donald J Trump. A flair for diplomacy, Tillerson bumped a NATO meeting in favor of a flight to Moscow. Excellent. What is it about this administration and the Russians. The smoking gun is about to burst into flames ... watch this space Paul Manafort is to give evidence. Once the Trump campaign manager, Sean Spicer explained "he was just a man who worked for somebody for five months ..." Ouch!
That's all for this week from the West Wing Whisky Tango Foxtrot ...
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So what happened to Markets?
The Trump bump skipped a beat this week as markets reassessed trends in the White House. The Dow closed at 20,634 from 20,948. The FTSE closed at 7,336 from 7,424.
Sterling was up against the Dollar to $1.249 from $1.239 and was up against
the Euro to €1.156 from €1.153. The Euro moved up against the Dollar at 1.080 from 1.075.
Oil Price Brent Crude closed at $50.81 from $51.75 The average price in March last year was $38.21.
UK Gilts
- yields moved down. UK Ten year gilt yields closed at 1.21 from 1.23. US
Treasury yields softened to 2.41 from 2.50. Gold closed at $1,247 from
$1,230.
John
That's all for this week. Don't miss our next economics update in Manchester on the 18th May.
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