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Saturday 16th July 2016
Hi Friend,
May the force be with you ...
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So much for a two horse race. Theresa May romped home without challenge ...
The new Prime Minister moved into Number Ten on Wednesday. Heads rolled - Gove, Letwin and Osborne left government. Heads turned - Phillip Hammond became Chancellor of the Exchequer. Eyes rolled - Boris Johnson became Foreign Secretary. Ruthless with a sense of humour, the May Day tumbrils rolled along Downing Street.
The Brexit boys have been moved to the front line. Boris Johnson will baffle the heads of Europe, David Davis is to assume responsibility for Brexit negotiations and Liam Fox will head up the department of international trade. No skulking in dark shadows, daggers drawn ... the Eurosceptics have taken the Queen's shilling. When the whistle blows on Article 50, the generals will step out of the trenches. The bombardment has already begun.
It could all be over by Christmas. David Davis believes negotiation is "explaining to the other side the things you really would like to have". Access to free market, without paying the subs and finding jobs for the peoples of Eastern Europe. All over by Christmas? The lights are going out all over Europe. No one is taking his call.
Liam Fox my have to boost the immigration figures. We have no trade negotiators to meet the enormous job of negotiating deals around the world. A few may return from Brussels but one thousand are needed. We may have to recruit from overseas, with a points system of course. Can you negotiate? Can you make a point". You are in! Welcome to the UK!
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Phillip Hammond in at Number Eleven ...
Phillip Hammond has taken over as Chancellor of the Exchequer. No easy transition but no knee jerk "statement" in response to the rôle either. The chief financial minister will take time and counsel in the preparation of his first Autumn statement.
Lots of advice there will be. Consumer confidence has been hit. Business spending plans are under review. House prices and commercial real estate prices have been marked down. Private car sales fell in June as overall sales slowed.
Construction slows ...
The construction figures for May released this week were disappointing. Overall output was down by 2% year on year. The good news - private sector housing was up by over 4%, commercial real estate was up by over 3%. Declines in public sector housing down 20% and infrastructure spending down 10% pushed overall output lower.
So what is to be done ...
With the financial fetters off, as spending targets are reviewed, the Chancellor could have some easy wins in the Autumn statement. A boost to housing and infrastructure, confirmation of spending on runways, rail and transport routes. "Business as usual" should be the guideline. Nothing may change for five years or more as trench warfare returns to Europe in Team Brexit negotiations with the EU.
Business hates uncertainty. Clarify where we can. The Prime Minister should make it clear, there will be no enforced repatriation of EU citizens currently living and working in the UK. Let us make it clear, students from around the world are welcome and will continue to be so. It really is time to take education out of the immigration stats.
Cuts to corporation tax, a boost investment allowances, rethink the apprenticeship levy, it was just a payroll tax after all. Keep out of the board room and the bed room. Don't worry about executive pay, 50% goes to Treasury anyway. Oh yes and abolish that iniquitous bedroom tax. So much social misery for so little return.
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The Bank of England holds rates …
This week the Governor of the Bank of England maintained his reputation as the unreliable boyfriend. Teasing markets with the hint of a rate cut, nothing changed on Thursday. The MPC voted 8-1 to maintain the base rate at 0.5% and to hold QE stocks at £375 billion.
A hint of action to come in August? "Most members of the committee, expect monetary policy to be loosened next month". various easing points and combinations thereof were discussed. A rate cut, more QE, a boost to the funding for lending scheme? Perhaps, we shall have to wait and see.
Taking a sledgehammer ...
Andy Haldane, Chief Economist at the Bank of England has said "I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison". So much for attitudes to a working life in the Bank of England. The call is for a material easing of monetary policy in August. There should be no rush to action. No perceived panic measures. Business as usual with clear support as the lender of last resort, in the event of a liquidity challenge in property and finance. I can think of of one young nut in Threadneedle Street, to be cracked with a sledgehammer
Inflation set to rise ...
Inflation is set to rise ... if sterling and oil prices stay at current levels, the cost of oil will increase by 15% in next month and by almost 40% by the end of the year. No time to ease monetary policy. Business as usual the mantra. Time to support the return of Sterling to normality from current oversold levels.
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So what happened to Markets?
Sterling rallied against the Dollar to $1.316 from $1.296 and also against the Euro at €1.189 from €1.171. The Euro held against the Dollar to 1.106 from 1.105.
Oil Price Brent Crude closed at $47.58 from $46.82. The average price in July last year was $56.56. In August it was $46.52.
Markets, were up - The Dow closed up at 18,479 from 18,120. The FTSE closed at 6,669 from 6,590.
Gilts - yields moved up. UK Ten year gilt yields closed at 0.84 from 0.73. US Treasury yields moved to 1.59 from 1.37. Gold closed at $1,327 from $1,352.
John
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