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Saturday 29th October 2016
Hi Friend,
Strong growth in Q3 ...
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The next rate move will be up ...
The ONS released the first estimate for GDP Q3 this week. Growth in the period from July to September was up by 2.3% year on year, compared to 2.0% in the first half of the year. The leisure sector continues to drive the service sector recovery.
Manufacturing growth increased by just 0.4%. Construction output fell by -1.4%, largely as a result of public sector cutbacks. Service sector growth increased by 3%. The leisure sector, retail, hotels and restaurants increased by 5%! Transport, storage and communications increased by 4%. Business services increased by 2.6%. The service sector is booming. Service sector inflation is above target. The Bank of England assumed growth of just 1% over the period, hence the early move to cut rates and expand Q.E. A premature move, now exposed as we explained at the time.
So what does this mean for the rest of the year? For the year as a whole we expect growth of 2.1%. In 2017 we expect growth to slow slightly but not by much. Our 1.8% expectation could be boosted by further household spending and private sector investment.
The next move in U.K rates will be up. Gilt yields increased to 1.3% at the end of last week. Yields are heading higher as inflation is set to rise. There will be no further cut in base rates. The QE expansion should be put on hold, especially in the corporate bond market. All eyes on the FED ... the decision made easier by strong U.S. growth figures announced on Friday ...
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U.S growth up by 2.9% in Q3 ...
The U.S. Bureau of Economic Analysis released the first estimate of GDP on Friday. Real gross domestic product increased at an annual rate of 2.9 percent in the third quarter of 2016. In the
second quarter, real GDP increased by just 1.4 percent. On the face of it, tremendous growth. There should be no doubt about a rate rise in the U.S. before the end of the year.
The headline rate is based on a quarterly growth rate of 0.7% which is then "annualised". The underlying growth rate, year on year is a more sober 1.5%. Nevertheless, we expect strong growth of 2% into the final quarter of the year. The overall U.S. growth will be 1.6% in 2016, increasing to over 2% next year. In the U.S. as in the U.K, consumers continue to boost spending. Additional contributions from inventory investment and exports assisted the growth performance.
Around the world, the recovery continues. Growth is returning to the E.U. Spain will grow by over 3% this year. Gilt and U.S bond yields are providing the marker to suggest the growth and inflation cycle is returning. The Bank of England is out of step. The model and perceptions fundamentally flawed. Speculation is rising the Governor will not stay the full term. Returning to the land of the Lune and the Loonie, the announcement could be made next week.
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Nissan deal boost hopes ...
The Nissan deal boosts hopes the Brexit trauma will not be as severe as feared for the motor industry at least. No cheque book involved, the accommodation will ensure investment plans will go ahead for the Qashqai and the X-trail.
Toyota announced investment plans will continue despite the Article 50 uncertainty. Deals for all in the SMMT are surely set to follow. Sectors at risk post Brexit include Higher education, Motor, Aerospace, Big Pharma and the Financial Services Sector.
Much is to be done, if the shock to the economy is to be mitigated. Tough negotiations lie ahead. The decisions on Nissan, Hinkley and Heathrow will restore some confidence in the May administration. Now is the time for clarity on EU nationals working in the U.K. Time to end the squeeze on student numbers. Time for clarity on immigration needs generally.
As for markets, the rise in gilt yields will secure the kindness of strangers. Sterling is oversold and set to rise against the Euro at least. The Bank is set to reveal a revised stance on monetary policy and interest rates specifically ...
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So what happened to Markets?
Markets, were mixed - The Dow closed up at 18,168 from 18,109. The FTSE closed at 6,996 from 7,020.
Sterling was down against the Dollar to $1.216 from $1.221 and down against
the Euro to €1.111 from €1.123. The Euro rallied against the Dollar
to 1.094 from 1.087.
Oil Price Brent Crude closed at $49.95 from $51.67 The average price in October last year was $48.43.
UK Gilts
- yields moved up. UK Ten year gilt yields closed at 1.27 from 1.07. US
Treasury yields moved to 1.85 from 1.74. Gold closed at $1,267 from
$1,2651.
John
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