In terms of monetary policy, a clear commonality exists between the current stance of the Bank of England and the actions of the Federal Reserve over the past year. This week GDP figures in the UK were reported at +0.4%, compared to the 0.3% growth in the previous two quarters. The media were quick to tie this in with the expectation that interest rates will rise in November.
Data sets which are not gaining traction include negative retail sales and the fall in car manufacturing. Production of cars had already contracted in April, May, June and August. Demand for cars in September dropped by 14%. Also not garnering exposure is how credit card rates have reached a 10 year high just as borrowing costs are about to increase, and how personal insolvencies are now at a 5 year high.
As with the Fed, the Bank of England is going to overlook dreadful economic data in favour of the top line figure of GDP. Because it is this number which people have been conditioned to recognise as a sound measure of growth. What the latest GDP figure disguises, however, is that the UK’s construction industry is now technically in recession, having reported negative growth totaling 1.2% over the last two quarters.
Elsewhere, the European Central Bank have announced they will taper their asset purchasing programme down to €30 billion a month from the current €60 billion, starting in January 2018. The announcement came twenty four hours before Catalonia’s parliament voted to declare independence from Spain. The ‘populism‘ narrative has gained significant traction over the past six weeks with victories for ‘populist‘ candidates in Austria and the Czech Republic. The Italian regions of Lombardy and Veneto have also gained a mandate to start pushing for greater autonomy from Rome.
As EU skepticism grows and countries lean more towards what the IMF and the BIS call ‘protectionism‘, the ECB is gradually undertaking its own variant of policy ‘normalisation‘. Nations seeking greater autonomy and sovereignty appears to be a prelude to the EU building its own mandate for future reforms. As discussed in previous updates, crisis is invariably used as an opportunity in order to generate support for structural changes to the union. The crisis of ‘populism‘ is one the EU looks certain not to waste.
- Retail sales fell this month at their steepest rate since the recession, according to new figures that add to anxiety over the strength of the economy days ahead of an expected interest rate hike.
- The poll from the CBI reported a reading of -36 for the year to October, down from a two-year high of +42 in September and its lowest level since March 2009.
- The retail data adds to fears over the resilience of consumer demand at a time when household finances are being squeezed, with wage growth failing to keep pace with inflation, which is at a five-year high.
- Policy makers are still widely expected to act, though, especially after official growth figures for the third quarter this week showed a slight improvement in the pace of expansion to 0.4%.
- UK car production fell during September as confidence was hit by Brexit uncertainty, according to a major car industry body.
- Plans to improve air quality also added to the decline in car output, the Society of Motor Manufacturers and Traders (SMMT) said.
- A 14% fall in demand in the UK market drove the overall drop, it said.
- But a government spokesperson said “the UK’s automotive industry remains a great British success story”.
- Mike Hawes, SMMT chief executive, said: “With UK car manufacturing falling for a fifth month this year, it’s clear that declining consumer and business confidence is affecting domestic demand and hence production volumes. Brexit is the greatest challenge of our times and yet we still don’t have any clarity on what our future relationship with our biggest trading partner will look like, nor detail of the transitional deal being sought.”
The number of people registering as insolvent in England and Wales hit a five-year high in the third quarter, according to figures on Friday that hinted at trouble brewing in Britain’s consumer economy.
The government’s Insolvency Service said 27,807 people in England and Wales registered as insolvent between July and September, up from 22,389 in the three months to June and marking the biggest total since the third quarter of 2012.
The insolvency figures are likely to bolster the view of economists who worry that even a small rise in Bank of England interest rates could have an outsized impact on consumers.
- The UK’s economy had higher than expected growth in the three months to September – increasing the chances of a rise in interest rates in November.
- Gross domestic product (GDP) for the quarter rose by 0.4%, compared with 0.3% in each of 2017’s first two quarters, according to latest Office for National Statistics figures.
- Economists said the figures were a green light for a rate rise next week. If it happens, it will be the first rise since 5 July 2007. The financial markets are now indicating an 84% probability that rates will rise from their current record low of 0.25%.
Zero Hedge: ECB Announces Dovish €30 Billion QE Taper Through September 2018 “Or Beyond”; Euro Tumbles
- The ECB announced that it would cut the rate of QE in half, to €30 billion “from January 2018 until the end of September 2018” adding that this would extend “beyond, if necessary” and “until inflation path has sustainably adjusted.”
- The market has taken it as a dovish development, as well as the announcement that the ECB will reinvest the principal payments from maturing securities purchased under the APP “for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary.”
- Incidentally, according to preliminary calculations, at a tapered €30 billion rate of QE, the ECB would have until Q2 2019 before it hits the Bund scarcity bottleneck.
- The U.S. economy expanded at a faster pace than forecast in the third quarter, indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday.
- Gross domestic product grew at a 3% annualized rate (est. 2.6%) following a 3.1% gain in 2Q, best back-to-back quarters since 2014
- While GDP grew more than anticipated, analysts look to another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories — the two most volatile components of the GDP calculation — climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.
- “I don’t see the need to continue pressing on the gas pedal of monetary policy and we are doing just this if we continue to make further purchases every month,” Weidmann said after a meeting of G20 finance ministers and central bank governors in Washington.
- Weidmann said the ECB would make a decision the future course of its massive stimulus based on the price outlook in the single currency bloc.
- “The improved growth dynamic is also relevant from monetary policy perspective as it opens perspectives for a normalization of monetary policy,” he said.
- One of the world’s top energy importers, China, is set to roll out a yuan-denominated oil contract as early as this year. Analysts call the plan, announced by Beijing in September, a huge move against the dollar’s global dominance.
- Earlier this year, the Chinese government announced plans to start a crude oil futures contract priced in yuan and convertible into gold. The contract will enable the country’s trading partners to pay with gold or to convert yuan into gold without the necessity to keep money in Chinese assets or turn it into US dollars.
- The new benchmark will reportedly allow exporters, such as Russia, Iran or Venezuela to avoid US sanctions by trading oil in yuan.
- Interest rates on credit cards are at their highest for at least 10 years, according to the website Moneyfacts, despite low base rates.
- The average rate on credit cards, including store cards and so-called “credit repair” cards, is 23% a year.
- Consumers are being warned not to rely on interest-free introductory periods, as eventually they may have to pay the full advertised rate.
- Among the most expensive cards is HSBC’s, which charges 29.9% a year.
- By contrast Lloyds Bank charges 5.7%, and Tesco 5.9%.
- The Eurosceptic MP, whose appearances at the Conservative conference in Manchester last month drew large crowds, said Carney had been “consistently wrong” about the economic impact of the EU referendum.
- Speaking to Emma Barnett on BBC Radio 5 Live, Rees-Mogg said: “Mark Carney has consistently complained about the Brexit vote and the result. He said before the Brexit vote there would be a sharp downturn in the economy because of Brexit, he had a panic interest rate cut that was completely unnecessary and helped push the pound down further than it would otherwise have gone.”
- He added: “Mark Carney is one of the enemies of Brexit. He has opposed it consistently.”