This week UK PMI data for construction, manufacturing and services all surpassed expectation, with economists now believing that an August interest rate rise by the Bank of England is more likely to happen. BOE governor Mark Carney did nothing to dispel those expectations in a speech at the Northern Powerhouse Business Summit on Thursday. According to Carney, he now has ‘greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate.’ Should inflation pick up leading into the August meeting (as the BOE are expecting), a rate hike appears assured.
Carney also took the opportunity to denounce the ‘protectionist‘ stance of the U.S. administration in regards to trade tariffs. His warnings over how tariffs will result in higher inflation are in accordance with the Bank for International Settlements, who two weeks ago raised concerns about the same issue whilst stating that central banks should carry on tightening monetary policy regardless.
There is a perception amongst both mainstream and independent economists that in the event of a fully fledged trade war and global recession, central banks would move to cut interest rates and resume quantitative easing measures. When you examine their communications, bankers are indicating the exact opposite.
For instance, here is what Mark Carney said during his speech:
In a general trade war, it is unlikely that global financial conditions would prove as robust, or that monetary policy could be as supportive.
On the prospect of heightened inflation off the back of a trade war, Carney said:
The scenario would put monetary policymakers in a difficult position. Although the shock from higher tariffs would drag on activity, their initial impact would be inflationary, particular for the country at the centre of the trade dispute.
This speech came less than twenty fours hours before U.S. tariffs worth $34 billion against China were officially implemented. China has promised a direct response, whilst Donald Trump is now suggesting that in the end China could face as much as $500 billion in tariffs. Hours before the tariffs were initiated, the Federal Reserve released its latest balance sheet showing a further roll off of $18 billion in treasury securities. It is a well established trend that geopolitical distractions increase when the Fed unwind assets.
Like Carney, the Fed have also expressed warnings about the impact of a trade war. However, the minutes from the FOMC’s June meeting make it clear that Fed officials are united in the belief that rates should continue to rise – primarily due to the risk of ‘heightened inflationary pressures.’
Far from being a hindrance to central banks, the rise in ‘protectionism‘ – whether through Trump, Brexit or populist outbreaks in Europe – is in fact assisting them in their goal of reversing a decade of monetary accommodation. Led by the Federal Reserve, banks are going to persist in tightening policy even as the economic outlook continues to decline. Inflation is one of the primary vehicles in which they intend to utilise in order to justify their actions.
Crucially, banks are successfully positioning themselves as being responsive to an ever increasingly hostile and dangerous geopolitical environment. Now that the global mandate of a 2% inflation target is relevant once more (unlike in 2011/2012 when inflation was running consistently above 2%), interest rates will continue to rise and assets will continue to be unwound. Central banks are not going to firefight a downturn as they did ten years ago.
Once this realisation finds a place within the wider economy, a financial collapse will inevitably follow.
BT: Central banks will not save economy in global trade war, Mark Carney warns
- Central banks cannot be expected to save the global economy if US rhetoric translates into an all-out trade war, Mark Carney has warned.
- “In a general trade war, it is unlikely that global financial conditions would prove as robust, or that monetary policy could be as supportive.”
Sky News: Mark Carney: If Trump carries on he will hurt world economy
- Mark Carney has hit out at the current “hostile” environment for world trade, in a thinly veiled attack on Donald Trump.
- In wide-ranging remarks he also gave a further hint that the Bank’s monetary policy committee (MPC) was on track to raise interest rates, as markets expect, in August.
BBC: US and China fire first shots in $34bn trade war
- US tariffs on $34bn (£25.7bn) of Chinese goods have come into effect, signalling the start of a trade war between the world’s two largest economies.
- The 25% levy came into effect at midnight Washington time.
- China has retaliated by imposing a similar 25% tariff on 545 US products, also worth a total of $34bn.
Telegraph: Bank of England warns of Libor timebomb
- UK banks and finance firms risk a trillion pound timebomb if they do not switch away from the Libor lending rate by 2021, top policy makers have warned.
- Minutes from a meeting of the Bank’s Financial Policy Committee have highlighted concerns about the ongoing use of Libor and the potential for a crisis when it is ended in 2021.
- The Bank said that more than £30 trillion of financial contracts are linked to Libor rates. These contracts include interest rate swaps interest rate futures, cross‑currency basis swaps, syndicated loans and floating‑rate notes. The scale of US exposure is far greater, with some $200 trillion of financial contracts based on Libor.
CNBC: Bank of England hawk says UK rates may rise faster than the markets are expecting
- The Bank of England (BOE) might surprise markets with a faster increase in interest rates than is currently expected, a member of the central bank’s Monetary Policy Committee told CNBC Tuesday.
- “If the economy plays out as I expect, it may be that rates need to go up a little faster than that,” Saunders told CNBC’s “Street Signs” in reference to market expectations.
Reuters: Bank of England says no big changes to bank regulation on horizon
- Vicky Saporta, the BoE’s executive director for prudential policy, said the central bank’s focus in future would be on new risks, or unintended consequences of existing regulation.
- “The finalisation of Basel III signals that the wave of regulatory reform following the Global Financial Crisis is now over. You should not expect a lot of further reform to bank regulation.”
Guardian: UK high street sales fall for fifth month running
- High street sales fell for the fifth month in a row in June, according to a survey that suggested bricks and mortar retailers have endured the worst first half year of trading in more than a decade.
- UK high street sales fell 1.7% year-on-year in June, the fifth consecutive month of falling sales, according to data released by advisory firm BDO, which bases its finding on a survey of mostly medium-sized retail businesses.
Reuters: UK economy picks up speed, raising chance of rate rise
- Britain’s large services industry grew last month at its fastest rate since October, a survey showed on Wednesday, prompting investors to increase bets that the Bank of England will raise interest rates next month.
- After a weak first four months of 2018, the IHS Markit/CIPS services Purchasing Managers’ Index (PMI) rose to 55.1 in June.
Reuters: UK construction recovery extends into third month – PMI
- The IHS Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) picked up to 53.1 from May’s 52.5.
- It was the third month in a row that the sector grew after contracting in March.
Independent: UK manufacturing ‘stuck in doldrums’ in June, latest survey shows
- UK manufacturers remained “stuck in the doldrums” in June, meaning the sector is unlikely to contribute to overall growth in the second quarter.
- The Purchasing Managers’ Index survey came in at 54.4 in the month, up slightly on May’s figure but well down from the recent peak of 58 at the end of 2017.
Reuters: UK new car sales drop 3.5 pct in April – industry data
- British new car registrations fell by an annual 3.5 percent in June, dragged down by a sharp drop in sales of diesel-powered cars, industry figures showed on Thursday.
- 1.3 million new cars had been registered over the first six months of this year — down 6.3 percent compared with the first six months of 2017.
CNBC: Fed: Letting inflation run too hot could lead to ‘a significant economic downturn’
- Federal Reserve officials worry that letting the U.S. economy run too strong could cause major problems down the road if left unchecked, according to minutes from the most recent central bank meeting.
- As a result, almost all officials at the central bank believe they should continue to raise interest rates on a regular basis. That comes even amid substantial worry that current tensions between the U.S. and its trading partners could stall the growth the economy has seen this year.
Zero Hedge: Why Did FRED Suddenly Discontinue Reporting On The Fed’s Balance Sheet Normalization?
- We can’t help but wonder why the government would decide that this data series – one that is simple to report, readily available from the source, and requires very little manpower to produce – would suddenly be discontinued from one of the most popular, publicly accessible, and free US government data repositories?
- Perhaps it is because the pace of balance sheet normalization is about to take a huge step larger – from around $30bn to around $50bn per month in the next quarter…
Steven Guinness 