Brexit Inflation and Interest Rate Signals

carney-cpi

The Bank of England’s inflation target is 2.0% – with the fall in the pound inflation is set to overshoot to between 2.5% and 4.5% depending which rune reading economist you believe. When the 2% target is missed by 1% or more Carney has to write to the Chancellor explaining why he has missed his target. He’s been writing those letters for most of his term…

Inflation has now crept up to 1% after knocking along at zero for a while. Even at the extreme end of forecasts inflation will not reach the levels seen before the great taming of inflation in the 80s. (Unless the QE unwinding is a disaster, which is not impossible.) Having read many papers on the subject Guido is none the wiser as to how the world’s Central Banks can go cold turkey from the QE opiate without a very bad come down. In any event, at these levels interest rate policy is now symbolic, market loan rates are increasingly detached from base rates. Firms are not going to make or break investment decisions because base rates are 0.25% or 0.5%.* May is right that we need to see rates rising, to head off inflation and to boost confidence.

Nothing would more clearly signal that the Brexit apocalypse is not upon us than the Bank raising base rates. Normalisation of monetary policy has to happen. Or at least the Bank should signal the beginning of normalisation…

*Fans of reflexivity and paradox will contemplate the post-referendum rate cut with joy. Carney implies it boosted the economy, critics say it was unnecessary. Did it boost confidence that the Bank of England was ready to do whatever or was it a way for Carney to claim credit for his gloomy predictions not coming true?

Investment Bank Moves Jobs to Britain

jobs-leaving-eu2

The Dutch investment banking giant ING is moving as many as 60 trading jobs to London from both Amsterdam and Brussels. The €44 billion firm is cutting 11% of its global workforce and chose London, the financial capital of the world, as the destination for a chunk of its European workforce. This is all despite George Osborne claiming financial services would be hit and 400,000 service sector jobs would be at risk if we voted to leave. It turns out financial jobs are at risk. In the EU…

City Boys Staying in London

surprise

Mark Carney is up in front of the Treasury Select Committee this afternoon where he is going to have to explain why he cut rates and re-started QE prematurely to Jacob Rees Mogg, who thinks “He acted too early in my view. There was not sufficient evidence at that point that further monetary stimulus was needed and there are adverse consequences of abnormally low interest rates as well as beneficial consequences.” As the Citigroup surprise index (above) shows, most City expert economists got it wrong on a Brexit recession. In the last week alone Morgan Stanley, JP Morgan and Credit Suisse have reverse-ferreted on their Brexit recession predictions. None have accepted Guido’s £1,000 wager offer…

fundmanagers-staying

On a similar theme it is worth reading the Centre for Policy Studies analysis out today on the pros and cons of Brexit for the financial services. Just as the consensus on a Brexit recession was misplaced (even Remain campaign financing investment bank JP Morgan has now conceded they were wrong) so too will the “City will lose out to Paris / Frankfurt / Dublin” consensus soon dissolve.  The above chart from Prequin shows that not many Masters of the Universe are keen to enjoy the Frankfurt nightlife…

What the City does want is “passporting”, assurance that the Square Mile’s firms will still be able to trade across the EU. The majority of the City’s exports in financial services (60%) go to countries outside the EU – not surprising when not one of the top 10 financial centres is in the EU. China and India are already choosing to do their capital market transactions in London, these are the growth markets of the future. In reality it is likely that if “passporting” obstacles were to be deliberately constructed, they could if necessary be circumvented by booking trades through EU based subsidaries. Zurich is the biggest financial centre on mainland Europe, it has bilateral deals with the EU, the City will want the same…  

PMI Data Shows UK Brexit Fear Has Receded

pmi

Today we saw surprising PMI data released in the US and UK. The UK surprised on the upside with a 53.3 reading, the US surprised on the downside with a 49.4 reading. The €urozone average is 51.7. That puts post-Brexit Britain in gold medal place on the PMI podium…

It is important to understand that the PMI is a survey and reflects the attitude of purchasing managers to the economy and market conditions. Last month UK PMI came in negative and the headlines in the remainstream media were apocalyptic. The reality is business and purchasing managers’ outlook was probably subjectively influenced by George Osborne’s irresponsible “Project Fear” propaganda that the UK would go into immediate recession, require an emergency budget and be attacked by zombies. None of which it now transpires was really true, however it did spook people.

Headlines last month when PMI came in negative were about a dramatic downturn, the FT warned of stagnation and the Indy breathlessly reported the “UK economy shrinking at fastest rate since financial crisis”. Guido doubts we’ll see headlines as dramatically positive tomorrow.

The Bank of England subsequently cut interest rates in a symbolic and probably unnecessary gesture – from 0.5% to 0.25% – a difference which will not animate the economy in any meaningful way. Does today’s PMI number mean Britain’s GDP will conversely now surge? Not really. Not least because China, emerging markets and the €urozone all have economic problems. Brexit is a small factor in the global situation compared to the €uro debt crisis and China’s economic problems, never mind the ever imminent Italian banking crisis…

London Lands 30 Billion Rupee “Masala Bond”

hdfc uk india

India’s first offshore rupee-denominated bond was listed on the London Stock Exchange today. The investment – known as a “masala” bond – was issued by India’s largest bank HDFC, whose chairman Deepak Parekh praised London’s “wide range of financial instruments” and “unshakable trust from international investors.”

“While we did explore other markets for listing, the responsiveness and efficiency with which the officials at the UKLA and London Stock Exchange responded to our urgent requirements was remarkable.”

HDFC’s decision to place the 30 billion rupee / £341 million bond on the British market was preceded by the Chinese government earlier this year, who issued the first ever Yuan bond outside of China (worth £300 million) in May. Last week, the German stock exchange (Deutsche Börse) voted overwhelmingly in favour of merging with the London Stock Exchange, hoping to make it the world’s largest market. Both India and China are listed within the top 20 GDP growth rates in the world, and form part of Guido’s post-Brexit trade map. It cements London’s place as the financial capital of the world – Paris and Frankfurt didn’t have a hope. Even the arch-Remainiacs over at Bloomberg are grudgingly admitting it’s good post-Brexit news…

Everybody’s Investing in Brexit Britain

dbg uk gsk city airport

Three huge businesses have announced major UK investments in the space of 24 hours – in some cases contrary to what their officials claimed prior to the referendum vote. GlaxoSmithKline has announced £275 million of fresh investment, London’s City Airport is getting a £344 million expansion, and Deutsche Börse’s shareholders overwhelmingly approved its merger with the London Stock Exchange. A vote endorsing London as the enduring financial capital of the world post-Brexit…

All three firms contributed to Project Fear. GSK CEO Sir Andrew Witty signed a letter to the Observer in May that claimed “Leaving the EU would bring added complexity and uncertainty, which is bad for business and research.” London City Airport’s CEO Declan Collier claimed Brexit would  “undermine the free flow of trade and travel.” The Financial Times warned of “advisers familiar” with the Stock Exchange merger claiming the day after the vote “The deal is dead. The German’s won’t allow it.” Willkommen in Großbritannien!

“Government Sachs” Hires EU’s Barroso

goldman-sachs-eu

Goldman Sachs has continued hugging the EU commission tight, after financing the anti-Brexit Remain campaign and spending millions lobbying Brussels, the aggressive Wall Street firm remains careful to keep in with the Eurocrats. Known as “Government Sachs” by those who mock the firm’s habit of hiring and providing US government officials, it is clinging tight to the EU bureaucracy post-Brexit. It has hired the former head of the European Commission Jose Manuel Barroso to be an advisor and non-executive chairman of Goldman Sachs International. These kind of hires provide lucrative connections to power and come to be very profitable in times of political crisis…

In September 2008 Peter Sutherland, also a former Irish EU commissioner, was Chairman of Goldman Sachs International when he strongly advised the naively led Irish government to buy up bank bond debts at the Irish taxpayer’s expense, for a total cost of some €85 billion or 37% of GDP, the highest per capita cost of the credit crisis in Europe. Sutherland’s advice will have saved Goldman Sachs billions in losses on the firm’s bond holdings. It will take the Irish people generations to pay off the debts Goldman Sachs advised their politicians to take on…

Europe’s Biggest Investor: Brexit Good for EU

allianz+brexit

Mohamed El-Erian was CEO of Pimco, a legend in the investing world who is now the Chief Economic Adviser to Allianz, the world’s largest insurance and financial services group which is also the largest company in Europe according to Forbes. He has just told a conference of money managers at the FundForum International in Berlin that a Brexit could resolve key issues within the EU.

“There are two fundamental divisions of the EU: There’s the British view — that it’s a super free-trade zone, that it’s a destination. Whereas the Germany-France view is that it’s a means to something else — to an ever closer union. These are fundamentally two very different views on what the EU is about. If the referendum [results in the U.K. remaining in the union], we don’t resolve these different views. It means we are going to have tensions over and over again, because they are pursuing two different objectives, within one institutional agreement. So, ironically, over the longer term, an exit may actually solve one of the basic inconsistencies of the European Union.”

His argument is that Brexit essentially secures the future of the EU, at short-term volatility cost. No one got rich betting against Mohamed El-Erian…

EU Trade Deficit Hits Record High

DEFICIT GRAPH

Tumbling British exports and an increase in European imports means that the UK’s trade deficit with the EU hit an all time high of £23 billion between November and January.

The trade deficit – the value of exports minus the value of imports – is crucial for measuring British businesses overall performance overseas.

Meanwhile, British exports to the continent are at their lowest since 2009. Divided between the 28 EU member states you get an average gap of over £3 billion per each common market member. Merkel might not want a free trade agreement, but German businesses will… 

Buried away in the ONS’ official data is an increase in EU imports of £674 million in January, while British exports rose a paltry £12 million. This includes a massive £300 million import bung for the Netherlands, while flagging economies Italy and Spain were able to flog us £100 million worth of pasta and sangria each.

They need us more than we need them…

Squandermania: Roof Not Fixed

Yesterday global stock markets passed the technical point where the world is defined as being in a global bear market. It is likely that problems in financial markets will soon be reflected in the real economy, property transaction volumes are already tailing off in a way that suggests we are near to the top of a property bubble. George Osborne promised to fix the roof when the sun was shining, as the moment of truth arrives, has he?

The stand out success of the British economy has been job creation and falling unemployment. Welfare reform driving people back to work and flexible labour markets largely explain that phenomena. The public finances have not been re-balanced, according to the IMF the UK deficit gap is the worst in the G7 and among the worst in Europe. Worse than even Greece.

Osborne has missed every single deficit target he has set himself. He asked us to judge him on how well he tackled the deficit, well he missed his balanced budget target for 2015, he’ll miss his new adjusted target for 2016 and his overall balanced budget target for 2020. If the global economy derails the likely knock on effect will mean even higher deficits.

Despite all this Osborne indulges in squandermania, allowing him to wander the country in hi-viz and hard hats for photo opportunities that will be the pictorial backdrop for his premiership campaign. There are it is famously said two types of Chancellor; those that get out in time and those that don’t. Unfortunately for George, time has run out…

Danny Alexander Tapped For China Bank Role

china-bank-danny-alexander

Bloomberg’s Rob Hutton is reporting that Danny Alexander, the currently unemployed former Chief Secretary to the Treasury, is in the running to join China’s new Asian Infrastructure Investment Bank. The Treasury is said to be putting forward Alexander for a seat on the bank’s board. It is not yet, Guido understands, a done deal… 

Joining the Beijing-based bank’s board would be a lucrative reward for Alexander, of whom George Osborne recently said he had “a lot of time for and respect for Danny”. As well as his board fees it would open up a lucrative future career in high finance in booming Asia. Sir Danny has come a long way in the decade since he was a press officer for the Cairngorms National Park…

Varoufakis Mockingly Praises Osborne’s Faux Austerity

Rock star former Greek finance minister and self confessed “unapologetic Marxist” Yanis Varoufakis used his slot on Question Time last night to compliment George Osborne for not actually implementing austerity.

“I don’t believe that we need an alternative to austerity because austerity is not an option. And indeed, I’m going to give a compliment to George Osborne and to the Tory government, it’s going to create some consternation I think in the Tory party. He hasn’t really practiced austerity, he’s talked about austerity, he did a little bit of it and then it didn’t work. He killed off this nascent recovery after 2009 with the little bit of austerity he did and he stopped, and indeed I can assure you that in discussions I have with good friends of mine in the Tory party, they have been very supportive to us here in Greece and to me personally in our struggle to end austerity in Greece.”

Varoufakis is right, Osborne jacked up welfare spending by £28 billion during his first four years on the job and is still overspending by £2 billion a week. In office Varoufakis, a socialist Greek finance minister, was more of a deficit hawk than the Conservative British Chancellor, Osborne’s austerity is only rhetorical, he is currently running a higher deficit than Greece

Osborne Running Second Highest Deficit in OECD

ONS numbers out today show that public sector net borrowing was £9.4 billion in June,  so the government is overspending by a mere £2 billion-a-week. So much for austerity…

Treasury Questions – coming up this morning – will be a chance to ask the austerity Chancellor how he is doing on the deficit compared to other finance ministers:

Budget-deficits[1]

Of the OECD’s industrialised nations only Japan currently has a worse deficit, financially chastened Portugal, Italy, Greece and Spain are currently showing more fiscal discipline than the Chancellor. George’s illusion is permitted by the financial markets because of a combination of QE (money priniting) and the fact that Osborne talks a good book when it comes to austerity. Though the rhetoric can sometimes fail him when he’s questioned by the likes of Kay Burley

Building HS2 on £50 billion of borrowed money, renewing Trident on borrowed money, borrowing billions to subsidise EU competitors, borrowing billions that end up aiding third world dictator’s offshore bank accounts… It all mounts up…

Investors Dumping Mirror Shares

tm

After the higher than they hoped damages awarded to Mirror phone hacking victims last week the struggling newspaper group admitted that “costs of settling claims is likely to be higher than previously anticipated we are increasing our provision to deal with matters arising from phone hacking by £16 million. This is in addition to the £12 million provided in 2014.” So the Mirror group has gone from denying that there was any hacking at all, to putting aside £12 million and now more than doubling the provision to £28 million…  

City investors are still worried that this is nowhere near enough and that the final figure will be nearer £100 million, the shares have been trading down since the ruling with £30 million knocked off the capitalisation this week. There is some question as to if the company will be able to pay a dividend…

Forgotten the deficit, George?

imf-deficit-uk

Remember that the core mission of the coalition in 2010 was to deal with the deficit? We were repeatedly warned by George Osborne that after Gordon Brown’s financial splurge, Britain risked having a bigger deficit than Greece. After 5 years of Osborne’s deficit cutting rhetoric, Britain really does have a deficit that is bigger than Greece’s, in fact as a proportion of GDP the IMF expects the UK deficit to be quadruple that of Greece [chart above].[…] Read the rest

+ READ MORE +

Relative Values: Lies, Damn Lies and Statistics

OSBORNE-NELSON

The spat between George Osborne and Fraser Nelson over whether or not the deficit has been halved is very much a Westminster bubble affair of little consequence to anyone outside SW1. Interested voters who even understand the difference between the deficit and the debt know that the government’s target to balance the budget in 2015 has been missed by £100 billion or so.[…] Read the rest

+ READ MORE +

The World Will End If You Vote UKIP

First it was value of your home that would plummet if you vote UKIP, and now it’s the markets that will crash should a small coastal town return the same MP the have had for the last four years:

“UKIP gains are changing the political landscape in Britain and these shifts have wider effects than shaking-up British politics; they are likely to spark short-term volatility in financial markets,” claims someone called Nigel Green, who claims to be the founder and chief executive of the deVere Group.[…] Read the rest

+ READ MORE +

Labour’s Chutzpah Over Market Rigging

Alex Belardinelli, the marauding SpAd for Ed Balls, is up early this morning tweeting about the Forex Fixing scandal;

According to the Bank of England the scandal dates back to 2006, the LIBOR scandal dates back to 2005, when Belardinelli’s master Ed Balls was Economic Secretary to the Treasury.[…] Read the rest

+ READ MORE +

CEBR Predicting London Led House Price Drop in 2015

cebr-house-price

CEBR’s Douglas McWilliams says “the London housing market is being hit by a double whammy of reduced domestic and overseas demand. Sterling appreciation since the start of 2013 means that London property is no longer as attractive an investment as it was a few years ago.[…] Read the rest

+ READ MORE +

SKETCH: Professor Krugman, Where’s the Shark?

Paul Krugman, the Nobel-prize-winning economist is in Oxford until mid-June as the Sanjaya Lall Visiting Professor in Development and Business.

The liberal Princeton/NY Times professor just delivered his inaugural lecture asking the question (the almost-rhetorical question) Do We Face Secular Stagnation?[…] Read the rest

+ READ MORE +



Tip offs: 0709 284 0531
team@Order-order.com

Quote of the Day

Boris on being scolded at the Munich Security Conference on Friday, for using the term “liberation” to describe Britain’s exit from the EU bloc…

“Come on, I have to say, I hesitate to accuse you of pomposity, but the word liberation clearly means… it’s etymologically equivalent to being freed, and it’s an undeniable fact that we, the U.K., has been unable to do, to run its own trade policy for 44 years. I want to reclaim the English language, if I may…”

Sponsors

Guidogram: Sign up

Subscribe to the most succinct 7 days a week daily email read by thousands of Westminster insiders.

Facebook

Amazing Robot Warehouses Amazing Robot Warehouses
Team Corbyn Tweeting Fake News Team Corbyn Tweeting Fake News
Sunday Shows Sunday Shows
Video: New Tory Attack Ad Targets Nuttall Video: New Tory Attack Ad Targets Nuttall
Farage: Nuttall Must Win Stoke Farage: Nuttall Must Win Stoke
Labour Condemn Blair’s Contempt for Democracy Labour Condemn Blair’s Contempt for Democracy
Open Britain Wheels Out Blair Open Britain Wheels Out Blair
Labour Whips Move to Save Bercow Labour Whips Move to Save Bercow
Arron Banks Sues Over Russia Claims Arron Banks Sues Over Russia Claims
No 10 Mulls Migrant Cut Off Date No 10 Mulls Migrant Cut Off Date
New: Nuttall Made Hillsbourough Claim in 2011 As Well New: Nuttall Made Hillsbourough Claim in 2011 As Well
Nuttall Press Officer Takes Rap Nuttall Press Officer Takes Rap
Anti-Bercow Lobbying Latest Anti-Bercow Lobbying Latest
May Copeland Victory Lap May Copeland Victory Lap
Snell: Give Woman “A Good Slap” Snell: Give Woman “A Good Slap”
New Statesman Cooking the Books New Statesman Cooking the Books
Suzanne Evans: Snell Not Fit To Be MP Suzanne Evans: Snell Not Fit To Be MP
Paul Mason: UKIP Voters Are Toe-Rags Paul Mason: UKIP Voters Are Toe-Rags
Daily Mail Pol Ed Runners and Riders Daily Mail Pol Ed Runners and Riders