Today has started with a reminder of a school of economics that I was taught about at university. The 1343 point or 7.71% rise in the Nikkei 225 equity index to 18,770 reminds us yet again that financial markets can move vastly more quickly than real economies as we wonder yet again what link that there is? My subject of the day the UK is already seeing a 1.8% rise in the FTSE 100 to 6256 so congratulations to all equity investors overnight especially those in Japan. Time for the Rally Monkey I think.
Meanwhile in the real economy the Bank of England is meeting right now to discuss interest-rates with one of the nine ( yes nine like the Nazgul ) already having voted for an interest-rate rise. The vote is now on a Wednesday and is announced tomorrow at noon along with the meeting minutes so I hope that there are no leaks and that security is tight. This would be unlike the US Federal Reserve where one news agency released details around 20 minutes early recently.
Moving to the issues then whilst this was aimed at the US it would appear that it also applies to the UK. From the Financial Times.
The US Federal Reserve risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.
So according to the IMF and now the World Bank the world economy is so weak it cannot take even a 0.25% increase in interest-rates in their opinion! How is the recovery going then?
The UK economy
The British Retail Consortium has updated us quite a bit on the state of play here over the past 24 hours.
UK retail sales decreased 1.0% on a like-for-like basis from August 2014, when they had increased 1.3% on the preceding year. On a total basis, sales were up 0.1%, against a 2.7% rise in August 2014.
Some care is needed her as the August Bank Holiday rather confusingly was in September this year and allowing for that means that retail sales were probably up by 2% according to the BRC’s chief economist.
One factor that did continue was the fall in prices reported.
Overall shop prices reported deflation of 1.4% in August unchanged from July……On a 12-month average basis, the Shop Price Index reported deflation of 1.7%
Maybe for once their use of “deflation” is not completely wrong as the headline sales number fell but unless there is a real change in UK retail sales patterns then it is misleading. That remains to be seen although on the official numbers growth was declining in July.
Maybe something is changing here and there is news today from somewhere rather close to home, at least for me! From Bloomberg.
Investors betting on making a quick profit on luxury apartments in south London’s Nine Elms district, Europe’s largest project for prime new homes, are facing long waits for buyers.
It is crane city up there and frankly as you pass it then any talk of UK construction output falling seems like from another universe. But I guess this is a consequence of the currency wars going on.
Malaysian investors, who purchased almost a third of the 866 homes in the first phase of the district’s $12 billion Battersea Power Station project, saw costs surge as much as 30 percent as the pound strengthened against the ringgit.
Whilst local property developments may not be that important they do matter if they turn out to be a guide to London overall as it is a forerunner to the rest of the UK. Via its Funding for (Mortgage) Lending Scheme the Bank of England went to a lot of effort to push house prices higher and will not like a prospective retracement or dip.
Industrial Production and Manufacturing
There have been signs of a declining situation here recently and sadly this morning’s data release has backed that up.
Total production output is estimated to have decreased by 0.4% in July 2015 compared with June 2015. Manufacturing fell by 0.8% and was the only main sector to have decreased. This was the largest fall since May 2014.
If we look into the detail we find out more about the fall in UK manufacturing.
The main manufacturing components contributing to the decrease between June 2015 and July 2015 were the manufacture of basic metals & metal products; the manufacture of transport equipment; and other manufacturing & repair.
In fact manufacturing was 0.5% lower than a year before which is a rather cheerless number. Overall production was up but this seems driven by the changes to the UK oil taxation structure introduced by the Chancellor.
Total production output is estimated to have increased by 0.8% in July 2015 compared with July 2014. There were increases in 2 of its 4 main sectors, with the largest contribution coming from mining & quarrying, which increased by 6.7%.
Who would have thought that UK production would be depending on North Sea Oil and Gas output which is supposed to be in decline?
Back of the first of this month I expressed my fears about the trends for UK manufacturing and I have put a link below.
The latest picture is summed up below.
In the 3 months to July 2015, production and manufacturing were 9.3% and 5.2% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.
What about trade?
UK trade figures invariably require some sort of warning as you need to borrow the TARDIS of Dr.Who to find a period when they were consistently good. Today’s figures backed up the production and manufacturing issues discussed above.
Exports of goods decreased by £2.3 billion to £22.8 billion in July 2015, the lowest export figure since September 2010.
Indeed there was a direct link.
This is attributed to decreases in semi-manufactures (specifically chemicals) of £1.0 billion and finished manufactures of £0.8 billion.
One sector of exports was especially poor if we consider that the Euro area has been doing better.
Exports of goods to EU countries fell by £0.6 billion to £11.0 billion, the lowest level since November 2009.
The effect of all this factors is shown below.
The UK’s deficit on trade in goods and services was estimated to have been £3.4 billion in July 2015, a widening of £2.6 billion compared with June 2015.
If we look deeper for a little more perspective the situation looks better as previous to July we had been on an improving trend.
In the 3-months to July 2015, the UK’s deficit on trade in goods and services was estimated to have been £4.7 billion; narrowing by £4.1 billion when compared with the 3-months to April 2015.
In a nutshell the improving trend was reversed in July and the monthly numbers which are unreliable on their own were backed up by the production numbers. Indeed the Purchasing Mangers Index also has been hinting at such issues.
Companies linked reduced overseas demand to the sterling exchange rate, weak sales performance to the eurozone and the slowdown in China.
Is the higher value for the UK Pound £ beginning to apply a brake to things?
The Oil Industry
This seems to be in a very contrary position as whilst we are recording higher output this is also happening. From the BBC.
The contraction of Britain’s offshore oil sector has already stripped out 65,000 jobs, according to a new report.
The calculation of a 15% drop since the start of last year came from the annual economic impact report of trade body Oil and Gas UK.
The Bank of England has been extending the term or maturity of its holding this week in response to a maturity of a Gilt held. Today’s operation will involve the purchase of £1.4 billion of Gilts maturing between 2023 and 2028. Just to give you an idea of how far this now extends yesterday some £173.5 million of a Gilt maturing on the 22nd of July 2068 was purchased.
I will keep it short for today, after the data release who would raise their hands and vote for a Bank Rate rise? After all we are due a slow down if history is any guide…
In other news congratulations to the Queen and Wayne Rooney in a rather odd combination.
As ever the “precious” is working against us. I will hand you over to Dan Davies who has been delving into the issue of regulation and banking.
An astonishing capitulation which IMO undermines the whole concept of TLAC
cetier1: HSBC and Santander win change to proposed capital rules
Seriously, if the FSB are allowing subsidiary capital to count for the parent, they should call it HLAC (Hopefully Loss Absorbing Capital)
Sorry for all the acronyms but I think that the underlying message and theme is clear.