Strong UK Retail Sales show that low inflation is good for everyone apart from retailers

Today has opened with a bit of a hangover from yesterday. The reason for that is that more than a few were caught out by this release in the afternoon. From Markit.

Flash U.S. Composite Output Index at 50.9 (53.0
in April). 36-month low.
▪ Flash U.S. Services Business Activity Index at
50.9 (53.0 in April). 39-month low.
▪ Flash U.S. Manufacturing PMI at 50.6 (52.6 in
April). 116-month low.
▪ Flash U.S. Manufacturing Output Index at 50.8
(52.7 in April). 35-month low.

Those hit the screens and impacted in two ways. Firstly the size of the drop and then a follow-up punch as they noted when 116 months ago was. The detail provided a further reminder of more troubled times.

The muted rise in output was attributed to softer
demand conditions and subdued growth of new
orders. The rise in new business in May was the
softest recorded since the series began in October

We were ready for this because back on the eighth of this month had noted this.

This is the clearest warning shot we have seen for the US economy. Outright falls in narrow money supply of this magnitude are rare on a monthly basis………Thus as we move through the autumn I now fear a US slow down and another month or so like this would make me fear a sharp slow down.

Moving back to the Markit PMI then they conclude this.

“A decline in the headline ‘flash’ PMI to its lowest for
three years pushes the survey data down to a level
historically consistent with GDP growing at an
annualised rate of just 1.2% in May. Worse may be
to come, as inflows of new business showed the
smallest rise seen this side of the global financial
crisis. Business confidence has meanwhile slumped
to its lowest since at least 2012, causing firms to
tighten their belts, notably in respect to hiring.”

So it looks like the impact of the “trade war” is now impacting the US economy and should it only grow at a quarterly rate of 0.3% it will have a knock-on effect for the rest of the world.

We got two fairly quick responses as bond markets rallied taking the US ten-year Treasury Note to 2.32% as I type this, or if you prefer it has further shifted to suggesting the next move in interest-rates is down. Also commodity prices fell with crude oil leading the pack with falls of 5% for some types and Brent Crude is now a bit over US $68. Dr. Copper has been diagnosing an issue for a while as the recent peak of US $2.99 on the 17th of April is replaced by us $2.69 now.

Fears of a slow down have had a by now familar response.

Thanks I think a 4% inflation target jointly announced by G3 central banks may be unlikely, but more powerful than worrying about asymmetrical targets or carefully calibrating inflation overshoots ( Former Bank of England policymaker Adam Posen)

Adam is seemingly convinced he can make us richer by er making us poorer. Also Olivier Blanchard is on the case and the emphasis is mine.

Blanchard and Tashiro, however, argue that, in the current economic environment in Japan, primary deficits may be needed for a long time, because they may be the best tool to sustain demand and output, alleviate the burden on monetary policy, and increase future output.

Last time Olivier Blanchard was involved in primary deficits the Greek economy collapsed. That is an odd feature of economics as who in the real world would rush to travel on a new plane by the 737 Max designers? Also these proposals fail my general critic which is why do we always need more stimulus? Surely it would be better to address why we need it as in a cure rather than ongoing treatment?

UK Retail Sales

These were strong again as we note below although it began with what in sporting terms would be called a head fake.

The quantity bought was flat (0.0%) in April 2019 when compared with the previous month, with growths in clothing, non-store retailing and fuel offset by falls in all other main sectors.

However this represented quite a surge on last year.

When compared with the previous year, the quantity bought in April 2019 increased by 5.2%, with growth across all sectors except household goods, which fell by 4.5%.

As you can see the numbers were strong and if we stockpiled anything ( after all many economists and much of the media claimed we were) then household goods seems an odd item. As to the more recent trend overall it has been strong too.

In contrast, from January 2019 to April 2019 the three-month on three-month index has shown strong growth…….In the three months to April 2019, the quantity of goods bought (volume) in retail sales increased by 1.8% when compared with the previous three months, with strong growth in non-store retailing, which reached a record high of 9.4%.

This brings one of my main themes into play as well as providing insight into an curious current episode. The theme that I established in January 2015 has worked again.

Both the amount spent and quantity bought in the retail industry showed growth of 5.5% and 5.2% respectively in April 2019 when compared with a year earlier.

What that shows us is that an inflation rate of 0.3% has led to strong retail sales growth one more time. That is more mud in the eye for inflation fanatics like Adam Posen who continue to prescribe more of it as a cure all for the economy. Actually there is so much evidence to the reverse now it is mud in both eyes. The low retail sales inflation we are seeing combined with annual wages growth of 3% or so means strong real wages growth in this area and therefore strong numbers.

Why are retailers doing so badly then?

This week has seen various problems for the retail sector. Here is the Guardian on Marks and Spencer.

Pretax profits were less than £85m – on sales of £10.4bn – after £440m of one-off costs, about half of which relate to the store closure programme………Marks & Spencer is stepping up its retreat from the high street by closing a further 20 of its full-line stores, which sell clothing and food under one roof.

Also the empire of Phillip Green has hit trouble this week or perhaps I should say more trouble, plus in a related piece of news Jamie Oliver’s restaurant chain bit the dust. So how can retail sales be so strong but retailing so week?

  • The low retail inflation number is good for consumers but must be squeezing retailers margins
  • “with strong growth in non-store retailing, which reached a record high of 9.4%.”

So not only are margins squeezed but we continue to shift online.

In April 2019, online retailing accounted for 18.7% of total retailing compared with 17.7% in April 2018, with an overall growth of 10.1% when compared with the same month a year earlier.

Or as Glen Frey put it.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on


As ever a lot is happening at once. We see more and more signs of a global slow down which to my mind should lead to us asking “how did I get here?”. Instead the same old crew repeat the same failed remedies and so rarely get questions. In the detail we may see something of a pivot towards the Euro area relative to the US as the monetary data has been better the last couple of months.

Returning to the UK we are likely to be grateful yet again for the UK consumer who seems to have inexhaustible desire and appetite. Of course it is not a free lunch as it poses questions for the trade figures. Also if we sum up the retail sector is reducing inflation but even with it we do not have that much economic growth. That no doubt explains why in spite of the rhetoric from Mark Carney and Forward Guidance from the Bank of England about higher interest-rates those trading UK Gilts do not believe it. That is because the UK two-year yield at 0.66% and the five-year yield at 0.72% are below his Bank Rate of 0.75% and suggesting cuts and not rises.

Also let me wish soon to be former PM Theresa May well as whatever one may think of her term it is nearly over and we all need to move on.




What are the prospects for inflation ( and hence wages )?

Yesterday saw a revealing insight into the establishment view of inflation. The world economic outlook of the International Monetary Fund was in general upbeat and positive but I noted this.

The outlook for advanced economies has improved, notably for the euro area, but in many countries inflation remains weak, indicating that slack has yet to be eliminated

You may note that it ignores the possible link between lower inflation and better economic growth in its rush to tell us that inflation below some arbitrary target is a bad thing. It really is old era economic thinking to say that low inflation is a sign of slack in the economy as well. Missing also is any thought that growth and inflation are being measured badly and that perhaps we have more inflation ( for example by factoring in one of the largest parts of any budget which is housing) and less growth than the IMF would like us to believe.

The same muddled thinking is evident in this excerpt as well.

Persistently low inflation in advanced economies, which could ensue if domestic demand were to falter, also carries significant risks, as it could lead to lower medium-term inflation expectations and interest rates, reducing central banks’ capacity to cut real interest rates in an economic downturn.

Central banks capacity to cut interest-rates was mostly reduced by them cutting them so much already! If that was the weapon implied here why would they need to do it again? Also as we know some central banks have been willing to employ negative interest-rates. If we move on in a word of low wage growth then most people would welcome low inflation and low inflation expectations. If we put this another way the IMF is skirting over the implication below in its view on asset valuations.

In advanced economies, monetary policy should remain accommodative until there are firm signs of inflation returning to targets. At the same time, stretched asset valuations

What are the inflation prospects?

So far in 2017 headline consumer inflation has been really rather low. For example the CPI in the Euro area is at 1.5% and the US CPI is at 1.9%. There was something of a warning though in the latest US data if we look at some of the detail.

Increases in the indexes for gasoline and shelter accounted for nearly all of the seasonally adjusted increase in the all items index. The energy index rose 2.8 percent in August as the gasoline index increased 6.3 percent.

So let us look at the oil price trend.

Crude Oil

If we look at the price of a barrel of Brent benchmark crude oil then we see it has been rising since late June when it dipped below US $45 per barrel as opposed to the US $56.62 as I type this. There have been various factors driving this of which one has been the economic growth described by the IMF. In addition there has been this factor according to Reuters.

A pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia to cut output by 1.8 million barrels per day (bpd) in order to prop up prices is due to expire by the end of March 2018. Discussions to extend the pact are taking place, but production elsewhere is rising.

There has been doubt as to how the OPEC deal has actually held but from its point of view the last 3 months or so have been a success as the oil price has risen. The other factor is the shale oil wildcatters in the United States who will also be benefitting from the higher price for crude oil as we wait to see if they expand output. If you recall the cash flow business model for the shale oil wildcatters then 2017 has been a good year as income will have been strong as we note higher prices are being accompanied by this.

U.S. producers are not participating in any pledge to restrain supply, and output has risen by 10 percent this year to over 9.5 million bpd.

Other Commodities

Reuters calculates a commodity price index which is currently at 183.2 which is just under 4% lower than a year ago albeit like in the oil price there has been a rise since late June. Back then it had dipped to 166.5. If we look at the index which excludes energy prices we see that there is a familiar if more subdued pattern as it has risen from just below 116 to 123.6 now.

If we look at metals prices we see Metal Bulletin reporting this today.

The underlying trends in the base metals are upward but those metals in or near high ground seem to be having to absorb selling which is capping the upside, while copper and nickel prices that are still some way below the highs seem to be having an easier time working higher, but neither seems in any rush. We remain quietly bullish, but expect trading to become choppier as prices run into more bouts of scale-up selling.

Dr.Copper had seen quite a surge as a year ago it was US $2.17 as opposed to the US $3.06 now as we wait to see the next move. I guess churches will be nervous about their copper pipes and roofs again. By contrast the Iron Ore price has been heading south at a rapid rate recently and this morning has fallen below the US $60 mark.

Benchmark Australian iron ore fines dropped 4.1% Tuesday to a three-month low of $59.1 a tonne, based on data provided by The Steel Index, taking losses since the start of September to more than 20%. (

They attribute the fall to this factors.

Iron ore prices continued their downward trend Tuesday amid ongoing concerns that looming steel production cuts in China on environmental grounds will sap steel mill demand……..At the same time, supply from Australia — the world’s No. 1 iron ore producer — has risen,further pressuring prices.

Food Prices

The United Nations calculates an index for this.

The FAO Food Price Index* (FFPI) averaged 178.4 points in September 2017, up 1.4 points (0.8 percent) from August and 7.4 points (4.3 percent) above September 2016. Firmer prices in the vegetable oil and dairy sectors were behind the small month-on-month rise in the value of the FFPI.

So a rise overall which is influenced by the 27% rise in dairy prices over the past year as we note the influence of the butter shortage. Mind you if you have a sweet tooth and are a Maroon 5 fan the news is much better as the sugar price has fallen by 33% over the past year.


We see that there has been a nudge higher in the beginnings of the inflation food chain over the past 3 months or so. Much of this has been the higher oil price but there have been rises in some metal prices too although not Iron Ore. However whilst the trend is low especially for this stage in the economic cycle it can still be damaging. The rising cost of one of the basic essentials ( housing/shelter ) in many places is mostly ignored and at other times claimed as growth. Secondly the fact is that wage growth is overall low too so that pockets of real wage growth are also much less abundant that we would usually expect in a boom. If the IMF gets the inflation it seems to want there is no guarantee that wages would rise as well so it would have made us all worse off.

So in essence if we look at food and energy prices they are the major players in the consumer inflation measures we have and of course the central banks and IMF try to ignore them as “non-core.” Oh well…….


What are falling commodity prices telling us about the world economy?

One of the features of 2015 has been the fall in price of so many basic staples of life. By this I mean the price of energy metals and some foods. Putting it another way we have seen a sort of currency revaluation where most people can now buy more and often considerably more product for the same monetary outlay. This is certainly true for those who use the US Dollar and even the Euro’s fall has only offset part of it. This currency revaluation has spread to much of the world and only has a downside for those who are producers where places like Western Australia and the oil producers come to mind.

If we look at things this way and again look at the Euro area I note that Mario Draghi has again indulged in Open Mouth Operations to drive the Euro lower today and thereby offset some of the commodity price fall. Does anybody in authority even question the wisdom of this?

The price of oil

if there is an equivalent to “the spice must flow” theme of the novel Dune for the world economy it is the supply of oil. That is why so many wars have sprung up around the middle-east in recent times. However the latter part of 2014 saw a sea change in the pattern of the price of oil as it fell and fell to a nadir in Brent Crude Oil terms of just below US $50 as 2015 began. This was very different to the period where as we observed on here a Star Trek style tractor beam kept pulling it back to the US $108 level.

Whilst there have been fluctuations in 2015 we have seen a more stable overall pattern as well as lower low and we currently find Brent Crude Oil at the US $46 mark. This has driven both consumer and producer inflation lower and given the world economy quite a boost in 2015 even if we allow for the regions where it is a deflationary influence such as the Middle-East. Although in a theme for these times we have the question of why the world economy is not doing better and so many central banks are still running such an expansionary policy.

Dr Copper

I pointed out earlier this week that the price of copper has been partying just like it was in 2009. The copper future followed by the Financial Times has fallen into the US $2.21s which means that it is some 27% lower than a year ago. For consumers this is again a clear gain especially for anyone looking for electrical wiring.

Underlying this has been the change in the Chinese economy where we see a very opaque picture. This as regular readers will recall is due to the collateralisation and financialisation of copper over there and likely hypothecation. Anyway with apologies for the salvo of long words in essence the financial market input has also driven the boom/bust cycle here. Along the way we see that copper was for a while a form of money just like white goods and cars did in Greece except that one became so in a boom and the others because of fears of a bust.

Other metals

Dr. Copper has not lacked friends n its downwards journey. From Bloomberg on Tuesday.

Zinc for delivery in three months fell 2.3 percent to settle at $1,607 a metric ton at 5:50 p.m. local time on the LME. Prices touched $1,576, the lowest since July 2009 and are down 26 percent this year.

Only the day before Nyrstar had announced plans to reduce production of Zinc concentrate by 400,000 tonnes a year but as you can see it appears to have been a leaf in the wind. This morning markets were playing “And the beat goes on” by the Whispers according to Sober Look.

Spectacular selloff in industrial metals on the Shanghai Futures Exchange: aluminum, zinc, nickel, steel

The Commodity Research Bureau calculates a metals sub-index and it pushed above 1100 in the commodity boom of early 2011. Then it fluctuated over the next 3 and a bit years but drifted downwards into the 950s or so. But with a by now familiar sense of timing something changed in late July 2014 as “Down Down” by Status Quo became the musical theme as we note that the last reading was 562.49. Apart from one rally in late April this has been the sort of move that those who use trend charts must dream of!


The majority of people reading this- I mean those who are neither central bankers nor farmers- will be pleased to read that the price of foodstuffs has fallen too albeit not on the same scale as discussed so far. The peak was 513 in April 2011 and we now find ourselves at 358 with the majority of the fall happening since, surprise surprise, the summer of 2014. On that subject does anybody recall why food prices rose in early 2014?

Of course this does not always feed through into our pockets as the recent price increase by Starbucks in the UK showed. There are other influences.

Trading Places

Just when you thought that the Duke brothers Randolph and Mortimer were figments of a film-makers imagination what pops up? From Bloomberg.

Futures have soared 35 percent from a three-year low of $1.0345 a pound on Sept. 29 as investors weighed slowed demand against declining output. Brazil is the world’s top orange-juice producer, followed by Florida.

Yes forecasts from the US Department of Agriculture are involved as life imitates art. It gives me a wry smile to note that this is happening as Bank of England Governor Mark Carney mounts his PR campaign to tell us that all the past market rigging problems were misunderstandings and local difficulties and that it is different this time. Perhaps Mark would be better off ripping it up and starting again.


These indices are also hammering out a worrying beat. The Baltic Dry Index has halved since early August creating quite a severe bear market. Whilst it is a volatile measure a fall from 1201 to 599 does create food for thought as does the fact that it is down over 50% on this time in 2014. If we move to the more stable Harpex Index we see that 394 has replaced the 646 of the summer.


It is easy to sing along with REM after noting the developments in commodity prices.

It’s the end of the world as we know it
It’s the end of the world as we know it

However there are ameliorating factors if we look at what created the commodity price boom. China decided to go on a commodity buying warpath pushing prices higher. In addition to that bank trading desks thought if the Chinese want to pay up let them and drove prices even higher. Hence we had something of a false boom and now as well as the Chinese slow down we are seeing banks exit the market as the easy money has gone.

In this I see a genuine danger which is not the deflation mania in much of the media. It is that in spite of the protestations of regulators and central bankers there are many derivative positions still around and the one thing that writers of such positions do not like is extreme volatility. If you are looking for a canary in this particular goldmine may I suggest noting developments like this from the Financial Times.

Glencore shares on the wrong side of £1 again