UK Economic Data Falls
The surprise index for the UK has taken a noticeable turn lower, the methodology for the surprise index tracks actual data against previous and expected figures. Following the vote to leave the EU most economists expected a drop in the UK economy however that did not happen and the British economy, fueled by its consumers, fired ahead. Since a high in Mid may the surprise index has turned lower and retraced much of the advance from earlier in the year.
This means that published data has been coming out below expectation and below previous levels. The one piece of data still registering as positive is inflation, the latest figure of 2.9% registered as positive but will start to register as negative should it get above 3%. That high inflation is really quite negative, with public sector workers having their pay rise pegged at 1% a 2.9% inflation rate means a cut in real income which will inevitably lead to a drop in consumer spending.
The UK appears to be heading for a worst case scenario of no trade deals post Brexit, the speed of negotiation is incredibly slow months of time was wasted because of the Uk general election and even more time wasted by the arrogance of the British politicians incorrectly thinking that Europe needs a deal more than the UK. It is that type of arrogance that caused the leave vote in the first place. It is worth noting that since the Brexit vote the EU has signed free trade deals with Canada and Japan, the UK on the other hand is still concerned with ripping up its only trade deal. This headline from the Ft sums it up.
Are we approaching the end of the easing era?
The score card on monetary easing rhetoric has moved, it now reads
6 banks talk tightening 1 bank easing and 1 neutral.
This is a huge change in the monetary policy landscape. It has roiled the markets and may continue to do so in the months ahead
The annual summer lull in Forex trading has been put on hold as Central Banks line up to give Hawkish rate rising rhetoric. Some increased volatility has resulted and with Bond prices beginning to price in far less accommodation than we have at present Stock markets may be under threat of a decent sized correction that will inevitably roll in to the FX space.
Lets review the latest view from each Central Bank:-
The Federal reserve is well ahead of the game, with four rate hikes in the last 18 months and more promised. The USdollar is showing some weakness of late and that may be due to the markets waning belief in future FED action and growing belief in future action from everybody else.
The Bank of Canada looks like it might be approaching a rate rise, Governor Poloz said ‘the next move is likely to be a rate hike rather than a cut… interest rate cuts in 2015 have largely done their work’. Deputy governor Wilkins said ‘pace of growth has been ignited by an improving labor market and strong demand’.
The Bank of England the unreliable girlfriend moniker continues to be well deserved as policy makers flip flop their guidance. In the latest version Governor Carney and other mpc members have been publicly airing disagreements as they get ever more concerned about the UK’s economic and inflation growth.
The ECB Mr Draghi’s comments on policy normalization last week upset the markets, they were unexpected and hawkish. It looks like we might get an announcement on tapering in September, that is much earlier than had been generally believed.
THE RBA gave an upbeat economic assessment on Tuesday but caused a fall in the Aussie dollar when they took a very cautious tone when discussing interest rates.
The RBNZ has good reason to consider raising rates, economic indicators are solid but the small island nation may be concerned about its already growing exchange rate, the RBNZ the first to raise rates after the financial crisis but have since reversed course.
Norges Bank removed its guidance on cutting rates at its last meeting and would appear to have limited downside risks
Swiss National Bank has used currency intervention to try and keep its currency low, the SNB will continue to follow the ECB as it tries to track the Euro having failed with its peg a couple of years ago so as the ECB tightens so does the SNB.
Bank of Japan the only significant central bank giving no sign of any tightening, it seems committed to bond buying and keeping a zero rate interest rate all the way to 10 years.
Adam Posen President of PIIE, my favorite place for economic news does not believe the rhetoric, he says we have seen it all before, a buzz in the air and a few positive meetings will get hit in the face by the reality of the situation.
If Posen is correct, he normally is, the Central Banks will not move on their words and we have more volatility ahead.