By now you’re likely to have already seen the bashing of Britain’s balance sheet by press – citing the latest IMF Fiscal Monitor Paper. Indeed a minus two trillion pound net worth (3tn in assets minus 5tn of liabilities) is a great headline and a terrifying prospect for those likely to bear this future tax burden. It’s also an embarrassment for many governments (including the UK’s) that have weakened their country’s long-term financial health significantly since the Global Financial Crisis: privatising illiquid assets to create the illusion of lowering public debt and assuming corporate liabilities (UK by 189% of GDP from 2007-08).
Ireland has come out in support of British Prime Minister May’s plan to sidestep a hard border cutting through the island of Ireland. Ireland want to avoid needing to enforce customs in €65bln in trade with Britain each year, and May is fighting to avoid the same between NI and Britain (hopefully bringing the DUP back on side) and of course any outcome better than a no-deal Brexit.
After a 3-day bounce the lira resumed its weakening, today spiking back up above 6.3, and now hovering around 6.08. Some BIS data, and the restrictions on short selling the lira, drew attention away from the currency as a barometer to a more fundamental assessment of the Turkish debt problem. This of course reminded markets that Spanish, French and Italian banks – greedy for returns – have cut themselves too thick a slice of Turkey.
The month of May looks to be somewhat challenging for Prime Minister Theresa May. Although she recently polled more popular (or more accurately less unpopular) than Jeremy Corbyn for the first time in a year - she now faces a new Brexit ‘ultimatum’ from MPs within, further dogged Brexit pessimism from various EU officials without, and following tomorrow may be answerable if any disappointment and losses across local council elections transpire.
It’s US consumer price inflation day again, and it seems forecasts were dead on, with the Core CPI up 1.8% YoY. This made for a relatively muted market reaction with 10-year US Treasury yields first falling 3 basis points but then returning to 2.86%. At around the same time President Trump tweeted CIA Director Mike Pompeo is to become his new Secretary of State, finally unseating a discordant Rex Tillerson; the White House confirmed Gina Haspel as nominee to replace Pompeo as CIA Director; and the expectation is that a replacement for Gary Cohn may also be announced imminently. Earlier Trump forenamed CNBC’s Larry Kudlow as having ‘a very good chance’ at becoming the new director of the White House National Economic Council.
UK’s Industrial Production for November 2017 came in this morning as forecasted at 0.4% mom: the 8th consecutive rise. Last time this happened was over 23 years ago in May 1994. Moreover, because of revisions to prior months’ data the yoy Industrial Production growth read 2.5%, beating forecasts of 1.8%. And although we are a nation built more upon the service industry, such an improvement should at least help the 2017 GDP figure reach its 1.5% target, which was notoriously revised downwards over the course of last year, as stalled Brexit negotiations took their toll.
The UK has finally caved to the EU’s disaggregated approach to Brexit negotiations: agreeing in principle to give around €55bn (as part of the eventual package deal) to compensate for retracting from future funding of the EU budget. The argument that such a stance was illogical (as they certainly wouldn’t enforce a leaving subsidised-member to continue receiving payments or impose a leaving-bonus) gained no traction after many precious months; neither did the previous €20bn and €40bn offers by Prime Minister Theresa May. Given that early talks of what the UK ‘owed’ were in the range of €60bn it seems that already in the first few items the UK as conceded much, and the EU precious little.
This Friday Prime Minister Theresa May will deliver a Brexit speech at the annual Pontignano Conference near Florence, Italy. It seems that Tuscany was the best platform for what will be May’s third update on Brexit plans (after the Lancaster House speech in January and the letter triggering Article 50 back in March), avoiding France and Germany where focus this weekend will instead be on the major labour reform demonstrations and federal elections respectively.
There are certainly reasons to be appreciative of being British today; from those on Portsmouth dockside welcoming home the HMS Queen Elizabeth Carrier to those wading through the latest data from the ONS showing, for instance, that employment rate (75.1%) has hit its highest on record and unemployment (4.4%) is at its lowest in 42 years. But less so in regards to the first in a series of detailed Brexit position papers setting out the ‘Government’s vision… to build a new, deep and special partnership with the European Union’. Guy Verhofstadt, former Belgian MP, current MEP, EU Brexit negotiator and author of ‘Europe's Last Chance’, sums up the central stance of the papers as ‘a fantasy’.
‘Our friends are concerned - and less friendly countries are bemused and astonished - that the great British machine, which is famous for efficiency, now seemed to be all over the place’ said Charles Grant, director of the Centre for European Reform, over the weekend. He was of course talking about the UK government Brexit negotiations where ministers are openly disagreeing about objectives and tactics. What he went on to say was even more critical, adding ‘Britain’s name has never been held in lower regard than now in terms of its competence, its ability to organise, its ability to be strategic and influence anything’.
As eyes are on the US Fed minutes release later today, spare a thought for the Bank of England quietly celebrating (if you can call it that) a decade of dovishness. It may not feel like it has been that long but today marks a decade since the last interest rate rise for the UK. The 12 months prior to this (between 2006 and 2007) saw 5 hikes to a peak of 5.75% on the 5th July 2007. It wasn’t long before the subprime mortgage crisis contaminated global markets with the Bank of England cutting rates 3 times to settle at 5% for a while, only to see an international banking crisis ensue, plunging rates across the world.
A lot of things have happened in the last decade; but productivity growth in the UK doesn’t seem to be one of them. The latest Q1 2017 flash estimate for quarterly productivity growth from the UK’s Office of National Statistics (ONS) came in at -0.5%. This is just enough to bring the index level back to 101.8 – in line with where it was back in Q4 2007… Yes it has been that long since the Global Financial Crisis (GFC). Now, with just 3 more quarters of the same mediocre performance (as can be expected in many countries including the UK), a number of countries will be able to join Japan in the ‘lost decade’ camp.
Today, after 9 months of waiting, the Brexit referendum has finally given birth to Article 50. In a sign of the times, the President of the European Council Donald Tusk notified the world of his receipt of the official letter via twitter a few minutes before 12:30 GMT. Prime Minister Theresa May then addressed the House of Commons calling the occasion a ‘great turning points in Britain’s history’; meanwhile Tusk opened his address stating ‘There is no reason to pretend this is a happy day, neither in Brussels nor in London,’ and concluded with ‘we already miss you’.
Just one week until Britain is expected to trigger Article 50, sterling at a three week high, UK inflation highest since 2013, leaked EU documents suggesting Britain could be kicked out EU and fined £50bn, Bank of England (BoE) Chief Economist Andy Haldane postulating a base rate rise to 4.25% that could wipe out 1.5 million jobs but boost productivity in the long run, Scotland pushing harder for another independence vote, and the BoE predicting a further retail slowdown: all in all perhaps enough commotion to burrow yesterday’s embarrassing infighting of the Labour Party. Or perhaps not.
As expected, Philip Hammond’s first and last Summer Budget delivered numerous but all modest adjustments to overall government spending. This has been reflected in markets with both sterling and Gilts little changed from before his speech. Beyond the peppered insults towards the leader of the opposition, the most notable mentions were the changes to the OBR’s forecasts.
19 years today President Bill Clinton announced: ‘I want to say one thing to the American people; I did not have sexual relations with that woman, Miss Lewinsky’. And, this morning, half of the world woke up to hear that President Donald Trump yesterday signed an order specifying that his much talked about ‘wall’ must be ‘a contiguous, physical wall or other secure, contiguous and impassable physical barrier; let’s hope this figurative and literal act will not be as well reminisced as Clinton’s ‘endeavours’.
A new ‘truly Global Britain’ - that was the dream outlined in a carefully scripted Brexit speech from UK Prime Minister Theresa May, along with 12 points of much needed clarification that make that dream seem so orderly and achievable. Perhaps such simple optimism gave case for the pound’s largest one-day rally since the global financial crisis. More likely the main reason for the spike in sterling was the fact that it had already dropped over the days prior due to a leak of ‘hard Brexit’ proposals and that there was little further in the way of surprise in the speech. Indeed the most notable development was the favourable confirmation that parliament will get to vote on the Brexit deal - but only once, ‘we know what that deal is.’
Today, 5 months to the day since the EU referendum, Chancellor of the Exchequer Philip Hammond has delivered the first Budget of the Theresa May Government; the first Autumn Statement to the Commons in light of Brexit. In brief: GDP growth forecasts lower by 0.8% and 0.4% for 2017 and 2018; planned borrowing to increase by £122bn for the next 5 years; some slender support for renters and affordable housing; some mollifying policies for the ‘just about managing’ or JAMS increasing the ‘national living wage’ and tempering some of the Universal Credit reforms; corporate tax will be cut to 17% along with a wide range of new tax reforms; and new fiscal targets of a 2% deficit with debts falling by 2020. Markets saw inflation expectations surge higher; also sterling rallied to 1.2435 during the statement but then fell to 1.2360 before the end of the statement as US data came out.
The UK’s vote to leave the EU is biting back with sterling extending losses against the US dollar, falling to its weakest level since the GFC. Despite recent economic data such as retail sales surprising on the upside sterling is being pounded by worries over a 'hard Brexit'. The pound is now over 16.5% weaker against the dollar year-to-date and has plummeted more than 18% against the euro, at time of writing. In fact the currency is one of the worst performing against the greenback so far this year; worst than the Argentinian Peso, and sitting ahead of the Angolan kwanza, Nigerian naira and the Venezuelan bolivar! Former BoE governor Mervyn King yesterday claimed that the weaker pound is a 'welcome change' adding that the Brexit concerns are ‘over the top’. He went on to comment that during the referendum campaign, it was noted that Brexit would push inflation higher, and that house prices and sterling would fall; basically what the BoE has ‘been trying to achieve for the past three years and now … have a chance of getting it.’
Back in 2012 Branko Milanovic from The World Bank published a well regarded paper on global income inequality along with its comprehensive datasets. Of particular popularity was a line chart of how globalisation has benefited those of differing wealth and incomes over 20 years (1988-2008), in what has now come to be known as the ‘Elephant Chart’ due to its shape. (A broad arch between the 15th and 65th percentiles representing the main body of globalisation’s benefit, but tailing off for the poorest decile - who remain mostly outside the advances and benefits of global market integration, as well as trunking down to zero around the 75th to 85th percentiles and then exponentially back up again for those at the very top).