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Maybe its time to be bullish??

Thursday, February 2nd, 2017

Sterling fell throughout Carney’s speech, down 0.8% against $ and down 1.2% against Euro. So the currency markets viewed what he said as dovish – that rate increases are less likely.

But the bond market was more unsure with the with 10 year gilt yield barely moved down just 7bps to 1.38%.

However Carney increased GDP forecast which is normally hawkish – a stronger economy leads to higher rates.

The confusion about the future direction of rates continues with the BofE stating that “monetary policy could move in either direction”. 

Central Bankers use the language of obfuscation and confusion to help them be in a position to change their minds in the future.  And Carney did what others do.  He started off hawkish stating that his “tolerance” was “limited” to above trend inflation.  And yet later he said that the MPC had “unanimously judged that the return of inflation” (from above target to 2% target) could be “somewhat longer than usual”.

So confusion reigns – not helpful if you are trying to gauge whether to reportage or not.  Although the markets think rates will increase twice by 2020 – just two rate rises in three years.

But lets’ just put some of the numbers into perspective.

First of all on inflation.  The Bank of England is now forecasting CPI to peak at 2.75% in a year’s time and thereafter to fall.  That is no way near the >5% that it got to under Mervyn King during the last great £ depreciation at the start of the financial crisis in 2009.  Despite all the media scare stories on inflation, a 2.75% peak is not bad at all.  In fact, you could just argue a temporary increase to 2.75% is just averaging out the past fall to 0%.

And can I point out that German inflation is currently higher than the UK.  German CPI out on Monday was 1.9% and the UK latest figure was 1.6%.  Inflation is rising globally.  For all the media scare stories about UK inflation rising because of the EU vote and a plunging pound,  please bear in mind that German CPI rate is above that of the UK! 

Secondly can we also put the GDP forecasts into context too?  The BofE expects GDP growth of 2% this year, and thereafter GDP growth of 1.75% for a couple of years.  The US economy grew at 1.6% in 2016.  So even under Brexit negotiations and after the actual event the UK is expected to grow faster than the US did in 2016.  This is no way near the dire and gloomy view often portrayed in the media (of course economic forecasts are notoriously wrong)

And there is a possibility (that few dare to suggest) that the UK economy could actually be about to boom. With economic forecasting, it often pays to go against conventional wisdom.  And the consensus is for an economic slowdown. 

Firstly the world’s largest economy with Trump in charge, may see an engineered fiscal boom from slashing corporation tax even if not from spending (tougher to get through Congress).  That will help the UK and the rest of the world economically as the US sucks in imports (tariffs might be more difficult to get into law).

The Euro area is recovering, not brilliantly, but better than last year.

Plus the benefits from a weaker pound on exports.

And slightly more fiscal stimulus from Hammond.

And finally consumers..   (My earlier tweet: Carney “few signs households cutting spending ahead of upcoming squeeze” AKA Britons are stupid & that’s why I got my forecasts wrong.)

The Bank’s models have failed to predict the employment market at all in the past five years.  They failed to predict the extraordinary job creation – unemployment fell to 7% in three months not three years after Carney arrived with his “Forward Guidance”.  And the BofE like other central banks failed to forecast the slow recovery in wages that is a global phenomena and not just the UK. 

The assumption from pretty much all economic forecasters is that wage growth will remain muted and inflation will rise squeezing UK household incomes.  And that is why most are pessimistic. 

Well maybe the reverse is true – after years of slow wage growth, it will now accelerate.  With unemployment at a very low 4.8% (pre crisis it was 5%) and less immigration from the EU, wages will start to rise to the 4-6% more normal historically.  And maybe faced with a bit of inflation, Britons will start asking for wage increases to keep up. 

It is not inconceivable that this happens.  And yet no one is predicting this outcome.

Perhaps its time to be bullish and not bearish.


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