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Philip Rush

BoE: pushing back shock and negative rates

- The BoE made no policy changes in August but published an overdue forecast update. The shock is now less concentrated in Q2 than indicatively projected in May, but the recovery it sees is still more optimistic than I forecast. - Negative rates were deemed unhelpful under the prevailing circumstances, with the Governor pleading at the press conference against thinking this is the plan. - Future policy changes appear to require new demand shocks, where I continue to expect a disappointment that prompts further asset purchases. Projected excesses in demand and inflation are not dovish, but forw...

Philip Rush

BoE: steady hand during calligraphy lesson

- The BoE seems set to announce no change in either Bank rate or QE alongside the August MPR, after extending asset purchases and slowing the pace in June. - A long-overdue return of the formal forecast is likely. The illustrative scenario from May proved too pessimistic, especially on unemployment, but the optimal response will depend more on the shape of recovery than the depth of decline. - Negative rates were not mentioned at all in the June MPC minutes. I still doubt they would impart stimulus. Any discussion of a fine-tuning cut is only likely to be considered as part of a package associ...

Philip Rush

UK: retail recovery rotated off high streets

- Retail sales roughly recovered their pre-lockdown level in June on a 13.9% m-o-m surge. That was another substantial upside surprise, but it is bolstered by the rotation away from consumption elsewhere rather than reflecting broader health. - Consumers are spending online and for food in the home. The “eat out to help out” scheme should temporarily unwind some of that in August. Mandatory face masks are likely to discourage spend on the high street, though, hindering GDP’s recovery.

Philip Rush

UK: employment flipping the V-narrative

- The unemployment rate remained at 3.9% in May, contrary to all expectations yet again. The UR is now over 3pp below the BoE’s ludicrous nowcast from May. - Last month, economists latched onto falling employment in the early PAYE returns as evidence of collapse, despite extremely low correlations. Those data have been revised up and confirmed to be well-wide of the mark. - Alternative indicators of earnings and vacancies perform much better. The former indicates a substantial bounce in June while the latter’s recovery has faltered.

Philip Rush

UK: inflated June to be crushed by methodology

- UK inflation data was broadly slightly stronger than the Consensus expected in Jun-20 as the CPI rate increased to 0.6% and the RPI to 1.1%. Clothing, furniture, and recreation prices were all surprisingly high, with some offset in restaurants. - Probable payback in clothing prices means the fundamentals of this release cause little change to my CPI forecast. That same pressure knocks my RPI forecast down by about a tenth, despite the headline outcome being in line with my expectations. - August is an exception to the broader changes as the ONS has somewhat incredibly decided to incorporate ...

Philip Rush

BoE: pushing back shock and negative rates

- The BoE made no policy changes in August but published an overdue forecast update. The shock is now less concentrated in Q2 than indicatively projected in May, but the recovery it sees is still more optimistic than I forecast. - Negative rates were deemed unhelpful under the prevailing circumstances, with the Governor pleading at the press conference against thinking this is the plan. - Future policy changes appear to require new demand shocks, where I continue to expect a disappointment that prompts further asset purchases. Projected excesses in demand and inflation are not dovish, but forw...

Philip Rush

BoE: steady hand during calligraphy lesson

- The BoE seems set to announce no change in either Bank rate or QE alongside the August MPR, after extending asset purchases and slowing the pace in June. - A long-overdue return of the formal forecast is likely. The illustrative scenario from May proved too pessimistic, especially on unemployment, but the optimal response will depend more on the shape of recovery than the depth of decline. - Negative rates were not mentioned at all in the June MPC minutes. I still doubt they would impart stimulus. Any discussion of a fine-tuning cut is only likely to be considered as part of a package associ...

Philip Rush

UK: employment flipping the V-narrative

- The unemployment rate remained at 3.9% in May, contrary to all expectations yet again. The UR is now over 3pp below the BoE’s ludicrous nowcast from May. - Last month, economists latched onto falling employment in the early PAYE returns as evidence of collapse, despite extremely low correlations. Those data have been revised up and confirmed to be well-wide of the mark. - Alternative indicators of earnings and vacancies perform much better. The former indicates a substantial bounce in June while the latter’s recovery has faltered.

Philip Rush

UK: GDP limping from lows in May-20

- UK GDP bounced by only 1.8% m-o-m in May-20 from its depressed lows. Although the ONS confirmed an initial recovery in retail, manufacturing and construction, these sectors are now proven to be outliers ahead of lockdown easing elsewhere. - I remain relatively gloomy about the rebound, as strong signals are mostly about the leading sectors and say more about timing than the extent of recovery. Such disappointment should motivate another QE expansion, in my view. - Separately, the OBR has materially re-profiled the shock towards my forecast, with two years to recover the output level, a persi...

Philip Rush

UK: Chancellor still spiking the punch bowl

- The government’s support package needs to move on to encouraging an efficient reallocation of resources to what the post-Covid world needs. A “Kickstart” and traineeship scheme have this in mind but mostly encourage low-skilled working. - Efforts continue to focus on stimulating the economy back to where it was before, with a high deadweight loss in many cases. A targeted VAT cut is at least much better than a headline trim and should knock ~30bp from the Aug-Jan RPI rate.

Philip Rush

UK: retail recovery rotated off high streets

- Retail sales roughly recovered their pre-lockdown level in June on a 13.9% m-o-m surge. That was another substantial upside surprise, but it is bolstered by the rotation away from consumption elsewhere rather than reflecting broader health. - Consumers are spending online and for food in the home. The “eat out to help out” scheme should temporarily unwind some of that in August. Mandatory face masks are likely to discourage spend on the high street, though, hindering GDP’s recovery.

Philip Rush

UK: inflated June to be crushed by methodology

- UK inflation data was broadly slightly stronger than the Consensus expected in Jun-20 as the CPI rate increased to 0.6% and the RPI to 1.1%. Clothing, furniture, and recreation prices were all surprisingly high, with some offset in restaurants. - Probable payback in clothing prices means the fundamentals of this release cause little change to my CPI forecast. That same pressure knocks my RPI forecast down by about a tenth, despite the headline outcome being in line with my expectations. - August is an exception to the broader changes as the ONS has somewhat incredibly decided to incorporate ...

Philip Rush

UK: VAT cut is a feasible folly

- Recent reports indicate the government is considering a temporary VAT cut, despite historical evidence that it makes little difference to UK consumption. It is also terribly targeted to current needs, although a selective re-rating might work. - If a headline cut is popular enough, it will probably happen, irrespective of the merits. I estimate the pass-through of a 1yr cut at about 50% to the price level.

Philip Rush

UK: 40% recovery in May-20 split unevenly

- Retail sales rebounded by double the expected amount in May-20, with the 12% m-o-m rise recovering 40% of the level lost in the lockdown. A third of the sales growth was from the already booming online sector, with most other areas weaker. - GDP will be supported by the early recovery in retail and industry, while other sectors take longer to turn. I maintain my Q2 forecast for GDP to fall 20% q-o-q.

Philip Rush

UK: inflation in May-20 approaches its trough

- UK inflation data matched expectations for the CPI to slow to 0.5% y-o-y while the RPI was 18bp below my forecast at 1.04%. The latter surprise occurred as MIPs returned to reality after an acknowledged official mistake. - Energy does not appear to be rising to the expected extent as wholesale prices rebound, and alcohol price declines in Jun-20 weigh further on my forecast. - The trough in my CPI forecast has fallen by 0.1pp since last month’s release to 0.4% in July, but I do not expect the RPI rate to dip below 1%. A prolonged period of well below-target inflation provides plenty of space...

Philip Rush

FLASH: UK Mfg PMI rises with room for more

- The UK’s manufacturing PMI increased to 56.3 in October, which was in the upper quartile of the Consensus. Some further strength is likely to occur as the UK survey reconverges with the euro area’s balance over 2-points higher.- Input prices and lead times are also rising amid “intense competition” for resources, which provides additional evidence of underlying inflationary pressures. The BoE still looks set to begin a hiking cycle with its upcoming decision.

Philip Rush

BoE preview: cautious first hike of several

Rapidly falling spare capacity and excessive inflationary pressure appears to have become intolerable for the MPC, whose hawkish guidance has raised expectations for a Nov-17 rate hike. I expect them to follow through by 8-1 votes. This hike would offset the upside inflation news since August, but leave the market pricing an insufficient tightening to balance the inflation risks around the target. Guidance on this and a “gradual and limited” cycle are likely to remain. There is a fundamental need to return rates to neutral, amid a near zero output gap. The market doesn’t appear to be pricing...

Philip Rush

FLASH: UK GDP acceleration leaves BoE on track

- UK GDP growth increased to 0.4% q-o-q in the ONS’s first estimate of Q2, in line with my forecast but 0.1pp above the consensus. Services didn’t grow as fast in August, but the July fall was trimmed along with volatility around the post-Brexit trend.- This outcome exceeded the BoE’s forecast from August but was probably in line with what they expected ahead of the release. It at least presents no reason to abort the rate hike widely expected for November, including by me.

Philip Rush

FLASH: UK labour market helping the MPC to hike

- The LFS unemployment rate held at 4.3% in August. Another fall to 4.2% could come as soon as next month in what would be an additional hawkish surprise.- Pay growth beat expectations at 2.1% y-o-y 3mma (ex-bonuses), amid revisions and a better impulse. New data show a less severe slowdown that has already ended.- A tightening labour market and reduced concerns about pay should help the MPC to hike Bank rate in November. I still see that as the start of a series of hikes.

Philip Rush

FLASH: UK Inflation Steady with Domestic Pressures

- CPI inflation ticked up to 3.0% y-o-y in September, as expected. However, RPI inflation held at 3.9%, thereby representing another downside surprise for this month, and supporting an extension of this evolving seasonal factor.- Domestically generated inflation also appears to have strengthened further in September. The inverse-import weighted CPI is now growing at 3.2% y-o-y, which is 1pp above levels historically consistent with inflation at the target.

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