Chief Economist, Heteronomics

Phil Rush

Chief Economist

Heteronomics

Heteronomics represents a different kind of economics. We believe analysis should delve into the details of what is really going on, rather than using overly simplistic assumptions to quick-sell stories. Independence from myopic institutional pressures allows us to focus on the realities underlying your asset allocation decisions, without the conflicts of the old market structures. Heteronomics targets the themes driving UK asset prices, offering the benefits of depth, independence and ultimately price.

UK-centric macro research

Macroeconomics

<ul>
<li>The beginning of the third national lockdown’s end on 8 March will see the return of conditions equally as tight as during the second one from November. UK GDP should recover by a few per cent in March but we still see it down by 4.5% q-o-q in Q1.</li>
<li>Further easing is extremely gradual with remaining restrictions only planned to end on 21 June if everything goes to plan. The UK is failing to capture a relative economic dividend from its relatively successful vaccination programme, despite bullish pricing.</li>
</ul>


The beginning of the third national lockdown’s end on 8 March will see the return of conditions equally as tight as during the second one from November. UK GDP should recover by a few per cent in March but we still see it down by 4.5% q-o-q in Q1.
Further easing is extremely gradual with remaining restrictions only planned to end on 21 June if everything goes to plan. The UK is failing to capture a relative economic dividend from its relatively successful vaccination programme, despite bullish pricing.


<ul>
<li>UK retail sales fell by more than three times what the consensus expected in Jan-21, with the -8.8% m-o-m outcome also triple the pain of the Nov-20 lockdown. Food sales started too high to rally further, while the non-food crash was about 50% of lockdown 1.</li>
<li>This disappointment is likely to continue the downwards trend in GDP forecasts. That doesn’t matter to Sterling’s vaccination-fuelled up-trend, but while markets hope it will allow the UK to unlock quicker, EA and SE activity has just gone ahead and increased.</li>
</ul>


UK retail sales fell by more than three times what the consensus expected in Jan-21, with the -8.8% m-o-m outcome also triple the pain of the Nov-20 lockdown. Food sales started too high to rally further, while the non-food crash was about 50% of lockdown 1.
This disappointment is likely to continue the downwards trend in GDP forecasts. That doesn’t matter to Sterling’s vaccination-fuelled up-trend, but while markets hope it will allow the UK to unlock quicker, EA and SE activity has just gone ahead and increased.


<ul>
<li>Inflation exceeded consensus expectations again in Jan-21 while matching both our CPI and RPI forecasts of 0.7% and 1.4% respectively. Weighting changes were worth about 0.1pp to the CPI with the other 0.1pp caused by upside in furniture and restaurants.</li>
<li>The distortion in the UK was smaller than elsewhere in Europe because the weight on garments was raised rather than slammed down. This is likely to more than unwind next January if it's not corrected next month alongside the release of RPI weights.</li>
<li>A continued grind higher looks likely to occur in both Feb and Mar before inflation spikes back into the right ballpark of the target in April. We still expect a potential breach of the target in 2021, but for it to be of insignificant size and longevity.</li>
</ul>


Inflation exceeded consensus expectations again in Jan-21 while matching both our CPI and RPI forecasts of 0.7% and 1.4% respectively. Weighting changes were worth about 0.1pp to the CPI with the other 0.1pp caused by upside in furniture and restaurants.
The distortion in the UK was smaller than elsewhere in Europe because the weight on garments was raised rather than slammed down. This is likely to more than unwind next January if it's not corrected next month alongside the release of RPI weights.
A continued grind higher looks likely to occur in both Feb and Mar before inflation spikes back into the right ballpark of the target in April. We still expect a potential breach of the target in 2021, but for it to be of insignificant size and longevity.


Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

FX & Rates

In the past nine weeks major currencies and global equity markets have traded broadly in line with our expectations. The US Dollar has traded in a very narrow range, confounding consistently bearish market expectations. Similarly, most emerging Asian currencies have barely moved, pointing to the ability and willingness of Asian central bank to intervene in FX markets in a bid to manage both the volatility and directionality of their currencies. Conversely, emerging currencies, particularly in Latin America, have been prone to sharp pull-backs.Stretched currency valuations and still very weak global economic growth in January – which tallies with our forecast – has likely been a driver of currencies’ performance. In the past five weeks the inverse correlation between the Dollar and S&amp;P 500 and between the Dollar and the steepness of the US Treasury yield curve has broken down.Our take is that the broad-based diversification out of Dollars, driven by buoyant global risk appetite and market concerns about the Dollar’s real carry, has stalled and slightly reversed. We suspect that central banks and sovereign wealth funds may have re-focussed on domestic factors, which has in turn led to a rotation between other reserve currencies. This includes a rotation out of Euros and move into Sterling and a rotation out of the safe haven Swiss Franc and in particular Japanese Yen into commodity reserve currencies – namely the Canadian and Australian Dollars and Norwegian Krone – and New Zealand Dollar. These four currencies’ NEERs are now near the top end of their three-month ranges. In each case specific drivers have been in play, “in our view. Our analysis suggests that the Norwegian Krone may still be “cheap” relative to the current price of Brent crude oil.Figure 8 suggests that a rotation in and out of other (EM) currencies which were 1-2 months ago trading at the extremes of their ranges may have also taken place.The Dollar NEER has weakened about 0.9% since 4th February and its inverse correlation with the S&amp;P 500 (+1.2%) has re-established itself. We think this is a short-term correction, with another prolonged Dollar downtrend still a couple of months away.

In the past nine weeks major currencies and global equity markets have traded broadly in line with our expectations. The US Dollar has traded in a very narrow range, confounding consistently bearish market expectations. Similarly, most emerging Asian currencies have barely moved, pointing to the ability and willingness of Asian central bank to intervene in FX markets in a bid to manage both the volatility and directionality of their currencies. Conversely, emerging currencies, particularly in Latin America, have been prone to sharp pull-backs.Stretched currency valuations and still very weak global economic growth in January – which tallies with our forecast – has likely been a driver of currencies’ performance. In the past five weeks the inverse correlation between the Dollar and S&amp;P 500 and between the Dollar and the steepness of the US Treasury yield curve has broken down.Our take is that the broad-based diversification out of Dollars, driven by buoyant global risk appetite and market concerns about the Dollar’s real carry, has stalled and slightly reversed. We suspect that central banks and sovereign wealth funds may have re-focussed on domestic factors, which has in turn led to a rotation between other reserve currencies. This includes a rotation out of Euros and move into Sterling and a rotation out of the safe haven Swiss Franc and in particular Japanese Yen into commodity reserve currencies – namely the Canadian and Australian Dollars and Norwegian Krone – and New Zealand Dollar. These four currencies’ NEERs are now near the top end of their three-month ranges. In each case specific drivers have been in play, “in our view. Our analysis suggests that the Norwegian Krone may still be “cheap” relative to the current price of Brent crude oil.Figure 8 suggests that a rotation in and out of other (EM) currencies which were 1-2 months ago trading at the extremes of their ranges may have also taken place.The Dollar NEER has weakened about 0.9% since 4th February and its inverse correlation with the S&amp;P 500 (+1.2%) has re-established itself. We think this is a short-term correction, with another prolonged Dollar downtrend still a couple of months away.

Dollar’s Recent Weakness – Blip, Not New Trend

<ul>
<li>GDP growth beat expectations with a 1.2% recovery in December ahead of the stricter lockdown set to hit activity in January. The proportion of businesses trading implies a fall of about 4% in Q1, which would be consistent with the BoE’s downgraded view.</li>
<li>The trend decline in business responses to the surveys has now extended to a change on the year worth 6.1% of turnover. The ONS assumes respondents are representative, but private-sector pain of non-respondents could be a recession-sized hole in the recovery.</li>
</ul>


GDP growth beat expectations with a 1.2% recovery in December ahead of the stricter lockdown set to hit activity in January. The proportion of businesses trading implies a fall of about 4% in Q1, which would be consistent with the BoE’s downgraded view.
The trend decline in business responses to the surveys has now extended to a change on the year worth 6.1% of turnover. The ONS assumes respondents are representative, but private-sector pain of non-respondents could be a recession-sized hole in the recovery.


United Kingdom

The British Pound Sterling is the official currency of The United Kingdom. 

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UK: Lockdown Exit-Road Full of GDP Peril

The beginning of the third national lockdown’s end on 8 March will only return conditions to those from the second one (November's). The UK is...

Phil Rush

UK: Retail Pain Triples in Lockdown 3

UK retail sales fell by over three times what the consensus expected in Jan-21, with the -8.8% m-o-m outcome also triple the pain of the Nov-20...

Phil Rush

UK: Inflation Up-Scaled in Jan-21

UK inflation exceeded consensus expectations in Jan-21 while precisely matching both our CPI and RPI forecasts. Re-weighting distortions were...

Phil Rush

Dollar’s Recent Weakness – Blip, Not New Trend

In past 2 months range-bound USD and Asian currencies, pull-back prone EM currencies and buoyant equities have performed in line with our forecast....

Olivier Desbarres

UK: GDP Recovery Miscounts Private Pain

The trend decline in survey responses has reached 6.1% of turnover. The ONS assumes respondents are representative, but the pain of non-respondents...

Phil Rush

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