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>Capacity constraints, especially in energy markets, are squeezing inflation to higher and more persistent excesses. Despite disappointing demand data, the MPC sounds hawkish, encouraging market pricing for multiple rate hikes in 2022.</li>
<li>We still expect the first hike to postpone to Feb-23, but the risks skew earlier. Resilient labour market data would imply a bullish scenario was materialising, with a May-22 hike likely instead. De-anchored inflation expectations would drive more.</li>
<li>Markets should price a possibility of these hawkish scenarios but balance it with dovish ones related to a faltering recovery or even a return to recessionary lockdowns. Current guidance probably won’t lead to a policy response, in our view.</li>
</ul>


Capacity constraints, especially in energy markets, are squeezing inflation to higher and more persistent excesses. Despite disappointing demand data, the MPC sounds hawkish, encouraging market pricing for multiple rate hikes in 2022.
We still expect the first hike to postpone to Feb-23, but the risks skew earlier. Resilient labour market data would imply a bullish scenario was materialising, with a May-22 hike likely instead. De-anchored inflation expectations would drive more.
Markets should price a possibility of these hawkish scenarios but balance it with dovish ones related to a faltering recovery or even a return to recessionary lockdowns. Current guidance probably won’t lead to a policy response, in our view.


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

We turned bullish GBP/EUR in late-June and re-reiterated our constructive view in mid-July and early-August and the cross duly hit a 76-week high of about 1.182 on 11th August. In line with our expectations, historical monthly seasonal patterns were up-ended thanks in part to the positive impact of international travel restrictions on the UK’s tourism balance and the Bank of England turning more hawkish in absolute terms and relative to the ECB.However, since then Sterling has weakened about 1.1% against the Euro and 1.5% in NEER terms, despite the Bank of England turning even more hawkish, markets now pricing almost three 25bp rate hikes in 2022 and a sharp widening of the Gilt-Bund yield spread.The reason in our view is that Gilt yields have risen because of market expectations that UK CPI-inflation will rise from already elevated levels despite weak domestic economic growth, which renders UK financial assets (including Sterling) less attractive.UK GDP growth slowed in July despite the government having removed on 19th July all but a few social distancing restrictions in England and PMI data suggest GDP growth remained weak in August-September. Notably the deceleration in economic growth in recent months was likely more pronounced in the UK than in the Eurozone, albeit from higher levels. The UK economy faces a number of headwinds, namely i) acute labour shortages and supply-chain constraints and bottlenecks; and ii) multiple challenges to domestic demand.On the demand-front the issue is not weak household purchasing power or strained corporate balance sheets but rather tepid consumer and business confidence as a result of planned tax increases in April 2022, furlough having ended on 30th September, fuel-shortages, rising CPI-inflation and likelihood that Bank of England will hike rates next year. The risk is that the current shortage of fuel at forecourts will not be a one-off, in our view, because the ratio of vehicles to fuel forecourts has risen materially in the UK since 2000.In the current context we find it challenging to build a bullish short-term case for GBP/EUR.

We turned bullish GBP/EUR in late-June and re-reiterated our constructive view in mid-July and early-August and the cross duly hit a 76-week high of about 1.182 on 11th August. In line with our expectations, historical monthly seasonal patterns were up-ended thanks in part to the positive impact of international travel restrictions on the UK’s tourism balance and the Bank of England turning more hawkish in absolute terms and relative to the ECB.However, since then Sterling has weakened about 1.1% against the Euro and 1.5% in NEER terms, despite the Bank of England turning even more hawkish, markets now pricing almost three 25bp rate hikes in 2022 and a sharp widening of the Gilt-Bund yield spread.The reason in our view is that Gilt yields have risen because of market expectations that UK CPI-inflation will rise from already elevated levels despite weak domestic economic growth, which renders UK financial assets (including Sterling) less attractive.UK GDP growth slowed in July despite the government having removed on 19th July all but a few social distancing restrictions in England and PMI data suggest GDP growth remained weak in August-September. Notably the deceleration in economic growth in recent months was likely more pronounced in the UK than in the Eurozone, albeit from higher levels. The UK economy faces a number of headwinds, namely i) acute labour shortages and supply-chain constraints and bottlenecks; and ii) multiple challenges to domestic demand.On the demand-front the issue is not weak household purchasing power or strained corporate balance sheets but rather tepid consumer and business confidence as a result of planned tax increases in April 2022, furlough having ended on 30th September, fuel-shortages, rising CPI-inflation and likelihood that Bank of England will hike rates next year. The risk is that the current shortage of fuel at forecourts will not be a one-off, in our view, because the ratio of vehicles to fuel forecourts has risen materially in the UK since 2000.In the current context we find it challenging to build a bullish short-term case for GBP/EUR.

<ul>
<li>In September, the BoE MPC voted for an unchanged policy, although Dave Ramsden joined Michael Saunders in dissenting while the two new members supported the status quo. Some non-dissenters may be no less hawkish and merely favour using rates first.</li>
<li>Developments are viewed through a hawkish lens as GDP downgrades are seen as supply temporarily constraining strong demand while upside inflation news risks second-round effects. The formal policy guidance was considered no longer useful and dropped.</li>
<li>We still believe most MPC members would consider a mid-22 rate hike appropriate, but we expect disappointing demand data to delay that into 2023. However, with a less bullish GDP forecast and ongoing labour market resilience, our risks skew earlier.</li>
</ul>


In September, the BoE MPC voted for an unchanged policy, although Dave Ramsden joined Michael Saunders in dissenting while the two new members supported the status quo. Some non-dissenters may be no less hawkish and merely favour using rates first.
Developments are viewed through a hawkish lens as GDP downgrades are seen as supply temporarily constraining strong demand while upside inflation news risks second-round effects. The formal policy guidance was considered no longer useful and dropped.
We still believe most MPC members would consider a mid-22 rate hike appropriate, but we expect disappointing demand data to delay that into 2023. However, with a less bullish GDP forecast and ongoing labour market resilience, our risks skew earlier.


<ul>
<li>Gas and electricity prices have jumped amid a perfect storm of supply pressures, especially in the UK, where the infrastructure has failed in storage and through fire. </li>
<li>The extreme moves concentrate this winter, causing our typically accurate model to suffer. We now implement the regulator’s full model. The peak RPI y-o-y impact now looks less to us, at 89bps, and a small cut could occur with contract rolls in Oct-22.</li>
</ul>


Gas and electricity prices have jumped amid a perfect storm of supply pressures, especially in the UK, where the infrastructure has failed in storage and through fire. 
The extreme moves concentrate this winter, causing our typically accurate model to suffer. We now implement the regulator’s full model. The peak RPI y-o-y impact now looks less to us, at 89bps, and a small cut could occur with contract rolls in Oct-22.


<ul>
<li>Retail sales delivered another substantial disappointment by declining for the fourth consecutive month in August. Declines remained broad-based rather than reflecting a normalisation towards services, and restaurant bookings are falling in September.</li>
<li>Post-holiday quarantine has overtaken the “pingdemic”, with more adults than ever forced into isolation (nearly a million). Further disruption is likely to return with the schools. Consumers remain gloomy about their situation and are not splurging savings.</li>
</ul>


Retail sales delivered another substantial disappointment by declining for the fourth consecutive month in August. Declines remained broad-based rather than reflecting a normalisation towards services, and restaurant bookings are falling in September.
Post-holiday quarantine has overtaken the “pingdemic”, with more adults than ever forced into isolation (nearly a million). Further disruption is likely to return with the schools. Consumers remain gloomy about their situation and are not splurging savings.


United Kingdom

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

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BoE: Signposts Splitting the Policy Path

Markets should balance pricing of bullish and inflation expectations breaking scenarios with dovish ones related to a faltering recovery or even a...

Phil Rush

Sterling – Fuel for Thought

GBP/EUR down since 76-week high on 11 Aug despite widening of 2-yr Gilt-Bund yield spread. BoE & markets more hawkish but for wrong reasons....

Olivier Desbarres

BoE: Drops Guidance like Its Hot

Dave Ramsden joined the dissent against QE. We believe most MPC members would consider a mid-22 rate hike appropriate, but we expect disappointing...

Phil Rush

UK: Energy Jump into a Forward Roll Down

Extreme gas and electricity moves concentrate into this winter. However, the peak UK RPI y-o-y impact now looks less to us, at 89bps, and a small...

Phil Rush

UK: On Holiday from Retail

Post-holiday quarantine has overtaken the “pingdemic”, with more adults than ever forced into isolation. Further disruption is likely to return...

Phil Rush

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