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>UK wage data continues to surpass expectations, however, the Bank of England remains unfazed. There are concerns that premature rate cuts could lead to a financial bubble and policy reversal, akin to the situation in 1998. The UK does not benefit from the Euro Area's disinflationary data.</li><li>The upcoming week will be dominated by monetary policy speeches and rate decisions from the Reserve Bank of New Zealand, Indonesia, Korea, and Chile.</li><li>UK inflation data is the macro highlight of the week, with expectations aligning with the current CPI consensus. The release of Thursday’s flash PMIs is also of significance.</li></ul>

UK wage data continues to surpass expectations, however, the Bank of England remains unfazed. There are concerns that premature rate cuts could lead to a financial bubble and policy reversal, akin to the situation in 1998. The UK does not benefit from the Euro Area's disinflationary data.The upcoming week will be dominated by monetary policy speeches and rate decisions from the Reserve Bank of New Zealand, Indonesia, Korea, and Chile.UK inflation data is the macro highlight of the week, with expectations aligning with the current CPI consensus. The release of Thursday’s flash PMIs is also of significance.

<ul><li>The final EA HICP inflation print confirmed the unsurprising stability at 2.4% in the April flash release. Energy price base effects will probably push it higher again in May.</li><li>Underlying inflationary pressures have continued falling, with most statistical measures under 3% y-o-y with monthly impulses at or slightly below the ECB’s target.</li><li>Like the consensus, we expect inflation to stay close to 2%. This outlook and subdued underlying pressures will likely ease the ECB’s decision to start cutting rates in June.</li></ul>

The final EA HICP inflation print confirmed the unsurprising stability at 2.4% in the April flash release. Energy price base effects will probably push it higher again in May.Underlying inflationary pressures have continued falling, with most statistical measures under 3% y-o-y with monthly impulses at or slightly below the ECB’s target.Like the consensus, we expect inflation to stay close to 2%. This outlook and subdued underlying pressures will likely ease the ECB’s decision to start cutting rates in June.

<ul><li>Rate cuts are rare outside of recessionary regimes. The 1998 experience seems a more similar historical example for the BoE than 1989 or 2005, when its policy diverged.</li><li>CPI inflation will probably be less benign because wage growth is much higher, so sterling may not stay as stable. The speed of possible policy reversal would be critical.</li><li>Loosening monetary conditions when the real economy doesn’t need it risks stimulating a financial bubble. Carefully hedged investments would help avoid the eventual bust.</li></ul>

Rate cuts are rare outside of recessionary regimes. The 1998 experience seems a more similar historical example for the BoE than 1989 or 2005, when its policy diverged.CPI inflation will probably be less benign because wage growth is much higher, so sterling may not stay as stable. The speed of possible policy reversal would be critical.Loosening monetary conditions when the real economy doesn’t need it risks stimulating a financial bubble. Carefully hedged investments would help avoid the eventual bust.

<ul><li>Eurostat's second estimate confirmed the EA’s 0.3% q-o-q rebound out of technical recession. That fully recovers the H2 fall, although it was partial for Germany.</li><li>Employment growth matched GDP in Q1, extending the persistently poor productivity performance. Eastern Europe’s structural catch-up is a relatively small bright spot.</li><li>Jobs-intensive growth is keeping unemployment at its lows even as it rises elsewhere. EA potential looks relatively impaired rather than facing tighter monetary conditions.</li></ul>

Eurostat's second estimate confirmed the EA’s 0.3% q-o-q rebound out of technical recession. That fully recovers the H2 fall, although it was partial for Germany.Employment growth matched GDP in Q1, extending the persistently poor productivity performance. Eastern Europe’s structural catch-up is a relatively small bright spot.Jobs-intensive growth is keeping unemployment at its lows even as it rises elsewhere. EA potential looks relatively impaired rather than facing tighter monetary conditions.

<ul><li>UK unemployment increased again to 4.3% in March, as expected. The Q1 deterioration still looks spurious, like the preceding strength, but the extent of change is slowing.</li><li>Vacancies are falling, but so are redundancies. Incumbent workers enjoy high pay increases despite reduced demand for new workers amid broadly high expectations.</li><li>Average earnings surged beyond expectations again. The absence of progress in pay settlements prevents slowing to a target-consistent pace, but the BoE seems unfazed.</li></ul>

UK unemployment increased again to 4.3% in March, as expected. The Q1 deterioration still looks spurious, like the preceding strength, but the extent of change is slowing.Vacancies are falling, but so are redundancies. Incumbent workers enjoy high pay increases despite reduced demand for new workers amid broadly high expectations.Average earnings surged beyond expectations again. The absence of progress in pay settlements prevents slowing to a target-consistent pace, but the BoE seems unfazed.

Philip Rush is the Founder and Chief Economist of Heteronomics. Until launching in November 2016, he was Nomura's Senior European Economist and was the Chief UK Economist there since 2010. Before that, he was UK Economist at Barclays Wealth, where he also developed strategic asset allocation models for their market return portfolios. Philip started his career at Lehman Brothers covering the UK, Scandinavian and Swiss economies. A book on his fundamental framework was published in January 2018 as "Real Market Economics".