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>Inflation has continuously exceeded expectations as traditional economic models fail to capture the regime shift. Prices are far below equilibrium and rising towards it. </li>
<li>We now incorporate this macro convergence at a micro-level, bridging the gap between approaches. This fix reflects the new distribution, including the higher median impulse.</li>
<li>The pull toward equilibrium cumulatively adds about 1pp to UK inflation over the year ahead, driving us further above the consensus. Second-round effects would extend it. </li>
</ul>


Inflation has continuously exceeded expectations as traditional economic models fail to capture the regime shift. Prices are far below equilibrium and rising towards it. 
We now incorporate this macro convergence at a micro-level, bridging the gap between approaches. This fix reflects the new distribution, including the higher median impulse.
The pull toward equilibrium cumulatively adds about 1pp to UK inflation over the year ahead, driving us further above the consensus. Second-round effects would extend it. 


<ul>
<li>Monetary policymakers are rapidly back-peddling with the BoE hiking at consecutive meetings. Markets price this pace continuing to far higher levels than reached recently.</li>
<li>UK forward rates imply a neutral setting near 1%, whereas our macro estimates suggest it is nearer 1.5%. The US appears to be unwinding some of the Great Recession’s drop.</li>
<li>The BoE needs to feel where the neutral rate lies by watching the economy. If neutral feels high, policy can follow, but then it need not fall so far afterwards.</li>
</ul>


Monetary policymakers are rapidly back-peddling with the BoE hiking at consecutive meetings. Markets price this pace continuing to far higher levels than reached recently.
UK forward rates imply a neutral setting near 1%, whereas our macro estimates suggest it is nearer 1.5%. The US appears to be unwinding some of the Great Recession’s drop.
The BoE needs to feel where the neutral rate lies by watching the economy. If neutral feels high, policy can follow, but then it need not fall so far afterwards.


Policy Rates Feeling for a Higher Neutral

<ul>
<li>Only half of the retail sector’s horrible hangover recovered in Jan-22, and the mix still skews relatively far away from stores.</li>
<li>The end of draconian covid policies should support some more normalisation of spending patterns in 2023. Unfortunately, inflation is increasingly squeezing real income growth. </li>
<li>Such constraints tend to shrink retail volumes as consumers resist raising their spending values. For example, real wage weakness meant no real retail sales growth between 2010 and 2013.</li>
</ul>


Only half of the retail sector’s horrible hangover recovered in Jan-22, and the mix still skews relatively far away from stores.
The end of draconian covid policies should support some more normalisation of spending patterns in 2023. Unfortunately, inflation is increasingly squeezing real income growth. 
Such constraints tend to shrink retail volumes as consumers resist raising their spending values. For example, real wage weakness meant no real retail sales growth between 2010 and 2013.


<ul>
<li>The downtrend in the UK unemployment rate paused in Dec-21 as employment flatlined, and the population shrank slightly for the first time. </li>
<li>Unemployment is unlikely to match the BoE’s forecast, which should help slow hikes beyond March. The other side of an ageing cycle is wages, where the latest impulse was strong.</li>
<li>Inflation is more than eroding that, and the real-terms weakness will weigh on activity growth into 2022, ultimately preventing the Bank rate from going too high.</li>
</ul>


The downtrend in the UK unemployment rate paused in Dec-21 as employment flatlined, and the population shrank slightly for the first time. 
Unemployment is unlikely to match the BoE’s forecast, which should help slow hikes beyond March. The other side of an ageing cycle is wages, where the latest impulse was strong.
Inflation is more than eroding that, and the real-terms weakness will weigh on activity growth into 2022, ultimately preventing the Bank rate from going too high.


Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>The shekel has been the worst-performing currency in EM since late November with potential Fed hikes and hedging activity related to the sell-off in international stock markets weighing on it.</li>
<li>The shekel should resume its appreciating trend as the central bank would likely raise rates this year with inflation making a comeback and the balance of payment position remaining strong.</li>
<li>I recommend funding the shekel in British pounds to minimize exposure to the dollar, which continues to be volatile, and the BoE is further along in its rate-hiking cycle.</li>
</ul>


The shekel has been the worst-performing currency in EM since late November with potential Fed hikes and hedging activity related to the sell-off in international stock markets weighing on it.
The shekel should resume its appreciating trend as the central bank would likely raise rates this year with inflation making a comeback and the balance of payment position remaining strong.
I recommend funding the shekel in British pounds to minimize exposure to the dollar, which continues to be volatile, and the BoE is further along in its rate-hiking cycle.


Alpha Bites: Long Israeli Shekel (ILS) Vs Short British Pound (GBP)

United Kingdom

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

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Prices Obliterating Forecasts

Economic models fail to capture the inflation regime shift. Prices are far below equilibrium and rising towards it, with the pull adding about 1pp...

Phil Rush

Policy Rates Feeling for a Higher Neutral

The BoE needs to feel where the neutral rate lies by watching the economy. If it feels high, policy can follow it but then need not fall so far...

Phil Rush

UK: Consumers Face Inflation Constraint

Inflation is squeezing real income growth. Such constraints tend to shrink retail volumes as consumers resist raising spending values. Real wage...

Phil Rush

UK: An Ageing Cycle in the Labour Market

A slowing unemployment decline while wage growth rises suggests an ageing cycle. Inflation is creating real terms weakness that weighs on activity...

Phil Rush

Alpha Bites: Long Israeli Shekel (ILS) Vs Short British Pound (GBP)

I recommend Long Israeli shekel/Short British pound as the shekel should resume appreciating with the central bank likely to raise rates this year,...

Gautam Jain, PhD, CFA

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52-week Range

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