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 GDP growth in Jun-21 was close to expectations overall. Rapid Q2 growth in the UK is the rebound from output being thrown down so much harder than in other countries. The UK remains a global laggard, albeit to less of an extent as it re-opens.</li>
<li>Food, accommodation and health drove the June rise. Unfortunately, restaurant bookings and vaccinations rates dropped in July, which should unwind this support. Most other sectors are only limping up from still depressed levels.</li>
<li>The relatively hawkish BoE was at peak optimism on 5 August, in our view. We see the disappointment of its forecast in Q2 repeating during H2, delaying the first rate hike into 2023. Persistent damage from lockdown and covid seasonality drive that view.</li>
</ul>


UK GDP growth in Jun-21 was close to expectations overall. Rapid Q2 growth in the UK is the rebound from output being thrown down so much harder than in other countries. The UK remains a global laggard, albeit to less of an extent as it re-opens.
Food, accommodation and health drove the June rise. Unfortunately, restaurant bookings and vaccinations rates dropped in July, which should unwind this support. Most other sectors are only limping up from still depressed levels.
The relatively hawkish BoE was at peak optimism on 5 August, in our view. We see the disappointment of its forecast in Q2 repeating during H2, delaying the first rate hike into 2023. Persistent damage from lockdown and covid seasonality drive that view.


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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

US Treasury yields and the Dollar, perhaps unsurprisingly, have risen in the wake of today’s strong US labour market report. However, we think it would be a stretch to argue that markets have “hard-baked” in their view that the Federal Reserve will announce its tapering plans potentially as early as the Jackson Jackson Hole Symposium on 26-28 August. A case perhaps of once bitten twice shy and for good reason in our view.We have been moderately bullish the GBP/EUR cross since late-June and the cross briefly traded above 1.18 this afternoon, its strongest level since February 2020. We maintain a positive outlook in the remainder of Q3. The Kiwi Dollar has been the fourth strongest major currency since the Federal Reserve’s policy meeting on 16th June. The Kiwi Dollar NEER has so far in August appreciated about 0.9%, confounding historical patterns which on average in 2010-2019 saw the currency weaken 0.9% in the month of August. However, the currency may not fare quite as well in Q4, in our view – the theme of our next FIRMS report.Conversely, the Thai Baht has underperformed but it’s not just been a tourism issue.

US Treasury yields and the Dollar, perhaps unsurprisingly, have risen in the wake of today’s strong US labour market report. However, we think it would be a stretch to argue that markets have “hard-baked” in their view that the Federal Reserve will announce its tapering plans potentially as early as the Jackson Jackson Hole Symposium on 26-28 August. A case perhaps of once bitten twice shy and for good reason in our view.We have been moderately bullish the GBP/EUR cross since late-June and the cross briefly traded above 1.18 this afternoon, its strongest level since February 2020. We maintain a positive outlook in the remainder of Q3. The Kiwi Dollar has been the fourth strongest major currency since the Federal Reserve’s policy meeting on 16th June. The Kiwi Dollar NEER has so far in August appreciated about 0.9%, confounding historical patterns which on average in 2010-2019 saw the currency weaken 0.9% in the month of August. However, the currency may not fare quite as well in Q4, in our view – the theme of our next FIRMS report.Conversely, the Thai Baht has underperformed but it’s not just been a tourism issue.

<ul>
<li>The mix of UK retail sales in Jun-21 made the outcome a disappointment, despite dull headlines. Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. The failure to normalise threatens the recovery’s extent.</li>
<li>Rising infections are fuelling a broader surge in disrupted behaviours. Several hundred thousand people are legally required to isolate with guidance and school closures afflicting double that again. We still expect the recovery to disappoint in H2.</li>
</ul>


The mix of UK retail sales in Jun-21 made the outcome a disappointment, despite dull headlines. Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. The failure to normalise threatens the recovery’s extent.
Rising infections are fuelling a broader surge in disrupted behaviours. Several hundred thousand people are legally required to isolate with guidance and school closures afflicting double that again. We still expect the recovery to disappoint in H2.


UK: Retail Gorges on Failing Normalisation

<ul>
<li>The BoE has become more concerned about the size of its gilt holdings reducing future policy options: there is less to buy and more uncomfortable fiscal-monetary linkages.</li>
<li>Balance sheet problems can unwind by swapping the BoE’s gilt portfolio for T-Bills with the Debt Management Account. Undesirable linkages would break immediately as monetary and issuance functions are strengthened in their natural institutions.</li>
<li>Recycling these swapped gilts to the market instead of new gilt issuance would entirely normalise monetary policy space, intra-public sector linkages, and the tradeable free float by 2025-26. The BoE needs to innovate in its ongoing review of this, in our view.</li>
</ul>


The BoE has become more concerned about the size of its gilt holdings reducing future policy options: there is less to buy and more uncomfortable fiscal-monetary linkages.
Balance sheet problems can unwind by swapping the BoE’s gilt portfolio for T-Bills with the Debt Management Account. Undesirable linkages would break immediately as monetary and issuance functions are strengthened in their natural institutions.
Recycling these swapped gilts to the market instead of new gilt issuance would entirely normalise monetary policy space, intra-public sector linkages, and the tradeable free float by 2025-26. The BoE needs to innovate in its ongoing review of this, in our view.


Despite buoyant domestic expectations (or at least hope) football will not be coming home after the England football team lost on penalties to Italy in Sunday’s final of the Euro Championship but Sterling is arguably coming home, albeit slowly. The GBP/EUR cross has this week traded mostly above 1.17, a level which has proven hard to break. GBP/EUR is up about 0.6% since late-June, in line with our modestly bullish view, and we expect further modest appreciation in the remainder of Q3 (see “<a href="https://www.smartkarma.com/insights/sterling-leads-euro-1-0-at-half-time-in-dull-encounter-but-could-extend-advantage" target="_blank" rel="noopener">Sterling leads Euro 1-0 at half-time in dull encounter but could extend advantage</a>”, 29th June 2021).The catalyst for Sterling’s outperformance versus the Euro has arguably been the widening differential between UK and Eurozone CPI-inflation, the Bank of England’s more hawkish rhetoric relative to a still very dovish European Central Bank and markets upping their pricing of Bank of England policy rate hikes. The recent hawkish pivots by Monetary Policy Council members Ramsden and in particular Saunders may not yet enjoy consensus support. However, it is increasingly clear, in our view, that the MPC is divided (and vocally so) as to if and when it should prematurely terminate its QE program and when it should start hiking its policy rate. The rates market, which is now pricing in 21bp of Bank of England hikes by mid-September 2022, is seemingly siding with the hawks which is in turn providing some ammunition (even if still a little blunt) to Sterling bulls. We expect reasonably robust UK GDP growth in coming months to push headline CPI-inflation above the Bank of England’s “peak forecast” of 3% yoy. We are thus sticking to our view that the gap between UK and Eurozone growth and CPI-inflation will widen further and see the Bank of England becoming increasingly hawkish, in absolute terms and relative to the ECB.Finally, the typically very large UK tourism deficits, including with Eurozone countries, are likely to be far smaller than normal in July-August, which could in turn up-end Sterling’s typical seasonal weakness versus the Euro in these two months.

Despite buoyant domestic expectations (or at least hope) football will not be coming home after the England football team lost on penalties to Italy in Sunday’s final of the Euro Championship but Sterling is arguably coming home, albeit slowly. The GBP/EUR cross has this week traded mostly above 1.17, a level which has proven hard to break. GBP/EUR is up about 0.6% since late-June, in line with our modestly bullish view, and we expect further modest appreciation in the remainder of Q3 (see “Sterling leads Euro 1-0 at half-time in dull encounter but could extend advantage”, 29th June 2021).The catalyst for Sterling’s outperformance versus the Euro has arguably been the widening differential between UK and Eurozone CPI-inflation, the Bank of England’s more hawkish rhetoric relative to a still very dovish European Central Bank and markets upping their pricing of Bank of England policy rate hikes. The recent hawkish pivots by Monetary Policy Council members Ramsden and in particular Saunders may not yet enjoy consensus support. However, it is increasingly clear, in our view, that the MPC is divided (and vocally so) as to if and when it should prematurely terminate its QE program and when it should start hiking its policy rate. The rates market, which is now pricing in 21bp of Bank of England hikes by mid-September 2022, is seemingly siding with the hawks which is in turn providing some ammunition (even if still a little blunt) to Sterling bulls. We expect reasonably robust UK GDP growth in coming months to push headline CPI-inflation above the Bank of England’s “peak forecast” of 3% yoy. We are thus sticking to our view that the gap between UK and Eurozone growth and CPI-inflation will widen further and see the Bank of England becoming increasingly hawkish, in absolute terms and relative to the ECB.Finally, the typically very large UK tourism deficits, including with Eurozone countries, are likely to be far smaller than normal in July-August, which could in turn up-end Sterling’s typical seasonal weakness versus the Euro in these two months.

United Kingdom

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

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UK: Rebound Passed Peak Pace

Rapid Q2 growth in the UK is the rebound from output being thrown down so much harder than in other countries. Disappointment of the BoE's forecast...

Phil Rush

FX Focus: USD, GBP, NZD and THB

US yields and USD have risen following strong US labour mkt report but still not clear markets expect Fed to announce tapering plans in coming...

Olivier Desbarres

UK: Retail Gorges on Failing Normalisation

Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. Failure to normalise threatens the recovery’s...

Phil Rush

BoE: How to Unwind QE Concerns

Balance sheet problems can unwind by swapping the BoE’s gilts for T-Bills with the Debt Management Account. Undesirable linkages would break...

Phil Rush

Sterling’s Coming Home…albeit Slowly

GBP/EUR has inched higher, in line with our bullish view. We expect further gains. UK recording faster growth and inflation than Eurozone and Bank...

Olivier Desbarres

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