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 retail sales were broadly battered by the second national lockdown in November, with a 3.8% m-o-m headline decline. High demand at food stores and weakness in clothing and fuel was unsurprising, but non-store sales failed to capitalise further.</li>
<li>The sector has reversed its recent gains by returning to the level from between June and July. A repeat of March’s GDP elasticity or a similar overall reversal would be less bleak than I previously assumed, but remains recessionary over the winter.</li>
</ul>


UK retail sales were broadly battered by the second national lockdown in November, with a 3.8% m-o-m headline decline. High demand at food stores and weakness in clothing and fuel was unsurprising, but non-store sales failed to capitalise further.
The sector has reversed its recent gains by returning to the level from between June and July. A repeat of March’s GDP elasticity or a similar overall reversal would be less bleak than I previously assumed, but remains recessionary over the winter.


<ul>
<li>The BoE MPC unsurprisingly voted unanimously to keep Bank rate at 0.1% and make no changes to its asset purchase programme. Reverse gilt auctions will remain a similar size, albeit adjusted for reinvestment, with the same technical parameters.</li>
<li>Optionality is preserved to raise this pace if market functioning deteriorates again, otherwise, the next change remains likely to be tapering in May-21. No mention was made of rate cuts, which I still see as counter-productive and unlikely to occur.</li>
</ul>


The BoE MPC unsurprisingly voted unanimously to keep Bank rate at 0.1% and make no changes to its asset purchase programme. Reverse gilt auctions will remain a similar size, albeit adjusted for reinvestment, with the same technical parameters.
Optionality is preserved to raise this pace if market functioning deteriorates again, otherwise, the next change remains likely to be tapering in May-21. No mention was made of rate cuts, which I still see as counter-productive and unlikely to occur.


<ul>
<li>The upside news from October’s inflation release more than unwound in Nov-20 as the CPI and RPI rates undershot forecasts by 0.3pp at 0.3% and 0.9% respectively. Garment prices stripped back much more than I had already dovishly assumed.</li>
<li>Payback in garment prices is negligible during Decembers. Shocks in insurance premiums also rarely unwind rapidly, so most of the downside news persists in my forecast. Base effects in the Spring should still kick inflation back up, with it exceeding 2% in Dec-21.</li>
</ul>


The upside news from October’s inflation release more than unwound in Nov-20 as the CPI and RPI rates undershot forecasts by 0.3pp at 0.3% and 0.9% respectively. Garment prices stripped back much more than I had already dovishly assumed.
Payback in garment prices is negligible during Decembers. Shocks in insurance premiums also rarely unwind rapidly, so most of the downside news persists in my forecast. Base effects in the Spring should still kick inflation back up, with it exceeding 2% in Dec-21.


<ul>
<li>UK employment data beat expectations again in Oct-20 with only a 143k 3m-o-3m decline driving a 19bp rise in the unemployment rate to 4.94% (5.1% forecast). Furlough is likely to prolong adjustments and push more of the pain into productivity again.</li>
<li>Recessions routinely break productivity trends with permanent costs that are widely ignored. I remain a productivity pessimist, with recent data and policy intensifying this view. The UR peak I expect keeps pushing lower and later, to about 7% in mid-21.</li>
</ul>


UK employment data beat expectations again in Oct-20 with only a 143k 3m-o-3m decline driving a 19bp rise in the unemployment rate to 4.94% (5.1% forecast). Furlough is likely to prolong adjustments and push more of the pain into productivity again.
Recessions routinely break productivity trends with permanent costs that are widely ignored. I remain a productivity pessimist, with recent data and policy intensifying this view. The UR peak I expect keeps pushing lower and later, to about 7% in mid-21.


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

Sterling underperformed in September, in line with our bearish forecast (<a href="https://www.smartkarma.com/insights/uk-sterling-facing-potential-quadruple-whammy" target="_blank" rel="noopener">UK &amp; Sterling facing potential quadruple whammy</a>, 4th September 2020). It gradually recovered from 22nd September, appreciated throughout October and peaked on 27th November.Sterling NEER has since weakened about 2.4% to an 11-week low. The sell-off at the turn of December was exacerbated by all four of the United Kingdom’s devolved nations still being subject to tight social distancing restrictions and their negative impact on the UK economy. In the past ten days the dwindling odds of the United Kingdom and European Union signing a free trade deal before 31st December have driven Sterling’s sharp fall – a risk we flagged over three months ago.About 90% of a draft treaty has been nailed down but many clauses are still subject to a broader agreement and negotiators are still at loggerheads on a number of key issues, including the EU’s fishing rights in UK waters, “level playing fields” and the role of the ECJ.Senior officials met on 9th December in a last-ditch attempt to reach agreement but little or no progress was made. Both sides have agreed that a deal needs to be reached by Sunday 13th December. This is now a “hard” rather than “soft” deadline, in our view. Both sides have warned in the past 48 hours that agreement on a new trade deal by Sunday is unlikely and the EU has published contingency measures in the event of a no-deal.A “hard” Brexit would have a material negative impact on the UK economy in the short-term, according to our analysis, and we would expect Sterling to weaken further, particularly as net short speculative positions are still modest.We still think a free-trade deal (“soft” Brexit) will be reached but our degree of confidence has sharply eroded in recent weeks. A Sterling rally could still be hostage to “devils in the detail” of such a deal and to the weak near-term outlook for an economy on the back-foot.Finally, while mass vaccination is a game-changer medium-term it not does not preclude a further tightening of UK social distancing measures in coming weeks, in our view.

Sterling underperformed in September, in line with our bearish forecast (UK &amp; Sterling facing potential quadruple whammy, 4th September 2020). It gradually recovered from 22nd September, appreciated throughout October and peaked on 27th November.Sterling NEER has since weakened about 2.4% to an 11-week low. The sell-off at the turn of December was exacerbated by all four of the United Kingdom’s devolved nations still being subject to tight social distancing restrictions and their negative impact on the UK economy. In the past ten days the dwindling odds of the United Kingdom and European Union signing a free trade deal before 31st December have driven Sterling’s sharp fall – a risk we flagged over three months ago.About 90% of a draft treaty has been nailed down but many clauses are still subject to a broader agreement and negotiators are still at loggerheads on a number of key issues, including the EU’s fishing rights in UK waters, “level playing fields” and the role of the ECJ.Senior officials met on 9th December in a last-ditch attempt to reach agreement but little or no progress was made. Both sides have agreed that a deal needs to be reached by Sunday 13th December. This is now a “hard” rather than “soft” deadline, in our view. Both sides have warned in the past 48 hours that agreement on a new trade deal by Sunday is unlikely and the EU has published contingency measures in the event of a no-deal.A “hard” Brexit would have a material negative impact on the UK economy in the short-term, according to our analysis, and we would expect Sterling to weaken further, particularly as net short speculative positions are still modest.We still think a free-trade deal (“soft” Brexit) will be reached but our degree of confidence has sharply eroded in recent weeks. A Sterling rally could still be hostage to “devils in the detail” of such a deal and to the weak near-term outlook for an economy on the back-foot.Finally, while mass vaccination is a game-changer medium-term it not does not preclude a further tightening of UK social distancing measures in coming weeks, in our view.

United Kingdom

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

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UK: Retail Reverses Gains Since June

UK retail sales were battered by the second national lockdown in November. A repeat of March’s elasticities or a similar overall reversal in GDP...

Phil Rush

BoE: Cruising at a Top Sustainable Speed

The BoE is preserving optionality to speed up purchases if market functioning deteriorates again, otherwise, the next change remains likely to be...

Phil Rush

UK: Inflation Stripped in Nov-20

UK inflation undershot forecasts by 0.3pp as garment prices stripped back much more than I had already dovishly assumed. Base effects should kick...

Phil Rush

UK: Productivity Pains Intensifying

Recessions routinely break productivity trends with permanent costs that are widely ignored. I remain a productivity pessimist, with recent data...

Phil Rush

Sunday Bloody Sunday

GBP under pressure as risk of hard Brexit mounts. Sunday "hard" deadline for UK and EU to reach deal (still our core scenario). UK economic outlook...

Olivier Desbarres

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