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>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.


<ul>
<li>The BoE delivered a 25bps rate hike to 0.5%. In a hawkish twist, four members dissented for a 50bps jump. They are likely to carry that into a March hike.</li>
<li>Excess inflation squeezes policy tightening enough to balance future spare capacity in the BoE’s trade-off. </li>
<li>Energy futures prices imply much lower inflation, which would not justify rates rising as far as markets price – i.e. there is internal inconsistency.</li>
</ul>


The BoE delivered a 25bps rate hike to 0.5%. In a hawkish twist, four members dissented for a 50bps jump. They are likely to carry that into a March hike.
Excess inflation squeezes policy tightening enough to balance future spare capacity in the BoE’s trade-off. 
Energy futures prices imply much lower inflation, which would not justify rates rising as far as markets price – i.e. there is internal inconsistency.


<ul>
<li>A two-month retail binge ended with a horrible hangover in Dec-21. More things fell and by further than expected, although the hospitality trade may not have suffered as much.</li>
<li>We maintain our Q4 GDP growth forecast of 1.0% q-o-q. Front-loaded Christmas spending will have temporarily weighed while implying a worse consumer trend. </li>
<li>The BoE already discounted a depressing winter, so realising that should not offset the hawkish pressures pushing it to another rate hike in Feb-22.</li>
</ul>


A two-month retail binge ended with a horrible hangover in Dec-21. More things fell and by further than expected, although the hospitality trade may not have suffered as much.
We maintain our Q4 GDP growth forecast of 1.0% q-o-q. Front-loaded Christmas spending will have temporarily weighed while implying a worse consumer trend. 
The BoE already discounted a depressing winter, so realising that should not offset the hawkish pressures pushing it to another rate hike in Feb-22.


UK 2Y (GUKG2 INDEX)

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

BoE: Early, Often, but Probably Not Far

The BoE delivered a 25bps rate hike to 0.5% and is likely to go again in March after surprise hawkish dissents. Early action replaces needs later...

Phil Rush

UK: Retail Has a Pre-Christmas Hangover

Front-loaded Christmas spending hit UK retail and implies a worse trend. The BoE discounted a depressing winter, so realising that should not...

Phil Rush