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>The BoE matched widespread expectations again by holding the Bank rate at 4.75%, although the three dissenters exceeded the two we expected (consensus was for one).</li><li>Surprisingly high wage growth is reinforcing the gradualist urge of most members. Softer labour market conditions will likely be used to justify a February rate cut.</li><li>We maintain our call for BoE cuts in February and May before an extended pause that may end with rate hikes to remove accidental stimulus amid high neutral rates.</li></ul>

The BoE matched widespread expectations again by holding the Bank rate at 4.75%, although the three dissenters exceeded the two we expected (consensus was for one).Surprisingly high wage growth is reinforcing the gradualist urge of most members. Softer labour market conditions will likely be used to justify a February rate cut.We maintain our call for BoE cuts in February and May before an extended pause that may end with rate hikes to remove accidental stimulus amid high neutral rates.

<ul><li>The final Euro area inflation print for November trimmed its rise by 4bps, rounding it down to 2.2% y-o-y. Revisions were broadly spread over the special aggregates.</li><li>Median inflation remains close to annualising at 2%, although Germany is excessive like the UK. Our projections for underlying pressures softened slightly over the past month.</li><li>In our view, EA inflation will still slow to the 2% target in a few months and stay near there through 2025. Forceful ECB easing could break that benign outlook.</li></ul>

The final Euro area inflation print for November trimmed its rise by 4bps, rounding it down to 2.2% y-o-y. Revisions were broadly spread over the special aggregates.Median inflation remains close to annualising at 2%, although Germany is excessive like the UK. Our projections for underlying pressures softened slightly over the past month.In our view, EA inflation will still slow to the 2% target in a few months and stay near there through 2025. Forceful ECB easing could break that benign outlook.

<ul><li>UK inflation matched expectations by increasing to its highest headline pace since March, although this doubled the BoE’s forecast error to 0.2pp (0.1pp in services).</li><li>Only one division contributed much less to the monthly impulse than last year, with the median rate remaining excessive at 3% amid broadly high unit labour cost rises.</li><li>An early December index date will likely be used, weighing on airfares in the short term. Our forecast still gaps higher than others in 2025 despite the consensus rising.</li></ul>

UK inflation matched expectations by increasing to its highest headline pace since March, although this doubled the BoE’s forecast error to 0.2pp (0.1pp in services).Only one division contributed much less to the monthly impulse than last year, with the median rate remaining excessive at 3% amid broadly high unit labour cost rises.An early December index date will likely be used, weighing on airfares in the short term. Our forecast still gaps higher than others in 2025 despite the consensus rising.

<ul><li>UK unemployment stopped rising in October, with the 4.3% rate close to the average of the past 18 months. The underlying trend is only for a slight weakening after strength.</li><li>Employment and hours worked are booming, partly owing to recent revisions. The poor productivity performance raises the hawkish pressure from these activity data.</li><li>Resurgent wages compound the hawkish news as private pay jumps on not-yet-captured public sector settlements. These data torch the dovish case for cutting rates this week.</li></ul>

UK unemployment stopped rising in October, with the 4.3% rate close to the average of the past 18 months. The underlying trend is only for a slight weakening after strength.Employment and hours worked are booming, partly owing to recent revisions. The poor productivity performance raises the hawkish pressure from these activity data.Resurgent wages compound the hawkish news as private pay jumps on not-yet-captured public sector settlements. These data torch the dovish case for cutting rates this week.

<ul><li>Flash PMIs for December broadly exceeded expectations in the services sector, with the UK and EA rebounding and the US surging to highs more consistent with hikes than cuts.</li><li>A slight trend rise in the US unemployment rate suggests strength is partly structural but could be noise around cyclical strength. Global rates still don’t look tight. </li><li>We still expect persistent underlying price and wage inflation to truncate easing cycles earlier than most expect, following the norm for cuts without recessions, like in 1998.</li></ul>

Flash PMIs for December broadly exceeded expectations in the services sector, with the UK and EA rebounding and the US surging to highs more consistent with hikes than cuts.A slight trend rise in the US unemployment rate suggests strength is partly structural but could be noise around cyclical strength. Global rates still don’t look tight. We still expect persistent underlying price and wage inflation to truncate easing cycles earlier than most expect, following the norm for cuts without recessions, like in 1998.

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".