Blog

One of the perils of an economics blog is that you write something one day and seemingly contradictory evidence emerges the next day. It happened to us last month. On 22nd December we wrote about UK growth slowing next year and on 23rd December the ONS upgraded third quarter GDP. And today Markit said that its composite purchasing managers’ indicator hit a 17-month high in December. Are we wrong already? We don’t think so but we should clarify.

Strong Second Half. To be sure, the UK economy was stronger in the second half of 2016 than we expected. After the EU referendum result, we pencilled in slower quarterly growth rates of 0.2% or 0.3%. We now know that growth was 0.6% qoq in the third quarter and is likely to be 0.4% or better in the fourth.

Intriguingly, Simon Ward of Henderson Global Investors points out that real M1 money growth was exceptionally strong between September 2015 and June 2016. This implied that the economy should have been booming in the second half of 2016. He reckons that the Brexit vote may have actually dampened growth by 0.75% of GDP over two quarters.

But Slowdown Ahead. However, the crux of our argument is unchanged – a weaker pound and rising oil price will push inflation up and real incomes growth down. This in turn will depress consumer spending. Economic growth could slow from 2% in 2016 to below 1.5% in 2017. That may not seem much but those annual average figures mask a slowdown in four-quarter growth from 2.2% in third quarter 2016 to 1.2% in third quarter 2017.

There are already some straws in the wind …

• Within the GDP data last month, the savings ratio – household savings as a percent of household incomes – fell to an eight-year low in the third quarter. In other words, consumers were spending increasingly out of savings.
• The Bank of England said yesterday that monthly consumer credit growth hit an eleven year high in November. Again, consumers are borrowing at a rising rate.
• The RAC reported today that petrol prices rose by around 3p a litre in December and by 14% over the past year, eating into family budgets.
• Eurozone inflation jumped to 1.1% in December from 0.6% in November. Analysts suggest a similar size increase in UK inflation, which was 1.2% in November.

When And How Much. In our minds, the question is not so much whether the UK economy will slow but when and by how much. For now, we assume that triggering Article 50 in March will be the catalyst. The phoney war will be over; the tough negotiating will begin. This could be the catalyst for consumers to respond to their tighter finances. However, we stress that the result will be slower growth, not a full-blown recession.

Alternatively, inflation will be close to 3% in April-May and possibly above 3% from September onwards which could prompt consumers to pause. A final possibility is that a mini-debt crisis causes a retrenchment. In this case, the downturn will be later but more severe.

None of this looks like good news for UK financial markets. After a good run for most sterling assets in recent weeks, it might be time for some caution.

We feel like Scrooge in A Christmas Carol but cannot help thinking that bah humbug will hit UK consumers next year. If there is a predictable surprise for the UK economy, it will be a sharp slowdown in economic growth due to squeezed incomes.

The consumer is a key driver of the UK economy. In the year to the third quarter of 2016, the economy grew by 2.3% and personal consumption accounted for 1.7 percentage points of that.

If consumption growth slows from its latest rate of 2.6% yoy, the whole economy will feel the chill wind. But how likely is a sharp slowdown? After all, retail sales grew a very healthy 5.9% yoy in November and a CBI survey of retailers showed sales at a 15-month high in December.

The crucial factor behind real expenditures is real incomes. The chart shows quarterly consumer spending growth (navy blue line) and a proxy for real incomes growth (grey). The proxy uses monthly data for average earnings, employment and consumer prices. While the fit is not perfect, one can see the relationship.

So we can break the consumer spending outlook down into earnings, jobs and prices. We reckon that incomes will grow by around 2.5% yoy in the fourth quarter – earnings growth of 2.6% plus employment growth of 1.1% minus inflation of 1.2%.

By this time next year, those numbers could be say 3.0% plus 0.5% minus 2.5% to give incomes growth of just 1.0%. Average earnings growth may pick up a little to reflect the tight labour market; jobs growth has been slowing for a while and may slow further, as Brexit fears intensify; and inflation is set to increase, partly due to sterling’s tumble since 23rd June and partly oil price rises.

Of course, Britons may dip into savings or borrow more in order to sustain spending. That has happened before! However, there are two good reasons to think households may be more cautious this time round.

First, Article 50 of the Lisbon Treaty could be triggered by 31st March. Even though actual departure from the EU may be many years hence, the start of divorce proceedings should prompt caution.

Second, memories of the 2008-09 financial crisis are relatively fresh. Many households suffered badly after the collapse of Lloyds and RBS. Once bitten, twice shy.

Elsewhere in the economy, we expect businesses also to be cautious so do not envisage a boost from investment spending. However, overseas trade should thrive, thanks to the pound’s more competitive level. The bottom line is that we expect annual average growth of 1 1/4% next year after 2.1% this year.

Investment Conclusion. This is tricky because so much in 2017 depends upon sentiment regarding Brexit and Trump. Leaving those aside, we expect the Bank of England to be on hold at worst during 2017 and would not rule out another easing later in the year. On a six to twelve month view, that will not benefit two year gilts much (today’s yield is just 7 bps!) but ten year yields could fall a bit; sterling will presumably weaken further; and this may give the internationally-exposed FTSE 100 some support but the domestically-focused FTSE 250 is likely to struggle.

At first sight, the financial markets are set fair for 2017, with steady economic growth and inflation under control in the major economies. Life couldn’t be better … or could it? Here are four potential horror stories around the world which could foretell an unhappy new year.

The Apprentice President. The Trump Trade has been in vogue since 8th November.  The new president will be inaugurated on 20th January and the markets look forward to corporate tax cuts, $1trn of infrastructure spending and a bonfire of regulations. This could easily go wrong.

On the one hand, Mr Trump may be unable to deliver. He is a fiscal liberal; Congressional Republicans are fiscal conservatives. When it comes to budget talks, it is unclear how much can be achieved. On the other hand, he may also deliver his promise to impose tariffs and to restrict immigration. If so, then he will give to the markets with one hand and take away with the other.

And, finally, even if he gives but does not take away, then the result could be an over-heating economy. This could push the Fed into more rapid interest rate rises and topple an over-valued US equity market.

Populists In Europe. The big danger in Europe is politics. On 15th March, Geert Wilders’ Party for Freedom could become the largest party in the Dutch parliament; on 7th May, Marine Le Pen could win the French presidency; and in September or October, Angela Merkel could be ousted as German Chancellor.

Current polls suggest that only the first of those is likely. But we cannot rule anything out and either of the latter two would scare markets. This is not to mention problems in Spain with Catalonia or in Italy with the banks.

Brexit Bungling. Somehow this seems less of a risk and more of a likelihood. The government claims to have a plan but Brexit secretary David Davis will not tell anyone what it is until February. In the meantime, ministers offer contradictory views.

Markets do not like uncertainty and Brexit is riddled with it. For now, markets assume that serious work is going on behind the scenes and that there will be a softer rather than harder divorce. The key date, of course, is 31st March.

China’s Borrowing Habit. China is making a difficult transition from a manufacturing/export-led economy to a services/consumption-based one. This involves a slowing growth rate and massive reforms. So far, so good but in the process China’s debt ratio has ballooned to 255% of GDP.

We reckon that there is less to worry about than generally reckoned (see our blog post of 3rd November) but, even so, there is a distinct risk of a bad outcome so we include it in our horror stories.

Conclusion. The economic cycle and equity market upswing are looking tired and our monthly risk register is getting longer. Investors should continue to hold risk assets but refrain from irrational exuberance. At some point in 2017, there will be difficult times.

Yesterday, Italy voted No to constitutional reform by a wide margin. After the UK Brexit vote and Donald Trump’s US election victory, is this another seismic change or just a little local difficulty?

The Vote. The gap was 59.1% to 40.9%, with nearly 33m votes counted, in a comprehensive rejection of PM Matteo Renzi’s plan. For many, especially in southern Italy, it was a protest vote against hard economic times and the migration crisis. However, many who were in favour of reform still voted No because this particular proposal was poorly framed. While it might have made Italy more governable, it also raised the chances of the “wrong” person holding power for five years.

In a parallel vote yesterday, Austria rejected far right presidential candidate Norbert Hofer by 53.3% to 46.7%. The margin was smaller than in Italy but did suggest that a weaker protest vote across Europe than first feared.

Immediate Implications. PM Renzi will resign as prime minister. It currently looks as though finance minister Pier Carlo Padoan or Senate leader Pietro Grasso will form an interim government until early 2018 elections. However, given the heavy No vote, the danger is an early general election and a win for the anti-euro opposition parties.

Another pressing issue is the Italian banking system and its €360bn of non-performing loans. Banca Monte dei Paschi di Siena plans to raise €5bn in fresh capital and dispose of nearly €28bn of bad loans by year end. Unicredit is due to unveil a €13bn turnround plan next week, including sales of two sizeable businesses and €50bn of non-performing loans.

There is a key Italy versus EU conflict here. Italy would prefer a state bail-out, with no political pain for the man in the street. The EU are opposed to state-aid in any industry and want bond-holders to be “bailed in”. This is politically toxic for the Italian authorities, as households hold €170bn of domestic bank bonds.

Finally, the ECB meets this Thursday to consider its asset purchase programme. The Italian referendum result will doubtless feature in the discussion. Some think that it might prompt an easier ECB stance than otherwise. We are not so sure but, even so, there is a difficult judgement regarding how quickly to wind down the quantitative easing scheme from its current €80bn a month pace.

Longer-Term Consequences. The underlying fear is that Italy could cause the break-up of the euro, starting with this referendum result. The chart shows one reason why.

While Germany and France have at least weathered the two eurozone recessions since 2007, Italian GDP per head has fallen by more than 12% over the past nine years, according to annual data from the IMF. It is no great surprise that Italians should be unhappy.

The market reaction to this morning’s news was benign. The euro reached new lows against the US dollar but has since bounced by one and a half cents; Italian equities are barely changed but are up over 5% from late November lows; but the 10yr BTP is 10 bps higher in yield. Partly this reflects better political news from Austria but perhaps also the feeling that Italy will muddle through. With Dutch, French and German elections due next year, this could yet be a slow-moving seismic change.

Britain’s new chancellor has quickly gained the nickname “Spreadsheet Phil” with his eye for detail and dull demeanour. A safe and steady pair of hands is just what the UK needs after George Osborne’s tenure. Philip Hammond delivered a commendably dull Autumn Statement against a difficult backdrop.

The statement comes with overwhelming detail. The statement itself (the document, not the speech) runs to 71 pages. This is brief compared with the Office for Budget Responsibility (OBR)’s 271-page Economic and Fiscal Outlook. And this is before the many official supplementary reports and the media over-kill.

However, the key message is that growth will be slower, inflation higher and government borrowing greater than expected in March, as these two charts illustrate.

The first shows the forecast profile of quarterly growth now compared with that in March. Previously, the OBR expected growth to continue at around 0.5%-0.6% a quarter pretty much indefinitely; now, it thinks growth will dip to around 0.25% a quarter in the first half of 2017. Brexiteers have immediately accused the OBR of excessive pessimism but the OBR is more optimistic than independent forecasters and it sets out its reasons in detail in its report.

The second shows that Britain’s public sector borrowing figures are projected to stay higher for longer than previously thought. The deficit this year (FY16-17) will be £68bn rather than £55bn and next year £59bn rather than £39bn. The deterioration comes from three key sources – a) technical changes in ONS statistics, b) policy changes and c) the weaker economy.

The third of those is by far the biggest factor. Taking FY17-18, for example, the technical changes account for £0.4bn of the deterioration, Philip Hammond’s actions for £2.5bn and the economic forecast for £17.2bn. By the way, the £2.5bn “give-away” consists of a large increase in capital spending, a smaller increase in day-to-day departmental spending and a small tax increase.

There were two major talking points. One was the impact of Brexit. The OBR assumes that the UK leaves the EU in April 2019 and that this will mean slower trade growth, a tighter migration regime, lower EU transfers but higher domestic spending (probably not £350m a week to the NHS) and no change in EU-related tax systems (such as VAT). The result is that the level of UK real GDP is 2.3% lower by FY20-21 than it would have been otherwise and that Britain’s public finances will be £10bn worse off in FY17-18 and £15bn a year thereafter.

The other was fiscal rules. George Osborne unveiled three in May 2015: none of them survived 18 months. Philip Hammond introduced another three yesterday. The structural deficit should be below 2% of GDP by FY20-21; net debt as a percent of GDP must fall by FY20-21; welfare and tax credit spending should be not more than £130bn in FY21-22. None of these is especially demanding. The worrying question is whether Mr Hammond has much interest in reducing the UK’s budget deficit to a reasonable level. Perhaps he is not so dull after all.

As Lewis Carroll put it, jam tomorrow and jam yesterday but never jam today. But leaks from Downing Street suggest that Philip Hammond’s Autumn Statement next Wednesday will target the “Jams” today – those just about managing. Measures will include promised increases in income tax allowances (to £12,500 for the basic rate), a freeze in fuel duty, further childcare subsidies and so on. What about the big picture though?

It’s The Economy, Stupid. UK public finances depend heavily upon the health of the economy. Strong growth boost income taxes and VAT while low inflation holds down inflation-linked spending and interest payments.

In the near term, the news is good. The economy grew by a better than expected 0.5% in the third quarter and inflation was back below 1% in October, although the archaic RPI measure was 2%. However, it seems very likely that growth will slow and inflation rise next year. The table shows the Office for Budget Responsibility (OBR) forecast in March versus the average of independent forecasters then and now.

There are two lessons here. First, the OBR tends to be pretty close to the consensus. One benefit of an independent budget think-tank is that the chancellor is no longer tempted to massage the numbers.

Second, the independent forecasters have nearly halved their 2017 growth forecast, slashing it from 2.1% to 1.1% over the past six months. They have also raised their inflation forecast substantially, from 1.8% to 2.7%. Rightly or wrongly – and these are highly uncertain forecasts – the UK decision to leave the EU is the key reason for the changes.

And The Consequence Is … The OBR is sure to forecast higher public sector borrowing figures next week than it did in March. And, unfortunately, the starting point has worsened. In March the then Chancellor, George Osborne, expected a deficit of £72.2bn in 2015-16 and £55.5bn in 2016-17. Well, the outturn for 2015-16 was higher at £76.0bn and the deficit in the first six months of 2016-17 is only £2.3bn lower than a year earlier.

The Institute for Fiscal Studies does a thorough job analysing Britain’s public finances and thinks the deficit will be £60.5bn in 2016-17 falling to £47.3bn in 2017-18. That looks optimistic to us, which just goes to illustrate Mr Hammond’s difficult balancing act.

Likely Outturn. Look out for three aspects of the Autumn Statement. The first is a sense of medium term direction. His predecessor had an addictive urge to meddle and micro-manage. Mr Hammond may take the opportunity to set out a more sober, medium term view. Some sign of sensible fiscal rules would be welcome.

The second is a moderate boost for the economy now. Extra infrastructure spending would be better than tax cuts but this is difficult to do because many projects have little immediate impact

The third is keeping some budgetary firepower for March. The UK economy remains in reasonable shape, so it makes sense to avoid big measures now in case they are needed in the March 2017 budget statement.

After the Brexit vote in the UK and Donald Trump’s win in the US, the Italian referendum and the French election are in the spotlight. We can ignore the French election for now but Italy’s referendum on 4th December is rapidly approaching.

The past twenty polls all show the No vote will win. True, the polls were wrong about Brexit and Trump but only because they under-estimated the extent of the protest vote. After last week’s US election, it seems likely to us that PM Renzi will lose the referendum and it is time to think about what happens next.

It will mean broadly no change for the Italian political system but Matteo Renzi is likely to resign as prime minister. Although he has furiously back-tracked, he has unwisely made the referendum a vote of confidence in his leadership. Maybe there is a slight chance he stays but we doubt it.

Thus, President Mattarella will face a choice between early elections – next due March 2018 – or a technocratic government. He is likely to choose the latter, led by either Pier Carlo Padoan or Enrico Letta.

Nothing to see here then, you might think, but you would be wrong. First, there is no guarantee that a technocratic government would last. If the No vote is sufficiently decisive (say 55% to 45%), then the outcry for new elections could become irresistible.

Second, even without early elections, it would only delay matters by some fifteen months. Note that the ruling Democratic Party is the only major party in the Italian parliament which is actively pro-euro. The next most popular parties – the Five Star Movement and the Northern League – wish to pull Italy out of the euro. And the latest polls show support for Democratic at 33% and Five Star Movement at 31%.

Third, before Trump’s win, it was plausible that the protest parties could win power in March 2018 and start the process of leaving the euro, thanks to weak growth, banking system problems and a refugee crisis. The dramatic US election result last week has reinforced the argument. Austria’s presidential election, the same day as Italy’s referendum, is yet another wild card.

The smart money is shifting the same way. The chart shows the spread between ten year Italian and German government bonds: this has widened out to 180 bps this morning from 115 bps three months ago. Another indicator is Italian central bank balances with the eurosystem. These show that €132bn has flowed out of Italy over the past year.

Neither indicator is anywhere near the panic levels of the Eurozone debt crisis in 2012 but both show rising concern. We would get seriously concerned if the BTP/bund spread climbed above 300 bps. For now, investors should avoid Italian assets.

In the early hours of Wednesday morning, Donald Trump became the 45th President of the United States. In a longer post than usual, here is our immediate reaction.

The Result. Mr Trump won the electoral college by an estimated 306-232 but lost the popular vote by 59.9m to 59.7m. The Republicans also held on to power in the Senate (52 seats to 48) and the House (238 to 193). However, Senate legislation often requires 60 votes so do not expect Washington gridlock to cease.

Local Politics. With effect from 20th January, the US will have a real estate tycoon and reality TV star with no experience of public office as its president. He will also be the oldest first time president in US history at 70 years old. At first sight, it does not look promising.

However, there are a couple of historical parallels. The first is Dwight Eisenhower, US president 1953 to 1961, who also had never held public office, although he had run an army. The second is Ronald Reagan (1981 to 1989) who was 69 when he was first elected, also came from a showbiz background and held right-of-centre views. Both are held in high esteem in US history.

But Trump comes to office after a bitter and divisive electoral battle, which his acceptance speech acknowledged – “it is time for us to come together … I pledge to every citizen of our land that I will be president for all Americans”. Also, he is on bad terms with most of the Republican establishment. Many refused to endorse him or even vote for him.

And, like most presidents, he will find it difficult to get stuff done. As one example, he cannot fire Janet Yellen as chair of the Federal Reserve, no matter how much he wishes to do so. He will have to wait for her term to expire on 31st January 2018.

Perhaps the most important pointer will be how he builds the White House team. The three key posts are Treasury Secretary, Secretary of State and White House Chief of Staff. If he gets those right, then things may look up.

Global Politics. The two big losers could be Europe and Mexico. Trump’s America First agenda will mean the US is reluctant to guarantee European security via NATO. However, there is an argument that Trump would not want to look weak, for example, if Russia moves troops to Lithuania’s border. Expect Vladimir Putin to test his resolve at an early date.

We shall also see whether Trump follows through on his promise to build a wall and to re-negotiate the NAFTA free trade agreement. If so, then Mexico’s future for the next four years looks fraught. On all three issues – NATO, NAFTA and the wall – the reality in the White House may be different to the words on the campaign trail.

However, Donald Trump ran for the presidency on an anti-trade, anti-immigration and anti-climate change platform. All of these are bad for the rest of the world and we assume that he will at least try to keep his word.

Another key issue is whether Donald Trump’s angry populist style gains traction elsewhere. After Brexit and Trump, it is an obvious thought that Marine le Pen could now have a serious shot at the French presidency in April 2017.

The Economy. The big shift will be the mix of fiscal and monetary policies. While policy pledges were scarce, Donald Trump promised extra infrastructure and defence spending. With echoes of Reagan, he is also keen on tax reform and corporate tax cuts. The consequence will be a higher budget deficit and hence a tighter monetary policy to prevent over-heating.

The impact on growth of the Trump agenda may be roughly neutral – a boost from public spending but a drag from less trade and immigration. However, there is likely to be upward pressure on inflation from less immigration (restricting the supply of workers in a tight labour market) and more government spending (boosting an economy near full capacity).

The Markets. The initial reaction to Trump’s win looks about right – equities, Treasury yields and the dollar all up. Corporate America should gain from infrastructure spending and tax reform (but will be squeezed by higher labour costs); US Treasury yields may rise due to higher inflation and a larger budget deficit; and the US dollar will strengthen due to the looser fiscal, tighter monetary policy mix.

We expect these trends to continue but a key uncertainty is the FOMC meeting on 14th December. There has been talk that the Fed might postpone its 25 bps rate hike. For now, we think it will go ahead and, significantly, the Fed Funds future shows an 82% probability of a rate increases.

Word of the Day (with thanks to The Economist) – Snollygoster. The OED defines snollygoster as a shrewd unprincipled person, esp. a politician. You can decide whether Donald Trump is a snollygoster.

The markets have worried about China’s debt load for some time but are they right to do so?

The Case for the Prosecution. Last month, the BIS, the central bankers’ bank, updated its four early warning indicators of banking crises: two were flashing red and another amber. The BIS is especially keen on the “credit gap” – the percentage spread between actual and trend credit-to-GDP – as a crisis leading indicator. It reckons that a reading over 10% is a cause for concern: China’s gap was 30.1% in March.

There is no doubt that China’s private sector debt has risen rapidly. The credit-to-GDP ratio has increased by roughly 60 percentage points over the past five years. An IMF study found that, in 38 out of 43 global instances where the ratio grew by more than 30 percentage points, the result was a financial crisis, much slower growth or both.

The argument is that excessive credit growth reduces the efficiency of capital spending and hurts corporate profits and asset quality. This in turn prompts an increase in defaults and non-performing loans.

The Defence. However, all may not be lost. First, China is engaging in massive economic and social change, one consequence of which is slower growth. Thus, the IMF’s narrative is correct but may not mean a financial crisis is due.

Second, China’s overall debt burden (including government debt) was 255% of GDP in March which was below that of five of the G7 – Canada, France, Italy, Japan and the UK. In other words, the debt ratio is nothing unusual, although it is high by emerging markets standards.

Third, since China’s public debt ratio is modest, the government has room to act in the event of a corporate debt crisis, taking private sector bad debts onto the public balance sheet, much as the advanced nations did in 2008-09.

Fourth, there is a problem of definition. Much of the increase in debt belongs to state-owned enterprises (SOEs), which might be better classified as local government debt. Thus, one would not expect the usual dynamics outlined above to apply. This does not deny that many SOEs are in trouble – there have been at least five major SOE near-defaults since 2014 – but the analysis should be different.

Five, the government has already recognised the problem and taken action. It has reduced coal and steel capacity, identified and tackled “zombie” companies, announced SOE reforms, improved local government finances and encouraged debt-for-equity swaps.

And, six, China has been here before. In 1997 about a quarter of SOE loans were non-performing. This prompted the government to step in with a rescue plan worth over 30% of GDP over the next decade.

The Verdict. China’s debt mountain is clearly a problem. But there are good reasons to think the position as not as bad as some analysts make out. Investors should keep this on the risk register and monitor closely. Meanwhile, the chances of a Chinese recession are slim and Asia-Pacific ex-Japan remains one of our favoured equity regions.

Nearly four months after the UK voted to leave the EU, it is time to take stock.

Politics – Fog lifting slowly. We do not claim any great political insight but the fog is slowly lifting. Since the Conservative party conference, the mood has shifted in favour of a “hard Brexit”. The prime minister has apparently decided the control of immigration should outweigh staying in the EU single market. However, parliament has asserted its authority and will debate Article 50 before the UK triggers the exit process by end-March next year.

Economics – Heavy cloud, no thunderstorms. In theory, the Brexit vote should mean weaker growth compared with not leaving the EU. We shall never actually know because we cannot run an alternative universe where there is no Brexit.

Just to complicate matters, the UK economy was slowing anyway prior to the EU referendum vote but, on the other hand, the Bank of England eased monetary policy on 4th August and the Chancellor, Philip Hammond, may loosen fiscal policy on 23rd November.

Leaving all that aside, the latest surveys show the UK economy is indeed below par compared with the past five years. We have looked at 18 business surveys for an up-to-date reading across the economy. Three are exceptionally weak, none are exceptionally strong, the rest are evenly split around the mean. In other words, timely growth data shows some weakness but nothing disastrous.

Turning to inflation, Tuesday’s numbers showed a jump in headline inflation to 1.0% and core inflation to 1.5% in September. The rising trend is mainly due to a firmer oil price and a weaker pound. The former has nothing to do with Brexit but the latter certainly does.

Sterling’s fall will continue to feed through into retail prices for some time such that inflation will head for 2.5% or 3% in a year’s time. We recommend you buy your Marmite now!

Markets – Mixed sunshine and clouds. The truest Brexit barometer is probably the pound, which has fallen some 15% in trade-weighted terms since 23rd June. The first roughly 10% came immediately after the vote as the markets re-assessed Britain’s prospects; recent weakness has reflected the rising chances of a hard Brexit. For now, we expect sterling to reflect the shifting chances of hard and soft Brexit.

UK equities have rallied in sterling terms but the gains are illusory. In any other major currency, they are down year to date. The large cap FTSE 100 has profited especially from its high weighting of oil companies and commodity producers and roughly 75% of profits being generated overseas. In the absence of a recession (which we do not expect) the market may slog higher.

Finally, the 10yr gilt yield has risen by around 60 bps since mid-August to just over 1.1% today. This largely reflects global markets – the 10yr Treasury yield has risen 40 bps – but also the additional negatives of a weak pound and possible fiscal easing ahead. We cannot claim that gilts are great value when inflation is heading for 3% but, with short rates anchored close to zero, there may not be much further upside for yields.