Tuesday, June 17, 2014

The UK Is Hot (excerpt)

The UK economy has been very strong of late, certainly much more so than the Eurozone’s economy. The pound has increased 9.8% relative to the euro since July 31, 2013. Almost a year ago when Mark Carney became the governor of the Bank of England (BOE), he suggested that the bank’s official interest rate would remain at 0.5% until 2016. Last week on Thursday, he changed his tune, thereby raising questions about the credibility of so-called “forward guidance” provided by central banks. He said that the first interest-rate hike “could happen sooner than markets currently expect.” Of course, by saying so, he changed expectations, with many BOE watchers now thinking that a rate hike will occur before the end of this year.

Carney’s main concern is that house prices are soaring. Carney said that this is “the greatest risk to the domestic economy." Chancellor of the Exchequer George Osborne agreed with this assessment in a speech at the same black-tie banquet for bankers and business leaders. He said that the BOE will have the authority to use “macroprudential policies” by limiting how much home buyers can borrow relative to their incomes and how much they can borrow as a proportion of a property's value.

Last Wednesday, the IMF launched “Global Housing Watch” in an effort to curb complacency among regulators and policymakers about housing bubbles. The IMF warned that the UK, Australia, Canada, and France have overheated housing markets. The US isn't currently on this watch list.

Carney is also concerned that labor markets are tightening, which could lead to higher wage and price inflation. So far, there isn’t much evidence of this happening. Average weekly earnings (including bonuses) was up just 0.7% y/y in April, while the CPI was up 1.8%. Nevertheless, the economy is hot, as evidenced by April’s 6.9% y/y increase in the volume of retail sales and the 4.4% rise in manufacturing output.

Today's Morning Briefing: Talking About Hiking Rates. (1) Talking the talk. (2) Less slack in UK and US? (3) BOE’s Carney changes forward guidance. (4) Macroprudential policies coming to UK housing market. (5) IMF says housing overheating in UK, Australia, Canada, and France. (6) Wage inflation remains low in UK. (7) Two camps on first rate hike at Fed. (8) Kuroda says BOJ doing enough, and Abe needs to do more. (9) Bank of Canada not doing much about housing bubble. (10) Stocks up, forward earnings down in UK. (11) Forward earnings looking toppy in Japan. (12) Weak loonie boosting forward earnings in Canada. (More for subscribers.)

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