Marginal Relevance - A weekly review of EconomicsWatch
I will generally try to keep each round-up to around three topics, with a mix of Macro (data such as growth, fiscal and monetary policy etc.) and Micro (cases of market failure, mergers & acquisitions etc.) but do feel free to post any other economic news that you find interesting as well!
Friday 3rd March 2017
Comments from several Federal Reserve policymakers have increased expectations that the Fed is looking to increase short term interest rates sooner rather than later, with a mid-March date being pencilled in. Lael Brainard, seen as one of the more dovish (i.e. in favour of low rates to stimulate the economy) members of the FOMC, spoke of how "assuming continued progress (in full employment and approaching target inflation), it will likely be appropriate soon to remove additional accommodation".
William Dudley, President of the New York Fed, also commented that the case for tighter monetary policy "has become a lot more compelling" since the election of Donald Trump, whose economic policy of infrastructure spending and tax cuts is expected to increase inflationary pressure in the US economy.
A higher rate has several effects. Among them, the cost of borrowing will likely increase, potentially discouraging investment from firms and increasing repayments faced by individuals with adjustable-rate loans (mortgages, car-loans etc.), whilst there is greater incentive for households to save their money instead of spending it. Borrowing costs for the government will rise too, with treasury yields already climbing, and in the case of the 2-year to highs since August 2009. Higher borrowing costs increases the burden of their debt, potentially leading to higher taxes or reduced spending in future.
Of course, this may not happen right away. Changes in monetary policy often face a time lag, typically around 18 months, before their effect is felt in the wider economy, so the short term impact of a rate hike won't be instantly felt (for example, banks won't instantaneously change their borrowing and saving rates). Furthermore, the effect of monetary policy is only one factor to consider, with other variables such as consumer confidence, fiscal policy etc. also impacting the economy. Indeed, in the case of Trump's economic policy, it may very well end up being the case that the fiscal side has a greater effect.
UK Manufacturing Growth slower than expected
In a sign that manufacturers continue to see a resurgence in fundamentals, the February Markit/CIPS Manufacturing CPI came in at 54.6 (a number above 50 indicates improvement), the seventh consecutive month of expansion, albeit down from January's figure of 55.7 and below the expectation of 55.8.
The report attributes the figure to "improved domestic and overseas demand, the latter aided by the continued weakness of the sterling exchange rate". A depreciation in the Sterling exchange rate makes UK products appear cheaper to foreigners, as they need to exchange less of their foreign currency to get the same amount of Sterling. This makes UK products more price competitive and hence increases demand for the country's exports.
However, the depreciation of the country's currency can equally be a double-edged sword. The report also notes "input costs...are still rising at near survey record rates". The UK imports many components and raw materials for its exports (for example, up to 85% of the components used by Nissan's Sunderland plant originate from China, Japan and Europe). The depreciation of Sterling will have also made these components more expensive, increasing the cost of production of manufactured goods which adversely impacts competitiveness.
LSE - Deutsche Merger in trouble
It's looking increasingly likely that a merger between the London Stock Exchange and Deutsche Borse, two of the largest stock exchanges in Europe, will not be going ahead after the London Stock Exchange refused to concede to EU regulator demands that it divest its 60% share in it's Italian bond trading platform, MTS.
Part of the responsibility of regulators is to protect consumers of an industry from a variety of monopolistic tendencies, including reduced quality of service and excess prices from a lack of competition in the industry. It may be interpreted that the merger would create an entity that regulators deemed too dominant in the market. Indeed, it has been speculated that the merger would result in potentially the most profitable company in its industry.
On the other hand, it may well be the case that preventing the merger becomes a case of Government Failure. As noted in the article above, such a merger may be needed for Europe to compete internationally with other exchanges, most notably those in the US (The NYSE and Nasdaq represent the largest and second largest exchanges in the world). Hence, the failure of the merger whilst improving competition regionally, may reduce competition on a global scale.
Things to look out for Next Week
Wednesday sees the release of the UK's Spring Budget by Philip Hammond, the Chancellor of the Exchequer. Stronger than expected tax receipts are likely to result in public sector net borrowing undershooting OBR forecasts by approximately £3 billion according to the EY Item Club, the only non-governmental forecaster to use the same model of the UK economy as the Treasury.
Meanwhile on Thursday, the ECB will decide whether to deviate from its current monetary policy. Though it is widely expected to maintain its present stance, it faces increasing pressure from Germany to rein in its stance, especially with Eurozone inflation climbing above the target rate to the highest in four years.
Questions to ask
Do you see the Fed hiking rates, and if so, by how much? Will it have much impact on the US economy?
To what extent has the fall in the Sterling exchange rate benefited the UK economy?
Is it possible to have a 'benevolent giant' without harming consumer rights?