June, 09 2017 by lsr team

Christopher Granville comments on UK election results:
- Minority Conservative government potentially bullish for economy
- Short-term Brexit process risks stem from political weakness
- Growth – now right on potential – to slow to 1%, recession risk is low

June, 02 2017 by lsr team

Ken Wattret, Chief European Economist, talks about our latest Europe Watch publication Economics: ECB meeting – what to expect 
- Upbeat on growth, cautious on core inflation; financial conditions a concern
-  Easing bias  should go but probably stays for now; exit discussion more likely Politics: Italian elections draw near; May’s wobbles 
-  A risky autumn election in Italy is looking more likely
-  PM May still in pole position but weakened by a poor campaign Markets: Dancing round the May pol...

May, 30 2017 by lsr team

Christopher Granville explains why there needs to be a Brexit Plan B.
- UK Brexit negotiation process creates economic risk
- The UK government may or may not be able to deliver ‘Plan A’
- Businesses need a credible Plan B before the end of 2017
- Failure to set out the alternative will see investment collapse

January, 23 2017 by lsr team

Questions: 1) Last October you noted that Sterling(£) was getting oversold and that the market was overly concerned with respect to the UK’s external balances. 2) Currently on a real effective exchange rate basis how cheap is Sterling(£)? 3) You also highlighted previously that within an overall negative view on sovereign bonds(ex EM high yielders), gilts might be particularly vulnerable? 4) So one of our key macro trades remains short gilts/long US Treasuries? 5) Last week before PM May’s speech you suggested that whatever its content...

January, 20 2017 by lsr team

- Germany & EA both growing above-potential, inflation rising
- Less inordinate ECB stimulus to be announced this summer
- Rising euro vs. dollar later in 2017 to put pressure on Italy
- Germany to accept fiscal union, or Italexit a risk in 2018-19
- Ultra-cheap euro, huge trade surplus: a cause of Brexit-Trump
- World impatient with prolonged resolution of new euro-crisis
- German domestic imbalances could shrink over 10-15 years
- Baby boomers retire – saving down. Immigration raises capex

October, 14 2016 by lsr team

The euro area LI continues to put in an above consensus call. It is probably over predicting growth somewhat but its strength is fundamentally underpinned by the newly emerged German locomotive. While German demand often turns out to be derived from others, chiefly China, in this case it is genuine. In fact, this is highlighted by our below consensus Australia call. China’s stimulus has not fed through to a rebound in private demand, although easing PPI deflation is helping manufacturers.

September, 30 2016 by lsr team

Events such as Brexit throw a spanner in the works of economic models and analysts are left with a wide range of plausible inputs. At the worst extreme, fear of Brexit becomes self-fulling and weighs on spending decisions, in turn crimping consumers’ style. Over-gloomy estimates prompt businesses to delay expansion plans. Firms make their capital spending projections based on these forecasts and they have not been in short supply. Undoubtedly, capex plans will be adversely affected by the uncertainty hanging over them. While a wide range of business sentiment indicato...

August, 05 2016 by lsr team

In our UK Outlook published shortly after the UK’s Brexit referendum, we outlined our expectation for the August MPC meeting of a 25bp interest rate cut and a new QE programme of around £100bn. At the time, the market was expecting a rate cut but the resumption of QE was a firm off-consensus call. When it came to it, the Bank of England delivered the quarter-point rate cut and, as yesterday’s re-pricing of sterling and the gilts curve demonstrated, surprised the market with a new £70bn QE package. To find out more, click above to watch the video o...

July, 15 2016 by lsr team

With central banks ready to raid their emergency tool kits and the ECB rapidly absorbing most of the euro area’s bond market, it is perhaps understandable that Brexit hasn’t triggered a wider deterioration in European financial conditions. The economy however will take a hit in coming months as the UK is an important market for many euro area exporters. That said, Brexit has had a significant impact on European banks, especially Italian lenders. Currently, Italian non-performing loans stand at around €210bn-360bn, or around 20% of GDP. Click above to wat...

July, 07 2016 by lsr team

Last quarter we warned that, although growth was likely to remain positive during our 2-year forecast horizon, the end of the cycle was now in sight. Since then the Brexit vote has dragged forward the debilitating effect of final demand uncertainty on investment that we would normally associate with the very late cycle. As a result we expect a technical recession during H2 2016. To find out more about Brexit’s impact on the UK economy, click above the watch the video or below for our latest UK Outlook report.  

June, 30 2016 by lsr team

The UK voted last Thursday to leave the EU. So far at least, market reaction to the news hasn’t been anywhere near as violent as the doomsday predictions before the vote implied. There is little evidence of either liquidity stresses or contagion so far. We believe that the imminent risks of contagion may be quite limited as, unlike in 2008, there is no major drying up of liquidity to force a widespread liquidation of risk assets. To find out more about Brexit’s market implications and our views, click above to watch the video or below for our latest Macro Str...

June, 22 2016 by lsr team

June would have been a busy month for event risk by any measure, with ECB, Fed, BoJ and BoE policy decisions, an OPEC meeting at the start of the month and Spanish elections at the end. But all these have been completely overshadowed by the EU referendum the UK will hold tomorrow on June 23. With the emphasis very much on the short term, we focus on two aspects of Brexit: what’s likely to happen and how to position for it. Click above to watch the full video or below for our latest Asset Allocation report on Brexit strategy.

May, 19 2016 by lsr team

Everyone likes a close race, and the media are trying really hard to portray the upcoming referendum on the UK’s membership of the EU as one that could go either way. In most surveys, the percentage of Undecided votes is very high – typically between 15% and 20%. With both Remain and Leave well below 50%, it is clear that it’ll be the people who haven’t made up their minds yet who will determine the outcome. To find out how investors can position themselves ahead of the vote, click below.

May, 16 2016 by lsr team

Depending on who you believe, Brexit would either cause a crisis on a par to what happened in 2008, or herald the start of a British economic renaissance, an era of free trade and rapid deregulation. The truth, of course, is that nobody really knows what will happen because the outcome depends on what policies and institutional arrangements are put in place following the referendum. The only thing we know for sure is that this situation is causing considerable uncertainty and a Brexit vote would compound any short-term damage that is doing to the UK economy. While Brexit...

April, 07 2016 by lsr team

We held a client seminar on the economic impact of Brexit in June 2015 – as always at LSR we like to be well ahead of the curve! As we stated then, the longer term implications of a vote to leave are likely to be small in either direction. However, since the middle of last year our concerns about the immediate impact of the referendum have been amplified by the declining household savings rate. With consumer demand closer to the end of its own cycle, any investment disruption will be keenly felt. Our senior economist, Richard Batley discusses Brexit and its impact...

March, 24 2016 by lsr team

We recently published the Q2 2016 edition of the LSR UK Outlook. Our central forecasts assume that the UK remains in the EU, but we also modelled a ‘Brexit risk’ scenario. This risk involved shocking the model in a number of different ways, in particular by weakening trade-weighted sterling, increasing the level of household’s precautionary saving and reducing the share of business investment associated with exports to the EU to a ‘depreciation-replacement’ only level. The difference in the quarterly profile of growth between our central pro...

March, 04 2016 by lsr team

March is a busy month for central bank watchers. The fun starts next Thursday in Frankfurt with the ECB policy decision, before moving to the BoJ (15th), the Fed (16th) and the BoE (17th). With investors concerned about the state of the global economy and wondering whether monetary policy is reaching its limits, markets are looking for a central bank response. But outside the euro area, we don’t expect a great deal of action. Market rate expectations for the Fed and the BoE have already dropped sharply (down 75-90bps since December) and some comforting words should be...

February, 25 2016 by lsr team

We held a client seminar on the economic impact of Brexit in June 2015 – as always at LSR we like to be well ahead of the curve! As we stated then, the longer-term implications of a vote to leave are likely to be small in either direction. However, since the middle of last year our concerns about the immediate impact of the referendum have been amplified by the declining household savings rate. With consumer demand closer to the end of its own cycle any investment disruption will be keenly felt. To what extent sterling will contin...

February, 23 2016 by lsr team

With the prospect of a June referendum hanging over the markets, interest in Brexit trades has heightened. There is currency-market evidence showing that speculative investors have been positioning for a possible Brexit principally in the FX options markets. Indeed, a chunk of decline in sterling during late December and January may be related to the build-up of option-market positioning, since spot market positioning indicators do not show evidence of extreme short positioning so far (see chart above). Our central view is that sterling will remain the main shock-absorbi...

February, 15 2016 by lsr team

The UK cycle is rapidly maturing. We have stressed before that uncertainty over Brexit is likely to add a burden to the end of the cycle, dampening investment intentions just when consumption bottlenecks would otherwise have driven up capex. As with the Scottish referendum, polls have narrowed. The latest poll of polls put those who want to remain in the EU on 51%, with those who wish to leave on 49%. Many of those who expect an exit presumably think it would be a good thing. But in the short term, uncertainty over how Brexit would affect trade and capital flows will tak...

February, 10 2016 by lsr team

It was almost exactly a year ago that various bond yields in Europe turned negative, unleashing a wave of questions from our readers. Clients wanted to know what this strange phenomenon meant and how long it would last. Twelve months on, far from proving to be a temporary aberration, central banks in Europe have taken their policy rates deeper into negative territory. Now the Bank of Japan has joined in and helped push the 10-year government bond yield to almost zero today. With risks to the global economy intensifying, there is even speculation that US and UK rates coul...

January, 29 2016 by lsr team

Both the UK and the US are relying on consumers to power recovery. But while British households have largely shaken off the after-crisis blues, their US counterparts seem to be suffering from a case of Post-Traumatic Stress Disorder caused by past job and home losses. The difference is clearest in the savings rate. In both economies, there is a strong historical relationship between wealth and savings. However, whereas American consumers are currently saving more than their wealth ratios would suggest, UK consumers are setting aside less. What has driven this divergence?...

January, 08 2016 by lsr team

While it is always dangerous to extrapolate from the recent past, the consensus expects 2016 to look remarkably like 2015. The issues that have dominated market commentary over the past 12 months – EM weakness, global deflation and central bank divergence – remain the sellside’s favourite 2016 themes. There is also a surprising amount of agreement about what will happen. Growth will move sideways, inflation will remain too low and the divergence trade has further to run. T...

December, 09 2015 by lsr team

Twelve months ago we said 2015 would be a year of ‘deceptive calm’. With the S&P 500 up 5% and US 10-year yields around 5bps higher, you could say our forecast was accurate. Markets spent much of the year in an anxious state, fretting about Greece, then China, then the risk of a synchronised global recession. In 2006 and 2007, LSR had a high conviction that a financial meltdown was about to wreak havoc on the global economy. This time around we stick with our 2015 theme ‘Keep Dancing’ but with no great conviction. Looking ahead to 2016, China...

November, 16 2015 by lsr team

Back in 2008 when central bankers were battling the global financial crisis, they knew they needed extraordinary measures to calm markets and guard against a collapsing world economy. But no one expected that seven years later interest rates would still be at emergency levels and that quantitative easing had not only been on a greater scale than first envisaged but had not even started to be unwound. Clearly, in the words of Lord Mervyn King, governor of the Bank of England (2003-2013), “the conventional approach to thinking about monetary policy doesn’t seem to...

November, 09 2015 by lsr team

The Bank of England’s Mark Carney, who has been a accused of flip flopping over the past few years, turned dovish again on ‘Super Thursday’ as he unveiled new macroeconomic projections that served to push back market rate expectations. Given the downside risks to global growth and with the ECB on the verge of expanding its stimulus, the MPC clearly felt that a little dovishness couldn’t do any harm. As a result, most investors don’t expect interest rate ‘liftoff’ until late 2016, with increasing speculation the first rate hike might...

October, 20 2015 by lsr team

Concerns over a slowing China and its knock-on effects on other emerging markets (EMs) have triggered stock market turmoil in advanced economies over the past two months. Investors have started to question whether developed economies, including the UK, can shrug off EM weakness. Meanwhile, expectations of the first Bank of England interest rate hike have now been pushed back to December 2016. What are the impacts of a slowing China on the UK? Will the slowdown in EM growth led by China hinder UK’s domestic-led recovery?  Click below to find out.  

September, 22 2015 by lsr team

In a recent note, we highlighted increasing EM political risk. Emerging markets constitute the ‘deflationary’ leg of our ‘deflationary boom’ forecast for the global economy. But heightened political risk is not just an emerging markets issue. Greece, for example, just held its third election in nine months. In Spain the rise of two new reformist parties, Podemos and Ciudadanos, effectively ensures that a coalition government will emerge from November’s election. Australia has had four prime ministers in 27 months whereas the previous four premi...

September, 16 2015 by lsr team

When oil prices crashed last winter, the world’s major central banks were planning to ‘look through’ this development. They argued the impact would be temporary, with inflation quick to rebound. This view has been broadly correct- inflation in developed economies is close to a trough and should rise by early 2016 thanks to favourable base effects. That said, the global economy is clearly more deflationary than policymakers anticipated at the start of the year. Meanwhile, China’s slump has caused a broader EM downturn, which is weighing heavily on...

September, 01 2015 by lsr team

The yuan’s relatively small depreciation cannot explain its huge impact on investors’ attitudes. Rather, it served as a reminder of the persistent, powerful global deflationary trend. In the UK context, sterling strength has amplified global deflationary pressure on UK economy. Our analysis suggests that currency strength alone will have been sufficient to push annual CPI inflation around 0.5% lower today than it otherwise would have been. Along with large falls in energy prices, global deflation has done more than enough to contain any pick-up in inflation t...

August, 03 2015 by lsr team

The productivity puzzle is a central topic for investors, especially those investing in the US and UK. Productivity, which measures how much output an economy produces per unit of labour input, is a crucial determinant of living standards. Faster productivity implies that an economy can expand faster without causing inflation to rise. The fact that productivity has slowed sharply since the global financial crisis in 2008 is a big deal and economists and policy makers have spent considerable effort trying to explain it. What caused the productivity crash and how does slow...

July, 30 2015 by lsr team

Recent comments by various MPC members and last week’s MPC minutes make next week’s Quarterly Inflation Report an interesting event to watch. Since the recovery began in mid-2013, policy discussions have centred on the debate between the economy’s cyclical strength and structural weakness in the labour market. Labour market conditions, however, have improved over the past year with a sharp rise in employment and wage inflation picking up. The UK’s domestic recovery is becoming increasingly solid, but is still vulnerable to external weakness, mostl...

July, 14 2015 by lsr team

 ‘Britain deserves a pay rise and Britain is getting a pay rise’, George Osborne announced during his Budget speech on Wednesday. A key aspect of our outlook, which we discussed before the UK general election, was that wages would grow faster than assumed in March 2015 and so the cyclical improvement in the deficit was likely to be stronger. The OBR has now made this adjustment by upgrading its wage inflation forecast. With forecast changes augmenting tax-raising measures to the tune of around £4bn per year, the government chose to slow the pace...

June, 17 2015 by lsr team

Following the surprise result of the UK general election, sterling markets are still faced with the prospect of political uncertainty.  An in/out EU referendum has to be held before the end of 2017, and most likely will be in late-2016.  The prospect of another fiscal rule intended to lock-in budget surpluses could have the effect of introducing a politically-motivated volatility. In the meantime, the UK economy is shaping up to enjoy a period of stable, non-debt dependent growth led by the consumer sector.  LSR’s Richard Batley introduced the sem...