FTSE 100 follows Japan’s fall as new data spoils bullish mood

23rd May 2013

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A flurry of bearish data has sent the FTSE 100 into downfall in early morning trading with top flight losing 120 points after Japan’s Nikkei index endures its biggest plunge in more than two years writes Philip Scott.

The Nikkei, arguably due a correction, after surging by some 50% since the start of the year, pulled back after the flash HSBC Purchasing Manager’s index (PMI) for May fell below the 50 point level to 49.6 – marking the first contraction since October last year. The Japanese index closed on Thursday 7.3% per cent lower, its steepest one day fall since March 2011.

Mark Williams, chief Asia economist at Capital economics says: “Today’s sub-50 reading on the flash PMI will shake the confidence of China’s policymakers, who have remained sanguine in the face of slow growth so far this year. We suspect they will resist the temptation to inject further stimulus since this would heighten the risk of financial instability and because there is only limited evidence of weakness in the labour market.

This is the first time that the Markit PMI has dropped below 50 since October last year. At face value, a sub-50 reading signals that manufacturing is contracting. In practice though, the PMI has averaged 49.8 over the past 12 months, with industrial output expanding 9.5% year-on-year over the same period.

“The reality is therefore probably not quite as bad as may first appear. But it is bad enough, with the economic slowdown apparently deepening after a weak first quarter,” adds Williams.

In the UK, sterling fell on Wednesday as poor high street sales figures, put a spanner in the works of the economic recovery. Figures from the Office for National Statistics reported that in April sales and spending each fell by 1.3%, with the largest source of downwards pressure coming from the food sector, where, compared with March 2013, the quantity of goods bought decreased by 4.1%, the lowest since May 2011. Over the same period the amount spent in the food sector decreased by 3.5%. Bad weather was largely blamed for the month-on-month drop.

The pound dropped against the euro and the dollar following the negative numbers from the ONS on Wednesday. Dr Howard Archer, chief European & UK economist, at IHS, says: “Much of the latest news on the UK economy has been relatively encouraging; but even allowing for the negative impact of ongoing cold weather and the fact that Easter occurred in March this year, April’s marked drop in retail sales provides a reminder that the economy is not yet out of the woods and still has a challenging job to develop sustained, clear growth.”

Official data has also confirmed that the UK economy expanded by 0.3% in the first three months of the year, narrowly missing falling into a so-called triple dip recession, but the International Monetary Fund this week warned that Britain is still a long way from “a strong and sustainable recovery”.

While the UK’s benchmark FTSE 100 index has lost some ground today, it remains up a compelling 27% over the past 12 months, 5% of which the past month accounts for, but investors are now concerned about how much further this can run. Adrian Lowcock, senior investment manager at fund broker Hargreaves Lansdown says: “I am confident long term equity markets will continue to perform my concern is investors should not put all their eggs in one basket. Likewise a market correction could happen but we do not know when. Investors should be prepared for markets to fall as well as rise.”

30 thoughts on “FTSE 100 follows Japan’s fall as new data spoils bullish mood”

  1. Forbin says:

    Hello Shaun,

    Hokey cokey I guess

    you put your Forward guidance in ,your Forward guidance out
    in out , in out

    you shake it all about….

    I think you can guess the rest …

    Forbin

    1. Jim M. says:

      Hi Forbin, hi Shaun,

      While we’re hokey-cokeying in and out we might continue Shaun’s Lutherean reference with a suggestion for Mr Carney (Carney / Carnie more like… another shape-shifting untrustworthy mountebank)

      “Never too much!”

      Mr Bean offers up another cracker for the Liars’ Lexicon…

      “spurious accuracy” … which is presumably what we’re trying to avoid with all these lovely guesstimates that we’ve been discussing of late.

      1. Anonymous says:

        Hi Guys

        Mr.Bean did offer up another good one which was that the Bank of England did not lead people to think that Forward Guidance mark one meant that Base Rates would rise in 2016. What it did do was to set an unemployment rate target of 7% and then forecast it would be achieved in 2016. What did it expect people to think?

        I bet the story would have been completely different if Forward Guidance had been accurate!

  2. Mark G says:

    If it wasn’t so important it would be comical. Certainly doesn’t inspire confidence from where I am sitting.

    1. Anonymous says:

      Hi Mark G and welcome to my corner of the blogosphere.

      Even our political class has spotted this as the MPs pointed out several times today that policy keeps changing. One went so far as to call the Bank of England as being like an “unreliable boyfriend”.

      This completely undermines that claim of Mark Carney that Forward Guidance helps people to invest and plan ahead. I wrote about this from the beginning after all the Bank of England has had a shocking forecasting record in the credit crunch era so it was always likely to get things wrong.

  3. Drf says:

    “How many more times will Mark Carney “flip-flop” on UK monetary policy?” Answer – in perpetuity, for as long as he can play this game!

    1. Anonymous says:

      Hi Drf

      I suspected from the beginning that for Mark Carney the Governorship of the Bank of England was a stepping stone to what he considers to be greater things, Hence the change in the term to five years. So we have just over four years of it left it looks like, unless of course the sort of job he wants is not available at the time.

  4. Paul C says:

    Shaun,
    The papers are full of it, how our desire for high multiple mortgages will be culled by bank oversight and the imminent raise in rates will be enforced by the banks. I think the 0.25% increase is really going to be a damp squib when it finally lands in the Auutmn. Money of course should have been correctly priced for the last 5 years at 5-7% but of course no one and least of all the Govt borrowing could have survived that.
    Any perceived uptick in the economy and strange house prices are all a result of 5 years of financial repression. A rate rise of only 0.25% is only a continuation of that same supression (less 0.25%). If things were normal, really booming and economy then a 5% rate call would reflect true due diligence from our “leaders”
    Here’s hoping.

    1. Anonymous says:

      Hi Paul C

      Sadly such questions do not tend to be asked at such events. For example they could be asked that if the recovery is as good as they say it is why do we still need a Base Rate that according to Mark Carney today said was a low as it could go. This in itself was an odd statement when the ECB has gone into negative interest-rates.

    2. Eric says:

      I think you’re right on the price of money, Paul.

      There’s a point at which the further easing of monetary policy ceases to have the desired effect. The experience of the last 5 years (and the previous 300) suggests that the point is 2%. Reducing it further only helps the banks – borrowing at next-to-nothing and charging you 18%, or more, on your credit card. It doesn’t seem to have encouraged consumers to borrow and spend. ZIRP means emergency; and emergency creates fear.

      And of course, any interest rate should reflect the risk. How much interest do you really want for lending your money to a bust bank? The FSCS isn’t a free guarantee. Savers are paying a huge price.

      The MPC has dug a hole and is now finding it very difficult to fill it in again. They plan to fill it in very slowly with very small pieces.

      They will tell you the alternative would have been worse.
      Worse for who?

  5. Pavlaki says:

    Again I question the statistics the governor is working with and the apparent inability to forecast the economy with any degree of accuracy at all! I begin to wonder if the B of E should have representatives who’s job it is to get out and talk to businesses both small and large to get a better feel for things. Relying totally on economical statistics appears to guarantee that they are behind the curve in most matters and not feeling the pulse of he economy. The governor is an intelligent man and I am sure that if the stats were telling a more accurate picture then he would as well. Where do you think that the B of E is missing input that could improve its poor forecasting record?

    1. dutch says:

      I’d question the methodology the governor is working with.

      All this making the 1% richer,’trickle down economics’,asset bubbles,bailing out banks has created a sesspit of debt that we can’t climb out of.

  6. Fraser Bailey says:

    These people are nothing more than the developed world’s equivalent of witch doctors. Why anybody gives any credence to a single word they say is beyond me.

    1. dutch says:

      Bit harsh on witch doctors fraser…

    2. Anonymous says:

      Hi Fraser and welcome to my part of the blogosphere.

      In essence central bankers attract attention because they have power! Indeed the credit crunch has seem them be encouraged by politicians to use ever more of it. There has been a takeover of much of economic policy by them and many markets now dance to their tune. So there is an interest in what they say but the intelligent will note that their credibility and credence is falling as fast if not faster than their rise in power.

  7. Anonymous says:

    Thank you very much for this column, Shaun. I wouldn’t know
    when anything happens at the Bank of England if I didn’t read your blog. At the TSC hearing, Governor Carney may have made a Freudian slip regarding Martin Weale. He said that when forward guidance was introduced in August, Mr. Weale was the sole dissenter on the MPC, because he disagreed about the “appropriate level of the inflation knockout”. However, this was not what got reported at
    the time.

    http://www.ft.com/intl/cms/s/0/15fe9250-050b-11e3-9e71-00144feab7de.html#ixzz2c9eXz0Rz

    According to FT, writing on August 14: “One of the three…’knockouts”,
    that _ if breached _ will force a rethink on guidance is that the MPC views it more likely than not that inflation will breach 2.5 per cent between 18 months and two years from now. Mr. Weale thinks this time horizon is too long.”

    During the press conference on August 13, Paul Wallace of The Economist said: “Given the first knockout, one interpretation of that would be that you’ve – or the MPC has temporarily raised the inflation target to 2.5%.” It seemed the obvious interpretation of that knockout. The rebuttal from Governor Carney was unconvincing. One wonders if Mr. Weale didn’t have similar qualms about effectively hiking the target rate of inflation by half a percent and he just didn’t want to express them in public. So Governor Carney wasn’t really mischaracterizing his dissent; he was revealing what he said in private ratherthan in public.

    This is not really strictly a historical issue. The unemployment
    knockout may have expired in February but the inflation knockout doesn’t seem to have been altered in any way, and still seems to mandate a 2.5% target rate of inflation. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      The odd bit about Martin Weale’s role as a dissenter is the way that he only did so once. From the August 2013 MPC Minutes.

      “One member of the Committee (Martin Weale), while supportive of the adoption of forward guidance, voted against the proposition in order to register his preference for a time horizon for the first inflation knockout that was shorter than proposed. He nevertheless intended to form his future judgements about the application of guidance and the knockout criteria in line with the framework adopted by the Committee.”

      So is he now for or against and what about the time up to now?

      As to the minutes I find myself being reminded of the brilliant definition of them by Sir Humphrey Appleby in Yes Prime Minister, which reinforces your point.

  8. GusBmth says:

    Hi Shaun

    Even in a working paper, the Bank;s language is deliberately confusing:

    ‘We find that a 1 percentage point increase in the policy rate reduces output by up to 0.6% and inflation by up to 1.0 percentage point after two to three years.’

    What they mean, I think, is that output would be reduced by up to 0.2% per annum and inflation would be up to 1.0 percentage point lower in years 2 and 3. Up to 0.2% in the context of GDP numbers is almost a rounding error.

    This is a tacit admission that ultra loose monetary policy is quite ineffective in stimulating economic activity, (pushing on a string) but does push up inflation. However, I think their analysis is quite flawed. The impact of a rise in the policy rate depends on timing and doesn’t follow a simplistic model. By allowing inflation to rise above 5%, they also caused a fall in real wages, which depressed economic activity. A rise in rates at that time may well have increased output – a point that you argued, a voice of reason in the wilderness. The impact of a 1% rise in rates at this time depends critically on the assumptions one makes about the impact on the currency and of course the housing market – the elephant in the room for any discussion about monetary policy in the UK.

    The Bank has supported the housing market at artificially high levels through ’emergency’ levels of interest rates and liquidity in order to protect the banks. From here, it is difficult to imagine what the desired outcome for the housing market is from the Bank’s viewpoint. Price rises of 0 to 3% combined with nominal wage s growth of 4% underpinned by productivity growth allowing a very gradual revaluation of the market? Maybe they’re hoping to very gradually raise rates when wages finally start to grow and maintain a ‘goldilocks’ not too hot not too cold housing market.This is an impossible task to achieve, especially given the Bank’s inability to forecast anything about the economy with accuracy.

    If an institution sets itself an impossible task, it is hardly surprising that its members look like flip-flopping chumps in trying to achieve it.

    1. Anonymous says:

      Hi Gus

      As you point out there are various issues with this type of analysis. My suggestion would be that the Base Rate rise impact would not rise in a straight line. For a while nothing would happen at all and all the action would be in year 2 and 3 . Hence the importance of getting ahead of the curve.

      Also the impact will differ as to where we are in interest-rates. The Bank of England is not so keen on that as it is afraid that the last cuts were pointless and may even have done some harm.

      Where we are and what we are thinking at the moment in time matters too in what is an ever growing list!

      1. GusBmth says:

        When economic historians look back at this period, I suspect their conclusion will be quite simple – ‘too much for too long’; Base rate cut too low, the last tranches of QE ineffective, neither policy error reversed in a timely fashion.
        The danger of being behind the curve is the need for a rapid response in the future, risking a second ‘great recession’ – not a certainty, but sadly a probable outcome.

    2. Eric says:

      Hi Gus,

      The MPC should not be in the business of setting itself tasks – impossible or otherwise. Its remit is clear. To keep inflation on target and support HMG’s economic policy with respect to growth and employment. They don’t have dual objectives. The remit is reaffirmed by the Chancellor in March every year – lest they forget.

      But these days it’s looking more and more like the Chancellor’s Back Office. An office full of – as you say – chumps.

      On the other hand if the MPC wants to (try to) run the country they should stand for election.

      1. GusBmth says:

        If the MPC had targeted an inflation measure that included a realistic measure of house price inflation, we might not have ended up in quite such a mess. If they were targeting that now, we’d have had a very different monetary policy. Sadly, as you say, they act more like the Chancellor’s back office than an independent central bank.

  9. Noo 2 Economics says:

    “Indeed the April annual growth rate for regular pay of 0.4% was the lowest in this series which goes back to January 2001.”

    An interesting nuance to this appears here – http://www.vocalink.com/about-vocalink/news/press-releases-2014/vocalink-take-home-pay-index-real-pay-growth-continues-for-ftse-350-employees.aspx.

    Whilst it relates to take home pay in May for the FTSE 350 rather than gross pay throughout the UK in April it provides an insight into who the winners and losers are.

    1. Anonymous says:

      Hi Noo2

      Thanks for the link. The message is not that dissimilar is it? Higher numbers than the official ones but still weak pay growth. I do not see the Bank of England doing anything until they think that wages have picked up. As to the link they might want to reconsider this bit “real take home pay growth is slowing on the back of a fall in inflation to 1.5%.”

      1. Noo 2 Economics says:

        Er yes! Because you are tying to talk down wage growth implying that it is failing to keep pace with inflation when the numbers mentioned in the link are already adjusted for inflation and show real wage growth albeit at a snails pace.

  10. Noo 2 Economics says:

    Hi Shaun,

    Face it, currently, despite protestations to the contrary Carney is looking at one thing and one thing only – the housing market.

    He sees the MMR looking like it’s beginning to bite and take the heat out of the housing market so he thinks he’ll leave rate rises a little longer. Earlier when he spoke of “this year” the latest stats said the housing market was roaring ahead. I don’t think he cares if the economy overheats (as I think it is becoming likely to) and inflation goes up – in fact all the better for debt.

    I also believe all the UK authorities are scared to death of a repeat of Thatcher’s great blunder at the end of the 80’s as she almost doubled rates in 2 years thereby making hundreds of thousands homeless as they failed to keep up their mortgage payments which in turn lead to a jump in social security expenditure and then the inevitable housing market slump and recession in the economy.

    So if you want to know where Forward Guidance is going next – watch the housing market.

  11. Eric says:

    Good stuff again Shaun,

    I still quote your memorable line – “a group of people in a dark room fumbling for the door handle” – the fumbling just gets worse.

    I don’t know how much more of Fred Karno’s circus I can stand.
    There must be an appropriate song from weird Al Yankovich; like – “Canadian Idiot”

    Geeeezus, what a mess.

    1. Anonymous says:

      Hi Eric

      Sadly for the purposes of satire in the UK Green Day wrote about an “American idiot”! Oh and the group in the dark have found neither the door handle nor the light switch.

      1. Anonymous says:

        An American idiot can have a wide geographical spread from the Yukon to Tierra del Fuego. So I think Carney qualifies as American ….

      2. Eric says:

        Yes but Weird Al said the Canadian Idiot was up to something and recommended a pre-emptive strike.

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