Bond Market Mayhem - what happens now?

When reflecting on current conditions in the bond markets it is worth remembering two aspects of their behavior.   The first is that traders operate ruthlessly and quickly to changes in sentiment and expectations.  And secondly, these changes may appear to be based on objective assessments of ‘the numbers’ but they embody many subjective views of the prospects for returns on debt.  There is currently quite a divide between the negative mood in bond markets and increasingly positive news in the ‘real’ economy.

 The consequence of the ruthlessness and speed of action of traders is that the markets have become an

Expect the Yuan to rise ….

­­­­­­­­but not for yet a while.

There have two major developments in the last 7 days in relation to the competitiveness of the yuan – or renminbi – the currency of China.  The first was the decision by US Treasury Secretary Tim Geithner to reserve judgement on whether the Chinese are manipulating their currency and keeping it low to maintain its export competitiveness.  The second was the meeting over last  weekend of the Chinese government to discuss its plans for the next 5 years of growth and development.  Unlike western economies the Chinese continue to create 5 year plans to guide the economy.  The one now published – the 12^th - covers the years 2011 to 2016.

Funding Universities in England and Wales

Government policy in the UK has moved decisively towards a more consumerist model for funding higher education.  Traditionally we have taken the view that the wide economic benefits of having a workforce educated beyond age 18 will more than pay for the investment required to get them there.  That is to say that the economic benefit of investing in education will be seen in higher levels of economic activity and growth and therefore more tax income for the government.  On that basis the ‘taxpayer’ is more than able to bear the cost of University and still be ‘quids in’.

The balance of the argument has now moved on.  First we introduced top up fees a decade ago.  This means that currently students pay up to £3290 per year for their courses which they receive as a student loan repayable after graduation.   It is essentially requiring students to pay for a part of their education out of the enhanced lifetime income stream it gives them.  Seems reasonable.  We are now facing the prospect of increasing the top up fees to some £7000 and perhaps more.  We must wait and see the full debate as it passes through the Parliamentary process.

More fundamentally

Growth is on the up as interest rates stay low

This is the time of year when the key global institutions (the OECD, IMF and World Bank) review their forecasts for the year in view of how economic events have developed since they last published reports in the Spring.

The Paris based OECD has been especially busy this month with updates on their Spring assessment for global growth as well as some newly published views on the state of several major economies including the US.  No time to lose after ‘la rentree’.  Both reports make pretty good reading at a time when many headlines are still discussing the likelihood of a double dip in growth. 

Their autumn global update (to be found at: www.oecd.org ) admits to a slower level growth for the second half of the year but with longer term improvements on the cards and a reducing risk of a return to a downturn. 

To Basle or not to Basle....

The agreement reached at the weekend to implement new capital requirements for banks is the next step on the road towards reforming our international financial system.

The key components of the agreement are that:
a) banks will be required to hold capital reserves of up to 7% of their loans as a buffer against bad and under-performing assets.  This is an increase on the 2.5% that has been the norm in the past.  And was the woefully insufficient amount that was the norm in the recent crisis.
b) the new arrangements will be implemented from 1 January 2013 giving banks and regulators plenty of warning and time to make the changes.  Already a number of banks have announced their plans to raise capital to this end.

If fully ratified by the G20 at their meeting in November,

The Budget – a glass half empty or half full?

This week’s emergency budget delivered by George Osborne was both significant and clever.  Significant for the dramatically new direction it has set out for the future of the UK and clever for the way in which funds were found to finance specific new activities.

Depending on the viewpoint you have, you will see the measures announced in quite different ways. 

For the markets – in capital, currency and credit – it has been seen as something of a gamble.  While they liked the clarity of a plan, there are some comments that he may have overdone the size of the deficit reduction.  The facts that the budget will actually lead to lower growth than previously forecast for 2010 with higher unemployment, a higher short term fiscal deficit and will result in a net deficit of well below 3% (the forecast is 1.7%) of GDP in 2015 provide evidence for the size of his additional discretionary fiscal tightening.

If you work in the public sector, the glass contains something of a spiked cocktail or at best some nasty tasting medicine. 

The battle lines are drawn ...

The two great opposing armies of economic thought and analysis are clearly ranged against each other. 

On the one hand are those advocating a positive role for government spending as a stimulus to support the economy out of recession and back to sustainable levels of growth.  On the other is the more market-oriented approach emphasising the inefficiency of government action and the way in which large levels of public spending can crowd-out private sector investment and activity. 

Behind the lines of combat there are some ideological differences...

The economic patient is stirring

If you glance at the breakdown for growth forecasts for the UK this year you will see what an economic system looks like as it starts to climb back out of recession.

If we achieve 1.5% GDP growth this year, it will have been driven mainly by public sector growth - likely to be around 1.7% - with a small contribution by private sector spending - around 0.7% - and some offsetting reductions in investment: investment spending has collapsed over the last two years and appears to be declining at a rate of 2.4% this year.   Oddly, while exports are expected to grow pretty well this year on the back of a more competitive exchange rate (forecasts suggest an expansion of some 4.5%), these are likely to be matched by higher imports so that there is only a very small net contribution to growth from trade.

The most recent estimated figures for UK GDP growth in Q1 make two issues clear.  Firstly, to use the

When governments and the market fails....

The  volcanic ash crisis is unfolding in a fascinating way with business leaders starting to look for someone to blame - and in this case it's 'the government' or even 'governments' of the EU that are to be blamed for not realising how bad the situation was becoming over the weekend.

I was one of those potentially stranded souls without a way to get home - from the Netherlands to the UK.  In the first case I had to change plans at the last minute on Thursday to ensure I could get to a business seminar in Maastricht.  Then as the situation escalated it was a matter of wondering how to get back.

The market system responded quite well to the occasion.  Eurostar found extra capacity it could lay on and its pricing model pushed ticket prices up.  Other alternative travel routes have followed suit.  The telecomms

Commercial Priorities for the Year Ahead

The prospects for growth in the UK over coming year and beyond are becoming clear. The final revisions to Q4 data for the US and UK tell a story that both these economies grew more rapidly in the Christmas quarter than had been thought at first. It is likely that we are out of recession but still in a depressed state when you look at activity levels compared with three years ago. Opinion is somewhat divided over the pace of recovery in 2010 – indeed whether we will slip back into recession in the West if a perfect storm of poor policy plus lack of confidence in ‘the markets’ and in the real economy fails to ignite growth.

We can learn a lot about the potential unfolding of this recession by reflecting on our previous experiences. The National Institute of Social and Economic Research (NIESR) produces a time-line for the UK recession compared with the four main recessions experienced in recent times: in 1930-34, 1973-76, 1979-83 and 1990-93. If you look at the progress of the recession in months since the peak of the cycle and the level of activity in relation to that peak, you see some very clear patterns.

Letters From Economists

The problem at the heart of the argument between the economists that have recently published open letters in the Times and FT is that we all want a level of certainty that is simply not possible. The debate and conclusions that the different groups draw are based partly on what they look at when they assess the strength of the economy and partly on their judgements about what that means.