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  • Neil Williams
    Political risk is ‘trumping’ economics, with a confluence of factors such as populism...
  • Neil Williams
    In his Q4 Economic outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that even a decade after the fall of Lehman Brothers - central banks will be slow to lift a tide of liquidity still hiding the rocks beneath.
  • Neil Williams
    In his latest Quarterly Economic Outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that markets are still taking a ‘glass half full’ view of the macro outlook, with little real consideration of the new risk emerging. Until now, this has made sense, with speculation the US would open the fiscal box having justified ‘reflation trades’. However, while better for growth (see chart 1), markets are ignoring the darker cloud looming. Rather than financial distrust, we may need to brace for political distrust with the threat of beggar-thy neighbour policies - from the US to anti-European populism - rising. 2018 could be a ‘year of two halves’... In which case, 2018 could be a year of two halves, where stimulus- euphoria gradually gives way to stagflation concern. Helpfully, the trade-off is that policy rates stay lower than many expect. As chart 2 attests, the world’s appetite for international trade has, as a share of GDP, more than doubled in the past 50 years. Nevertheless, without care, the unhelpful jigsaw piece of retaliatory protectionism from the 1930s, might come crashing into place. In 1930, it was triggered by the Smoot-Hawley reforms that raised US tariffs to up to 20% on over 20,000 imported goods. This hit the US’s relatively small number of trading partners, most notably Canada and Europe, and prolonged the depression.
  • Neil Williams
    •While 2017 was again dominated by geopolitical risk, none of that was allowed to seep into financial markets. Reflation trades prevail. Yet, the frustration for central banks is that recoveries are failing to generate enough inflation to trigger their usual reaction functions. •If they truly want to get their ‘powder’ back, in terms of reclaiming policy rates while core inflation stays tame, the spirit, if not the letter, of the Fed’s dual mandate may make sense for others too. •While this may be deemed ‘hawkish’, it would be more than offset if we need to brace for more political distrust: with the threat of beggar-thy-neighbour policies - from the US to an upsurge of anti-European populism - a major risk still unpriced by markets. •Amid these forces, our macro outlook is based on five core beliefs. First, despite ‘muscle flexing’, the road to normalisation will be long & slow. Real rates will stay negative, with ‘peak’ rates ending up below what we’re used to. The question is how to drain the liquidity ‘sink’ without unintended consequences.
  • Neil Williams
    As the BoE raised rates for the first time in a decade the pound plunged and we saw the worst day for sterling since the post-Brexit plummet. Will sterling continue to struggle? And are there more rate hikes on the horizon? Neil Williams, Group Chief Economist at Hermes Investment Management, gives his take on the Bank of England Inflation Report and says the hike was a one-off muscle flex from the BoE giving them more powder to use in an economic slowdown.
  • Neil Williams
    Ten years after the first glimpse of crisis, & major economies have recouped their GDP. But, despite ‘muscle flexing’, the road to policy normalisation will be long & slow, with the prospect of another two years of negative real rates in the US, UK, Japan, & euro-zone. Our analysis suggests that by sustaining its QT programme, the US Fed could ‘take out’ as much as 130bp of further rate hikes by 2019. US rates, when they peak, should be far lower than we’re used to.
  • Neil Williams
    With UK growth forecasts downgraded and interest rates kept on hold, is Brexit already damaging the economy? Carney said the consequences of Brexit are starting to build, warning that the UK is beginning to adjust to an uncertain EU relationship. Hermes’ Neil Williams examines the damage of Brexit and why they didn’t undo the safety net rate cut. Mark Carney, Bank of England Governor, delivers the quarterly Bank of England inflation report.
  • Neil Williams
    •After 12 months in the departure lounge, our Brexit negotiations have started. Political fall-out has added an extra ‘speed bump’ on a journey likely to take way longer than the two years hoped for. •Mr Hammond’s more conciliatory tone is welcomed, but is inevitably clouded early on by ‘cherry picking’. Our negotiations could take years to potentially end up back close to square one, in terms of striking the free trade agreement that most parties want. •When the deal is struck it will need Parliamentary approval, & be subject to a ‘phasing in’ period. And this after sign-off by our 27 EU peers. Striking a US deal by the 2022 UK election needs talks to start now - well before Mr Trump’s 2018 ‘Mid-Terms’ campaign. •Which leaves the BoE watchful that a weaker pound doesn’t keep pumping inflation. The MPC could feasibly reverse its 25bp ‘safety net’ rate cut from last August. But, in the absence of a recovery in real wages, we doubt they would hike any more aggressively. •Tapering their QE reinvestments would be the gentlest way to tighten. If it helps, Mr Carney may then be able to have his ‘cake’ (unhindered consumption) & ‘eat it’ (still low policy rates)...
  • Neil Williams
    •By debating the size of their balance sheets, central banks are showing the first signs since the crisis that they may be worrying about our growing addiction to QE. After unclogging the system in 2009, QE has since been an imperfect remedy. •But, its impact may not have been properly picked up. By taking explicit account of QE & fiscal positions, our analysis suggests the true US policy rate may be as low as -4%, & -3% in the UK. •This may be just as well, as, without care, an unhelpful jigsaw piece from the 1930s - retaliatory trade protectionism - might yet come crashing into place. The impact of protectionism this time, though, could be far more complicated. •First, the economic & financial linkages suggest the knock-on would be more far reaching. Global retaliation would activate second-round effects that later offset the initial growth-impulse from Mr Trump’s intended tax cuts.
  • Neil Williams
    • The US Fed remains the test case for whether central banks can ever ‘normalise’ rates. We expect it to try, but fail - peaking out at a far lower policy rate (1¼-1½%) than in past US recoveries. • We update our ‘Policy Looseness Analysis’ to gauge how the US & UK’s overall - monetary & fi scal - policy positions should shift into 2018. By taking explicit account of QE, true US & UK policy rates may be as low as -4¼% & -3% respectively. • Running true rates this low would make the FOMC increasingly uncomfortable if at the same time the QE stock remains as bloated. • Selling the assets back is admittedly one for later, & would have to be done gradually to minimise the disruption to bond markets. But, as a precursor, terminating the reinvestment programme would surely be the gentlest way of tightening - in effect by ‘doing nothing’. • It would help keep peak rates low, & give comfort that central banks are not falling ‘behind the curve’. It may even go some way to reducing the downside of QE, evidenced by asset-price distortions, suppressed saving, & funding strains on many pension schemes...
  • Neil Williams
    •Markets are taking more than a ‘glass half full’ view of the macro outlook, with little consideration of the new risk emerging. In the short term, this makes sense, as speculation, rightly, that major economies will open the fiscal box is sparking ‘reflation trades’. •Yet, while better for growth, markets are ignoring the darker cloud looming. Rather than financial distrust, we may need to brace for political distrust, with the threat of beggar-thy-neighbour policies - from the US to anti-European populism - rising. •In which case, markets face a year of two halves, where stimulus-euphoria gradually gives way to stagflation concern. Helpfully, the trade-off, though, is that policy rates stay lower than many expect. •The impact of protectionism this time could be far more complicated than in the 1930s. First, the economic & financial linkages suggest the knock-on would be more far reaching. Global retaliation would activate second-round effects that later offset the initial growth-impulse from Mr Trump’s tax cuts.
  • Neil Williams
    Explanation of the Brexit process & The Supreme Court ruling have made the UK’s departure date & destination clearer. But, the largest uncertainty now is probably the length of the journey ahead. Our negotiations could stretch well beyond the two years assumed by Article 50. Maintaining access to, rather than full membership of, the customs union looks nearest to Canada’s model. But, this took seven years, & ours may have to be even more ambitious.