Do the markets agree?

From the FT:

The strength of the UK economy is drawing covetous and occasionally envious glances from the eurozone as investors from around the world size up the opportunity presented by Britain’s recovery.

The UK economic revival has taken almost everyone by surprise, confounding domestic and international forecasting groups. Having failed to predict the turn, most explain the sudden resurgence as a rebounding of confidence linked to the removal of previous impediments to growth, such as weak banks and fears of a eurozone crisis.

Some economists believe the UK will be the world’s fastest growing developed economy over the next five years.

In a recent post Scott Sumner writes:

Effective monetary stimulus will lead to higher long-term rates.  The key is to make sure those long-term rate increases reflect the growth impact of policy, and not monetary tightening.  That’s why you focus on other asset markets like equities and forex rates.  If equity prices are falling and the currency is strengthening, then the higher rates may reflect tighter money.

What are these market signals saying about Britain´s growth prospects? Unfortunately, equity prices are falling and the currency is strengthening!

Do Markets Agree_1

In Japan, the opposite is happening:

From Lars Christensen:

Talk of further monetary stimulus from the Bank of Japan helped push the yen to a six-month low and lifted the Nikkei to a six-month high on Tuesday, and the move in Japanese assets may have further to run, analysts say.

Comments made by Bank of Japan (BOJ) governor Haruhiko Kuroda on Monday fueled speculation of further easing, after he told participants at a conference “we are ready to adjust monetary policy without hesitation if risks materialize.”

What are the markets signaling?

Do Markets Agree_2


6 thoughts on “Do the markets agree?

  1. The FTSE 100 can be a little misleading as an indicator of UK domestic demand because some large % of revenues for the constituents are from outside the UK. I prefer to use the FTSE 250, which is doing a bit better this year. And inflation expectations are stable. You are right about sterling… but I only see “falling NGDP expectations” flashing at yellow at best… not red.

  2. Also rising interest rates cause falling equity markets through the discount rates. The bond market has been steadily selling off. Not only through changes in the ten year rates but also through bringing forward the steep part of the curve, which also affects discount rates.

      • Yes, but its not clear how much of this gdp move was expected. The equity market in the UK is up more than 10% since July, and 20% for the year. I think it’s a mistake to read too much into a move which could be nothing more than noise.

        Similarly, for any given level of NGDP, a rise in RGDP will cause a currency to strengthen since it raises real rates. This is the good kind of strengthening. Provided ngdp expectations stay stable this is not necessarily a tightening.

        Also rising rates gives conventional policy more bite, since it is the difference between equilibrium short rates and the short rate which matters most.

        Anyway, it seems to me that there is every indication that the UK economy is gathering pace. Could easily see 4% RGDP next year. Even financial services are hiring again. The productivity gap is eroding, allowing strong output with weak inflation. We are in the sweet spot for inflation targeting, when falling supply side pressures will cause catch up ngdp growth. A bit late but better late than never.

  3. WoI, In the 3 months that followed Carney´s Dec 12 speech the market went up by more than 10%.
    I´m really looking at a very short period, checking the effects of recent speeches and statements by the “authorities”. It may well be that the UK will show a robust rebound. But the markets have not yet “bought that”.
    And surely, in “normal” conditions a strenghtening of RGDP (given NGDP expectations), as is the case of a positive supply shock, the currency will strenghten (and stocks will climb).

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