Aurelia Butler

Base effects are an important part of inflation: a big monthly jump in prices can look like a sharp fall once, twelve months later, it drops out of the year-on-year rate figures. These effects can be hard to visualise, a situation this article won’t really rectify. You can begin to crudely predict the next year-on-year inflation figure (eg for February) by taking the latest year-on-year figure (ie for January), deducting the month-on-month reading for the earliest month of the 12 preceding that January (ie the previous February), and then adjusting it by however much you think prices changed in your current February. Simples.Apply that system to February 2024, UK inflation stats for which will drop next week, and you get:(4pp [Jan 2024 y-o-y rate] – 1.1pp [February 2023 m-o-m rate]) + ???pp [February 2024 m-o-m] = ~~~2.9 per centGet the latest-month vibes roughly right, and you too could be a sellside economist.Looking at year-on-year inflation figures as the sum of 12 batches of monthly components is one of those things that is somewhat visually interesting:You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Another way of thinking about it is that every year-on-year price inflation figure starts its life as a single, embryonic month-on-month figure, and spends then spends 11 months developing into its final form.By crudely adding together month-on-month figures for UK CPI inflation, we can kinda, sorta, ish, see in a forward-looking fashion how base effects work.(Caveats: the following charts use figures that are all slightly out, which we think is a result of how m-o-m figures are rounded by the ONS but may also be our own incompetence. There’s almost certainly a better way that involves the year-on-year monthly figures, but we’d already committed too much time to doing it incorrectly.)Using this probably flawed system, here are the figures as they developed (use the filter to select your favourite reading):You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Viewed this way, you can hopefully see how big base effects kick in, creating big steps up and (particularly) down in inflation. This is especially acute in the UK, where the price cap system means that energy inflation undergoes sharp quarterly adjustments rather than developing more organically.As an alternative, here’s how the readings look developing in parallel:You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.What, if anything, does this teach us? It might prompt sinful thoughts like: “Wow year-on-year inflation sure is meaningless outside of certain contexts such as annual spending decisions!”Anyway, March’s inflation figures look like they may be roughly on target, while April could be the first of several undershoots.A Bank of America note published yesterday says:By a quirk of timing, the April energy price cap reduction is likely to help propel UK inflation to target, but things are not so pretty under the hood, as our Chart of the Day shows. The UK inflation persistence problem hasn’t gone away and will need materially higher real policy rates to deal with it, relative to peersSaid chart:(If you’re finding that hard to read, it’s:— Y-axis: % of inflation components— X-axis: % inflation rate)BofA analyst Mark Capleton’s argument is that, even as a target undershoot looms, “the UK’s underlying inflation picture is considerably less benign” than that of the eurozone (an argument for shorting gilts).Part of his argument hinges on a long-standing error in how the Office for National Statistics measured clothing price inflation:We’ve said before that the UK’s underlying inflation persistence problem long-predates Brexit, although it was aggravated by it. When we point out that the UK “had to wave a bigger stick” than its peers (needing much higher average policy rates, Exhibit 3) before the global financial crisis, in order to keep inflation in check, we are often countered with the fact that the UK did actually report lower average inflation than the US and Eurozone in that period.Except it wasn’t really like that. The UK reported severe clothing price deflation that didn’t actually happen, as a result of a sampling discontinuity glitch (Exhibit4), and this persisted for a very long time. Despite the relatively small weighting of clothing and footwear, the BoE estimate that this error resulted in overall CPI inflation being understated by 37bp per annum, on average, until it was fixed in 2010.Relevant charts:Capleton, cont.:This isn’t to say that the UK should price materially higher inflation than Eurozone (although it does). Our take would be that the UK has a much tougher fight on its hands, which will require meaningfully higher long term real policy rates, and this isn’t priced.The important context to this, of course, is the UK’s massive levels of planned gilt issuance, which BofA says creates a key fragility. Capleton deploys a chart from the Institute for Fiscal Studies, showing how poor the UK’s indebtedness position looks on a Public Sector Net Worth footing (which attempts to show indebtedness in the broader context of a state’s assets and liabilities):It’s worth caveating that chart, from a chapter in the IFS’s Green Budget last year, a little. As its author Ben Zaranko wrote:Performance against a public sector net worth target would tell us little or nothing about the government’s ability to access capital markets or service its debt… An increase in the estimated value of an asset the government cannot sell cannot be taken as a signal that the government can afford to borrow more.Nuances aside, Capleton says:[After] the Budget, we can say once more that the gilt market call on investors is simply huge – relative to GDP, relative to domestic savings, relative to the current stock of privately held Gilts, and relative to the stock of defined benefit pension liabilities (which are now half their 2020 peak market value).This debt burden can be expressed in a variety of ways, none of which are very cheerful:We’ve written plenty about quantitative tightening (and more is coming 🥳), and the impact of Bank of England active gilt sales piling on top of sizeable Debt Management Office issuance.BofA’s estimate is that the DMO will make £125.4bn of net gilt sales this year, with a further £89.7bn in net supply from the BoE — “equivalent to almost 15% of the currently outstanding privately held stock of Gilts”.The vicious cycle here is worth re-iterating: issuing debt from the DMO is more expensive because the BoE is selling gilts —y̶͎̾i̵̝̓e̸͓͆ľ̵̳d̶̬̒s̴̴͓̺̍̀m̴̗͊o̸̢͐ṿ̵͋e̶̴̤̗̓̈́í̶͍n̸̲̈́ṿ̴̎ḙ̶̓r̸̟͛s̴̢̓ë̴̠́l̵͇̄ỹ̶̴̲͚̽t̶̛͚o̸̵͚̼͂͘p̷̥̓r̷͖̊i̴̙̍c̴̦̔ē̵̝s̷̟͂— and more debt has to be issued because indemnifying the BoE against the losses on those gilt sales reduces fiscal space. It is a deeply unlovable situation, one that will potentially constrict the UK economy for years, and nobody really seems to know a way out.*Capleton concludes:This all leads, perhaps inevitably, to a reiteration of our bearish gilt bias, relative to other markets.There will undoubtedly be some celebration when, in sort order, UK annual inflation falls below target. There might even be an election, according to some reports. We’d hold off on ordering the cake.*simply yelling “growth” repeatedly doesn’t count.Further reading— The unbearable tightness of BoE’ing— The Bank of England is misusing its fiscal powers More

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A flood of Chinese-produced solar panels is driving prices to record lows in the US, a boon for renewable energy developers but a threat to solar manufacturers trying to create a domestic supply chain for the country’s fastest-growing source of electricity generation.China, the dominant solar equipment supplier, doubled production capacity last year to more than 1tn watts and now produces nearly three times more panels than global demand, according to the International Energy Agency and Wood Mackenzie. Global prices for panels have fallen 50 per cent in the past year to as low as 10 cents a watt. The supply glut has enticed US power companies to favour imports over more expensive domestic panels as they build new solar generating complexes. In response, North American manufacturers say they are pulling back on expansion plans despite lucrative incentives available under the Inflation Reduction Act, the landmark US climate law. “The market is crap,” said Martin Pochtaruk, president of Heliene, a Canadian solar-panel maker. He said his company delayed plans to add a 500-megawatt assembly line to its solar panel factory in Minnesota. “We don’t want to bite something we cannot chew.” Last month CubicPV, a Bill Gates-backed manufacturer of wafers for solar panels, scrapped plans to build a 10GW US factory announced in December 2022, citing a “dramatic collapse” in prices.Mark Widmar, chief executive of First Solar, the largest US solar manufacturer, warned at a Senate finance committee hearing on Tuesday of the country becoming a “de facto extension of China’s Belt and Road Initiative”. After the IRA’s passage, First Solar announced new factories in Alabama and Louisiana. “[China] does not want the US to have its own domestic industry . . . It’s a pretty dire situation,” Widmar told the Financial Times. The US puts a 14 per cent tariff on solar component imports from most countries. A separate 25 per cent applies to goods made from China, which Washington imposed citing Beijing’s “discriminatory” trade practices, along with anti-dumping and countervailing duties on Chinese solar panels that exceed 200 per cent. Solar shipments from south-east Asia were also subject to anti-dumping and countervailing duties after the US commerce department last summer found that five Chinese solar companies were setting up factories in the region to circumvent US tariffs. But the Biden administration issued a moratorium on the duties to last until June. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The US imports the bulk of its solar panels from south-east Asia, whose exports remain far cheaper than US-made counterparts even accounting for tariffs and IRA subsidies, according to a report by BloombergNEF. The clean-energy research group said the US imported 50 gigawatts of panels between January and November 2023, a record high.The “writing is on the wall” for US solar manufacturers, said Pol Lezcano, senior analyst at BloombergNEF. He anticipates cancellations and delays to solar manufacturing commitments which have totalled more than 115GW since President Joe Biden signed the IRA. BloombergNEF estimated that by the end of 2024, US-made solar cells and modules will cost 18.5 cents a watt, compared with 15.6 cents for a product from south-east Asia. “The IRA subsidies are hugely lucrative, but they’re still not enough to compete against cheap imports,” Lezcano said, adding that a “new protectionist measure” would be necessary to make American manufacturing competitive.  You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Manufacturers, including First Solar and Heliene, have called for stricter enforcement of tariffs, including striking an exemption for the two-sided type of solar panels that make up the bulk of imports. They have also called for bringing forward the end of the moratorium on duties against south-east Asian imports. Cheap panel prices have provided a tailwind for US solar deployment, which in turn has boosted the zero-carbon power source’s presence on the electric grid. The US Energy Information Administration expects 36GW in new solar this year, the biggest source of capacity growth on the electric grid. Abigail Ross Hopper, president of the Solar Energy Industries Association, which represents US solar developers and manufacturers, told the FT that the US will “always” source a mix of imported and domestically made panels. The industry group does not support an early expiration of the moratorium nor the removal of the tariff exemption for two-sided panels.“While we move towards a more domestic supply chain, we want to be making rapid progress towards our climate goals,” Hopper said. Solar photovoltaic panel components being produced at a factory in Jiangsu province, China More

(Reuters) -German online fashion retailer Zalando on Wednesday forecast a return to growth this year and said it was opening up its logistics business to more players, raising hopes of a boost to its performance and helping to lift its shares.The stock jumped as much as 18.5% after the company also said late Tuesday it would buy back up to 100 million euros ($109 million) of shares, starting from March 13.Zalando said on Wednesday it expected gross merchandise value (GMV) growth, a key metric measuring the value of all goods sold, of between 0% and 5% this year, after a 1.1% decline to 14.6 billion euros in 2023.It said it was targeting a compound annual growth rate of 5-10% for GMV and revenue through 2028, as it updated strategies for both its fashion/lifestyle business and its infrastructure business (B2B) ahead of a Capital Markets Day on Wednesday.In B2B, Zalando is opening up its logistics network, software and services to help the e-commerce transactions of brands and retailers regardless whether they take place on its platform.By doing so, “Zalando seems to be reckoning that the historical growth story relying on even-increasing online fashion penetration is now close to the glass ceiling,” said Bryan, Garnier & Co analyst Clement Genelot.”In other words, the growth potential has been reduced. Hence the shift towards a logistician business to address the over-capacity issue in its existing fulfilment network.”Zalando also expects revenue growth of 0% to 5% this year, after a 1.9% drop to 10.1 billion euros in 2023.”The wider range reflects the continued uncertainty we see in the market,” finance chief Sandra Dembeck told reporters.Zalando, a multi-brand platform that sells clothes, shoes, and accessories, is facing weakening demand after a growth boom during the pandemic, as consumers grappling with inflation and high interest rates cut spending and turn to cheaper options offered by fast fashion rivals like China-based Shein.Its shares were up 15% to 22 euros at 0823 GMT.The company expects adjusted earnings before interest and tax of 380 million to 450 million euros this year, up from 350 million in 2023.($1 = 0.9153 euros) More

(Reuters) -European shares hit new record highs on Wednesday, led by gains in retail and utility stocks following upbeat corporate updates, while investors awaited industrial production data from the region. The pan-European STOXX 600 was up 0.1% by 9:13 GMT, following Tuesday’s record-high close. The retail (SXRP) index emerged as the top sectoral performer, adding 2.5%, following a 13.6% jump in Zalando shares. The online fashion retailer reported a fourth-quarter profit beat and announced a share buy-back program, anticipating a return to growth and improved profitability in 2024.Zara-owner Inditex (BME:ITX) shares jumped 4.5% following higher sales at constant currencies in the first half of its spring season, boosted by upmarket fashions and sustained strong momentum.Shares in E.ON surged 5.0% as Europe’s largest operator of energy networks increased its five-year investment target to 42 billion euros ($46 billion) and provided 2024 profit guidance that beat expectations. The upbeat outlook and investment goal propelled the broader utilities index up 1.1%. Upbeat corporate updates have fostered a risk-on sentiment among European investors, reflecting confidence in the economy and enabling investment in riskier assets despite sticky inflation. In other company news, Vallourec shares climbed 6.4% after steelmaker ArcelorMittal (NYSE:MT) announced acquisition of a 28.4% stake in the France-based company for around 955 million euros ($1.04 billion) to increase its presence in the tubular business.In contrast, Adidas (OTC:ADDYY) shares lost 1.9% after the German sportswear giant posted its first loss in over 30 years in 2023 and projected a decline in North America sales this year due to the termination of its ties with rapper Kanye West in 2022, leading to the suspension of sales of the highly profitable Yeezy sneaker line. “While footwear sales are storming ahead thanks to strong demand for Sambas and Gazelles, Adidas apparel has fallen out of fashion, and the rise in popularity of athleisure clothing with brands like Lululemon (NASDAQ:LULU) and Alo has come at the expense of Adidas’ clothing lines,” said Victoria Scholar, head of investment at interactive investor. On the data front, investors awaited the release of euro zone industrial production data for January, due 1000 GMT, seeking further insights into the region’s economic resilience and the potential start of an interest rate cut cycle. More

MADRID (Reuters) -Zara-owner Inditex (BME:ITX)’s shares rose to a record high after it reported positive early spring sales, boosted by upmarket fashions and continuing the strong momentum that saw its 2023 revenue growth top that of rival H&M (ST:HMb).Shares in the world’s biggest fashion retailer rose as much as 5.9% on Wednesday after it reported that sales at constant currencies for Feb. 1 to March 11 jumped 11%. Sales rose 10% to a record 36 billion euros ($39 billion) in the year to January 2024.”The year got off to a positive start in a complex environment of inflationary pressures and an unstable geopolitical situation,” CEO Oscar Garcia said in a press conference.The Spanish group is expanding in the U.S., its second-largest market after Spain, and plans Zara store openings in Los Angeles, Las Vegas and Cambridge, Massachusetts, as well as the first Massimo Dutti store in the country that will open in Miami.The company behind Zara has widened its lead over Sweden’s H&M thanks to its ability to deliver trends faster from nearby suppliers and sell more clothes at higher prices. That has also helped it counter fast-growing Chinese rival Shein.In January, H&M reported a 4% drop in December and January sales, a bad sign for the key Christmas shopping period. German online fashion retailer Zalando on Wednesday reported a full-year decline in sales.SALES GROWTH SLOWSThe company’s results were in line with analysts’ expectations but its sales are growing more slowly than a year earlier, as the pace of price increases has moderated. In the first half of spring 2023, its sales rose 13.5%.Inditex posted an annual net profit of 5.4 billion euros, up 30% on the year and in line with analysts’ expectations in an LSEG poll, as the company maintained a gross margin of 57.8%.Inditex said it planned to invest 900 million euros per year through 2025 on logistics. Those plans include new logistics centres in Zaragoza in Spain and the Netherlands, Garcia said during an analysts call. It will spend a total of 1.8 billion euros this year to expand its store space by 5%, and on technology and improving online platforms in 2024.Inditex said it will start weekly livestreaming shopping services for its core brand Zara in the U.S. and UK this year, after offering the e-commerce experience in China since the end of 2023.Livestreaming is a retail phenomenon that initially became popular in China, combining online shopping, video streaming and texts to sell millions of products, and companies including Durex-owner Reckitt have jumped on the trend.Garcia said Inditex would expand its second-hand business to the U.S. after its launch in UK in 2022 and later in the rest of Europe last year.DIVIDEND BOOSTThe company had 5,692 stores worldwide in 2023, 123 fewer than a year earlier, and said its inventories in January were 7% lower year-on-year, in part due to the “normalisation in supply chain conditions”.Inditex said it will increase its dividend payout by 28% to 1.54 euros per share, above analysts’ expectations.Inditex’s core brand Zara began to raise prices earlier than H&M in response to surging inflation and as part of a shift to offer special, high-fashion pieces, while growing other brands in its budget range.But over the last two years, Zara has increased average prices season-over-season at a slower pace than H&M and others, according to retail intelligence company EDITED.Investors expect Inditex to continue to outperform H&M. The Spanish group has a higher valuation than peers H&M, Gap, and Next.($1 = 0.9152 euros) More

LONDON (Reuters) – UK wage data did its best to pull sterling down from a seven-month peak on Tuesday but the economy is showing enough signs of improvement to persuade investors that the Bank of England will still have to keep interest rates higher for longer than its peers.Sterling dipped on Tuesday to around $1.277 after figures showed regular wage growth slowed slightly more than expected, to 6.1% in the three months to January from 6.2% previously, putting the pound below Friday’s seven-month peak above $1.285.Yet the figures did not undermine the argument of sterling bulls, who say the employment market remains strong and the economy is recovering after slipping into a recession.The pound is still up roughly 0.4% against the dollar this year, with the prospect of interest rates higher in the UK than elsewhere making British bond yields more attractive, boosting the currency. The euro, yen and Swiss franc have all fallen. “Data is showing signs of improvement,” said Kamal Sharma, senior G10 FX strategist at Bank of America, who thinks the pound is likely to rise to $1.37 by the end of the year.”The labour market remains relatively robust. Real incomes have received a boost from a couple of angles: first of all headline inflation falling, and there will be a marginal kicker from the budget,” he said. “We are expecting the national minimum wage to increase in April as well. So the headwinds have turned into tailwinds.”Last week’s budget saw Finance Minister Jeremy Hunt unveil another two percentage point cut to a labour tax and the UK’s public finance watchdog upgrade its growth predictions. The budget was met with calm in financial markets, unlike in autumn 2022, leaving investors free to re-focus on the economy and how Bank of England policy is likely to compare to that of the European Central Bank and Federal Reserve.Wage growth remains well above the rates many economists think consistent with 2% inflation. And survey data has hinted at a recovery in the economy, with private-sector growth at a nine-month high in February.Interest rate derivatives show traders think the Bank of England is most likely to hold rates at 5.25% until August, whereas June cuts are seen as more probable for the ECB and Fed.Meanwhile, high levels of government borrowing, combined with the Bank of England’s active selling of its bond holdings, could keep upward pressure on Gilt yields, said Althea Spinozzi, rates strategist at Saxo Bank.”If inflation remains sticky, or even rebounds, then the sell off in Gilts can accelerate… on the basis that we have active quantitative tightening plus an increase of Gilt issuance,” she said.All that said, investor expectations could quickly reverse. The UK economy is far from strong and inflation is expected to dip below 2% in the coming months as energy prices continue to drop. Morgan Stanley economist Bruna Skarica said “the chances of a second-quarter rate cut look severely underpriced to us” in a note to clients after the wage data. More

LONDON (Reuters) -Britain’s economy returned to growth in January after entering a shallow recession in the second half of 2023, offering some relief to Prime Minister Rishi Sunak ahead of an election expected this year, official data showed.Gross domestic product grew by 0.2% month-on-month – boosted by a rebound in retailing and house-building – after a fall of 0.1% in December, in line with economists’ expectations in a Reuters poll.”The economy picked up in January with strong growth in retail and wholesaling,” Liz McKeown, a director at the Office for National Statistics, said. “Construction also performed well with house-builders having a good month, having been subdued for much of the last year.”However, it is too early to know for certain if the economy is no longer in recession. GDP shrank by 0.3% in the final quarter of 2023 and 0.1% in the quarter before – meeting the technical definition of recession widely used in Europe.Britain’s economy has been very sluggish since its initial recovery from the COVID-19 pandemic, beset by a surge in the cost of energy imports from Russia’s invasion of Ukraine and, more recently, by high Bank of England interest rates.But with inflation at 4% in January, down from double-digit rates in much of last year, and forecast to return to its 2% target soon, the squeeze on household spending is easing and the BoE is starting to consider when to cut interest rates.Sterling fell against the U.S dollar and the euro shortly after the GDP figures were released, and investors added to their bets of a rates cut in June, although the first one is not fully priced in until August.WEAKER THAN A YEAR AGOWednesday’s data showed that GDP in January was 0.3% lower than a year earlier and shrank by 0.1% in the three months to January, both in line with economists’ forecasts.”While the last few years have been tough, today’s numbers show we are making progress in growing the economy,” finance minister Jeremy Hunt, said.Rachel Reeves, the opposition Labour Party’s would-be finance minister, said the Conservatives under Sunak and his predecessors had presided over “14 years of economic decline” and were to blame for the most recent recession.Labour is running far ahead of the Conservatives in opinion polls with an election expected in the second half of this year. The opposition party is now seen as more trusted to run the economy than the Conservatives, according to some polls.The government’s Office for Budget Responsibility last week forecast an expansion of 0.8% in 2024, more than the BoE’s projection in February of around 0.25% growth.Business surveys have pointed to a pick up with purchasing managers’ index data rising to a nine-month high in February. Previously published ONS data for January showed the biggest retail sales jump since COVID restrictions were lifted in 2021.Wednesday’s figures showed that construction output – which is often volatile – jumped by 1.1% in January, its biggest monthly rise since June and led by a 2.6% rise in private-sector house-building, which had been depressed by high interest rates.Ruth Gregory, deputy chief UK economist at Capital Economics, said the data may not move the dial much for the BoE.”A 0.1% quarter-on-quarter rise in Q1 would match the Bank’s forecast and with domestic inflationary pressures fading, we think a rate cut this summer – perhaps in June – is still the most likely outcome,” Gregory said. More