INFLATION RATE - CPI HITS 1.6% & RPI 2.5%

December's inflation increased to 1.6% as measured by the Consumer Prices Index or CPI (HERE). The old RPI measure rose to 2.5%. This is more than was forecast by economists and is a portent of things to come. It overshadows Mrs May's speech later today on the main negotiating points for brexit and will probably affect the pound which recovered a little of yesterday's losses overnight.

On the news it was trading almost one percent up on last night's close. I assume traders think this will lead eventually to a rise in interest rates.  Not good new for those in debt.

MAY'S SPEECH TOMORROW HITS THE POUND

I expected Mrs May's widely trailed speech tomorrow (HERE), setting out her broad objectives and said to include the UK pulling out of the single market and the customs union, to cause a drop in the pound and so it has proven. Overnight it fell below $1.20 and was trading this morning at $1.20310 about 1.33% below its close on Friday.

What will happen (a) when she announces clearly that we are leaving the single marker and (b) when we actually do pull out is anybody's guess but I'm sure it will not be good.

UK TO LEAVE THE SINGLE MARKET?

Theresa May appeared on TV at the weekend in order to counter the impression that she does not know what she is doing. Unfortunately, it only seemed to confirm that she doesn't. We learned very little as usual.

What she did say was the UK would have control of its borders and the best possible trade deal with the EU. She didn't commit to maintaining "single market access", and she suggested that people who thought the country could keep "bits of EU membership" were missing the point that it "would be leaving". If one believes that the single market is indeed a "bit" of the EU then it looks like we're leaving.

I note the pound dropped 0.87% against the dollar ($1.21770) and 1.04% against the Euro (now trading at 1.15440). Every time she suggests we will have a hard brexit the pound falls.  If this turns out to be the actual plan the markets will pronounce on it.

STERLING CONTINUES TO STRUGGLE

This week's relatively benign economic news has failed to lift the pound above $1.22. Growth is surprisingly resilient at 0.5%, more or less what the Treasury forecast before the vote and Nissan's decision to build new models and even expand production at Sunderland is good news.  Although it does beg the question for Brexiteers why Nissan took some reassuring (and perhaps even money) to remain in a UK which is apparently going to prosper like never before.

It is as if they were just about to leave Heaven but were persuaded by St Peter to stick it out!

But all this is not good for sterling. If good news does not bring about a rally what will the first bit of bad news do?  Inflation is starting to bite (HERE) and consumer confidence is beginning to fall (HERE) so we may not have long to wait. The next set of trade figures will be interesting.

THE VALUE OF THE POUND

Roger Bootle in a Spectator blog (HERE) thinks we should celebrate the fall in the pound.  He approvingly quotes for a newly published book the benefits of a lower pound. But the piece also contains this:

Unless something changes, the UK economy is heading for the rocks. This is not because of the consequences of Brexit. On the contrary, the factors that we identify in The Real Sterling Crisis that cause us such unease predate Brexit, or even the chance of it, and have practically nothing to do with it.

On the face of it, the British economy does not look too bad. But we are not paying our way in the world. Every year, we are borrowing and selling assets to the tune of about 5% of GDP. This is rapidly increasing the amount of our economy that is owned by foreigners. This would not matter so much if we were using the money provided by foreigners to invest in productive capacity. But we are not. UK investment is extremely low. We are borrowing and selling assets in order to maintain our standard of consumption.

The book laments the selling of British assets to fund consumption but a falling pound will only make matters worse, our assets are now 20% cheaper than they were in early June.

STANDARD & POOR'S WARNING

S & P are one of the large US ratings agencies and they have issued a warning about Sterling's role as a reserve currency (HERE). They said the British government is treading into hazardous waters in negotiations with the EU and is risks serious damage to economy’s future growth trajectory, with long-term implications for the debt profile and the country’s credit-worthiness.

S&P fears that loss of unfettered access to the single market would have incalculable consequences for business, yet the Government so far appears almost insouciant about this.

“There seems to be this view that ‘we’re a big important economy, the Europeans export a lot to us, so they have got to give us what we want’, but is that really true?" said Ravi Bhatia, the director of sovereign ratings in charge of Britain.

Exactly!

HARD BREXIT HERE WE COME

The EU have obviously been listening to the rhetoric coming from the government and leave supporter this week and have concluded (HERE) that we are headed for total separation from the single market and the customs union, otherwise known as a hard brexit.

Donald Tusk, president of the EU council, in a speech in Brussels says the UK has a choice between a hard brexit and no brexit at all (HERE). In a dig at Boris Johnson's cake metaphor and his suggestion that we could get a better trade deal with the EU after leaving, he had this to say:

“That was pure illusion, that one can have the EU cake and eat it too. To all who believe in it, I propose a simple experiment. Buy a cake, eat it, and see if it is still there on the plate.”

We look increasingly stupid and pathetic.  The pound keeps edging south and is trading below $1.22 this morning.  

THE POUND CONTINUES TO FALL

Gerald Lyons, the former advisor to Boris Johnson, was on Radio 4 this morning saying the slump in the value of the pound would have happened anyway regardless of the referendum result. He joined David Davis and Mervyn King (HERE) and others in welcoming Sterling's decline in value. The Telegraph also says the fall is overdue (HERE).

This is going to push up the cost of imports and make our current account deficit even worse. Exports become cheaper but whether this will have a significant impact is debatable.  It is all beginning to look like the politicians have started something that they may find hard to stop.

Sterling is trading well below $1.23 this morning and shoppers are being warned of price rises to come (HERE).

POUND HITS RECORD LOW

The Telegraph (HERE) is reporting the pound trading at a record low on a trade weighted basis (against the currencies of our main trading partners). The text gives an explanation but things are getting even worse.  

Today the pound was trading at $1.22!  If interest rates have to rise to counter the slump God help us!

Amazingly the ex boss of HSBC and an enthusiastic Brexiter  Mr XXX says it's nothing to do with Brexit (HERE) and more to do with our lack of competitiveness!!  Did he think the slump in sterling on 24th June was a coincidence?  This is the shape of things to come. Brexiters are going to deny every piece of bad economic news is in any way connected with Brexit.  

He admits we haven't exported enough since 1997 (and well before this in my opinion) and the Mail reports Liam Fox (HERE) saying we need to export more to exploit glorious joy of free trade!!! It would have been wiser to address the deep seated problems of a lack of export competitiveness then go the Brexit - but no they've chosen to do it the other way round.

POUND UNDER PRESSURE AGAIN

Bloomberg report that the pound has regained the title of the world's worst performing currency in 2016 that it had temporarily lost to the Argentine peso recently (HERE).  Sterling's latest slump is attributed to the BoE's newly announced stimulus package.

Tonight the pound was trading at a new 52 week low of $1.29090 and €1.15680.

BREXIT PROBLEMS FOR THE MOD

The slump in the value of the pound may help some exporters but for the MOD it has been and will continue to be a disaster.  We spend apparently £10Bn a year with US defence companies and the bill will rise by about £700m per year simply because of the pounds weakness (HERE).

Lord West has said there wasn't enough money before the vote, now things will get even tighter. Prospering like never before.

DRAMATIC DETERIORATION IN UK BUSINESS ACTIVITY POST BREXIT

This morning the PMI flash figures for July were released and they show the purchasing manager's index down to 47.7 from 52.1 in June.  Any figure above 50 shows an expansion while figures less than 50 point to a contraction and the drop between June and July is the biggest since the height of the financial crash in 2009.

The pound dropped a cent within a few minutes of the information being released.

The PMI figure is an important first real indicator of sentiment in the UK business sector following the Brexit vote. The Telegraph has an odd schizophrenic page in the business section. Alastair Heath has a piece entitled - So far so good for the post Brexit economy while on the opposite side of the page the Live Blog has - Pound tanks and FTSE erases losses as UK economy contracts at steepest pace since 2009.  Poor Mr Heath, he should read his own paper more.

THE POUND - A MATTER OF TIME

The pound has rallied slightly after the catastrophic fall following the referendum and this morning is trading around $1.32260 (7:00 am) but Bloomberg are forecasting that this is on borrowed time (HERE).  Because there are still so many unanswered questions about our relationship with the EU and also because the Bank of England is expected to introduce more stimulus measures in a few weeks, the pound will continue to slide.

BANK OF ENGLAND MEET ON THURSDAY

The pound began this morning drifting around $1.2960 and doesn't look as if it will recover much anytime soon. The BoE policy committee meets this week for the first time since the referendum and there is speculation that an announcement to cut interest rates or begin more quantitative easing (money printing) will affect the future direction of the pound - Bloomberg HERE