A quiet start to the year in the UK, both politically and economically, with no bold headlines screaming for attention, but hidden amongst a first week of relatively strong UK data, (all the three Purchasing Managers Indices – for Manufacturing, Construction and, most importantly, Services – came out slightly stronger than expected), were some ominous, and possibly very significant, figures for the broad measure of Money Supply for November-M4.
M4 has now fallen 2.6 percent year-on-year. The decline seen since the onset of the financial crisis is particularly well illustrated by the chart below.
Is monetarism alive and well at the Bank of England?
The heydays of strict monetarism may seem a distant memory, but it is probably the case that no single measure of economic activity can do more to explain the Bank of England’s willingness to embark upon such an aggressive programme of Quantitative Easing, and also why it is highly likely that we will see an addition to the £275bn already announced in the not-to-distant future – possibly at the February Monetary Policy Committee meeting, but my guess is that the March meeting is the more likely date.
In light of this, one should expect Gilts to retain their new-found safe-haven status, with 10-year yields capped at 2.5 percent in the first half of the year. It is, however, highly possible that the vicious circle of bank/sovereign debt dependency/low growth and the competition for capital will put upward pressure on yields as we move into H2, as we may see a general aversion to sovereign risk in developed markets, even including the UK.
Nick Beecroft,
SAXO BANK