Speaker 1: Global business news twenty four hours a day. If Bloomberg
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Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters.
Speaker 1: I'm Katherine Cowdery. A third day of gains on Wall Street.
Speaker 1: Markets are showing further signs of stabilizing after wide swings
Speaker 1: in the wake of Britain's decision to leave the European Union.
Speaker 1: Consumer staple shares are leading the way, as Hershey rallies
Speaker 1: her She's been up as much as twenty one percent
Speaker 1: after report that Mondale International made a takeover bid for
Speaker 1: the chocolate maker. Trading and its shares has been halted
Speaker 1: pending an announcement. The SMP Utilities Index is traded at
Speaker 1: a record high today. We took the markets every fifteen
Speaker 1: minutes throughout the trading day. DAL Industrial Average is up
Speaker 1: two hundred sixteen points one percent at seventeen thousand, nine
Speaker 1: hundred ten. SMP five Funded up twenty five points one
Speaker 1: point two percent at two thousand ninety five. The NAZDAC
Speaker 1: is up forty nine points, a gain of one percent.
Speaker 1: It's trading at eight. West Texas Intermedia Crude oil down
Speaker 1: sixty eight cents of barrel one toe sparckled down five
Speaker 1: dollars announced at and the tenure treasury is up ten
Speaker 1: thirty seconds with the yield of one point for eight percent.
Speaker 1: And that's a Bloomberg business flash. You're listening to taking
Speaker 1: Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio.
Speaker 1: Political uncertainty, a recession perhaps baked in the cake. Now,
Speaker 1: that's all that's going on in the UK, and more
Speaker 1: since the vote last week to leave the European Union
Speaker 1: joining us now to look at what's next for that economy,
Speaker 1: what it means for the British pound. Is Carl Weinberg,
Speaker 1: chief economist managing director at High Frequency Economics. So Carl,
Speaker 1: first of all, let's get right into Mark Kearney's speech today.
Speaker 1: He suggested very clearly that the Bank of England is
Speaker 1: ready to cut its key rate this summer. UH some
Speaker 1: are already saying they'll be two rate cuts, one of
Speaker 1: one in July one in August. And he also said, well,
Speaker 1: let's start with the rate part. In my view, and
Speaker 1: I'm not pre judging the views of other independent members
Speaker 1: of the NPC, the economic outlook has deteriorated and some
Speaker 1: monetary policy easing will likely be required over the summer. Carl,
Speaker 1: what do you what do you what do you make
Speaker 1: of this? Was this a surprise? Well, um, yes and no.
Speaker 1: And first of all, any time Mark Arney talks about
Speaker 1: cutting rates is a surprise because if you look at
Speaker 1: his career, both in Canada and the UK, it's always
Speaker 1: been you know, rates have been too low for too long,
Speaker 1: they have to go higher, And of course with that
Speaker 1: comes to the caveat that he's never actually hiped rates
Speaker 1: on those threats, so that when he talks about easing,
Speaker 1: you have to take a deep breath and you know,
Speaker 1: wonder how much of this is you know, conditioning us
Speaker 1: for expectations rather than actually prepared to do something. I think,
Speaker 1: in terms of the mechanics the way it works, he
Speaker 1: laid out in his speech pretty clearly a plan, which
Speaker 1: is they're going to talk about it in July, but
Speaker 1: they've got to come up with new forecasts and new
Speaker 1: options for August. So I think that maybe they made
Speaker 1: disappoint markets in July, but probably will ease in August.
Speaker 1: One thing to keep in mind about all of this
Speaker 1: is that in order to justify a cut in interest rates,
Speaker 1: they have to have some forecast that tells them that
Speaker 1: the inflation target is going to be violated, and to
Speaker 1: make that forecast they need some idea about a policy setting,
Speaker 1: and policy, as we all know, is extremely up in
Speaker 1: the air right now without even a prime minister to
Speaker 1: make it, let alone a Parliament to approve it. So
Speaker 1: I think that waiting until August will give them a
Speaker 1: chance to come up with some plausible scenarios and some
Speaker 1: crude expectations for policies so they can justify a change
Speaker 1: in rates. I think it's going to be August. Carl
Speaker 1: explained to us why this um this certainty or you know,
Speaker 1: some amount of data suggesting that the inflation target will
Speaker 1: be violated. Presumably then to the downside is necessary because
Speaker 1: again in the latest Bloomberg survey done by a Bloomberg
Speaker 1: intelligence team in London, of the economist survey to see
Speaker 1: a recession over the next couple of years, they're evenly
Speaker 1: divided between this year and next. Only twenty nine percent
Speaker 1: are saying a recession at off. There's a recession on
Speaker 1: the horizon. Isn't that enough justification for a re cut? Well,
Speaker 1: the Bank of England, like the FED, has a mandate
Speaker 1: and its mandates are to support the unemployment objectives of
Speaker 1: the government, and primary UH mandate is to hit the
Speaker 1: inflation target, which is two percent year over year increase
Speaker 1: in CPI. So UH most importantly he has to be
Speaker 1: focused on the inflation number, and by saying he's going
Speaker 1: to ease, he's saying he has a premonition that we're
Speaker 1: going to see the inflation rate actually drop substantially further
Speaker 1: than it has already. Headline CPI is around zero. Core
Speaker 1: CPI is around one in a fraction percent in the UK,
Speaker 1: so that have to be a substantial flowdown and substantial
Speaker 1: increase in splack. That's all good, is a back of
Speaker 1: an envelope calculation, but to be the basis for justifying
Speaker 1: and easing of monetary conditions, he's going to have to
Speaker 1: show that in a forecast in the Bank's inflation report.
Speaker 1: This is a very well established process that they don't
Speaker 1: work on the basis and back of the envelope, and
Speaker 1: I think kinds of statements they act on the basis
Speaker 1: of model based forecasts and other kinds of formal forecasting techniques.
Speaker 1: So they're going to have to run this through their
Speaker 1: model and make their models show them that there's going
Speaker 1: to be an inflation undershoot, or at least a good
Speaker 1: likelihood thereof, and they need more input from the policy.
Speaker 1: So I had to be able to do that. What
Speaker 1: does this mean for the pounds sterling down against the
Speaker 1: dollar after Mark Kearney suggested that rate cuts are a
Speaker 1: very strong possibility anyway, And of course this pound sterlings
Speaker 1: tumbled since Paul's closed. Yeah. Well, what he's done is
Speaker 1: he's indicated what we used to call instead days. And
Speaker 1: I know you remember this, Kathleen, a bias towards easings.
Speaker 1: You know, this is a statement of his personal buyo
Speaker 1: is at least to it easy. And the market has
Speaker 1: taken that as a promise of lower rates to come,
Speaker 1: and they are doing what they've been told to do,
Speaker 1: which is discounting that bias as being a premonition of
Speaker 1: what's going to happen. I'm not saying that he can't
Speaker 1: do this. I suspect he probably will, but he's just
Speaker 1: not going to be able to do it between now
Speaker 1: and the MPC meeting in July. UM. As far as
Speaker 1: the markets, though, the market is always right and the
Speaker 1: market believes that there's a rate high coming soon, and
Speaker 1: whether as soon as July or August, it's changes the spread,
Speaker 1: it lowers the attractiveness of the UK assets even more
Speaker 1: to foreign investors, and that's going to mean the cheaper pound.
Speaker 1: You know. Markets also deferred this morning on selling off
Speaker 1: after the current account numbers came out. But the current
Speaker 1: account numbers have been just appalling. And we've been warning
Speaker 1: readers of high frequency Economics for a long time that
Speaker 1: a Sterling crisis is a potential outcome of running a
Speaker 1: current account deficit as big as seven percent of GDP,
Speaker 1: and the numbers we saw this morning were that order
Speaker 1: of magnitude and not getting any better. So I think
Speaker 1: there are a lot of reasons for Stirling to cheapen,
Speaker 1: and that Carney's statement today probably catalyzed some of that thinking,
Speaker 1: maybe a little bit firmer on the side of all right,
Speaker 1: Carl Weinberg, thank you so very much for so eloquently
Speaker 1: summing up the uh the forces that are facing Mark Harney.
Speaker 1: He's head of the Bank of England. As he looks
Speaker 1: at the possibility his own bank forecast a deep recession
Speaker 1: if this Brexit vote goes through. So Carl putting out though,
Speaker 1: that he's a couple of hurdles to cross, and one
Speaker 1: of them, of course, is inflation. Where that is looking
Speaker 1: when the bank offing gets to July. I'm Kathleen Hayes.
Speaker 1: This is taking Stock. My co host Pim Fox on
Speaker 1: vacation this week, and this is Bloomberg. A week from tomorrow,
Speaker 1: the United States Labor Department will re releasing its jobs report.
Speaker 1: In the meantime, we're gonna look at some of the
Speaker 1: big indicators of the labor market as the Fed considers
Speaker 1: its next rate move coming up. This is Bloomberg.