What giants?

The UK’s quixotic attitude to immigration has claimed another victim, a minister to go with scores of unfairly treated British citizens from the commonwealth. Home Secretary Amber Rudd resigned this morning for misleading the House by saying that her department had no deportation targets. The proof to refute Ms Rudd was summoned in less than a day.

The UK has a strange and conflicted attitude to immigration. An island nation, it is socially insular. And yet its leaders have always understood the importance of building ties abroad. The history of Britain is one great dance from one ally to another and back again. It built the largest empire the world has known, throwing its power around the whole world. Even now, its diplomacy and clout in global affairs vastly outweighs its economic or military heft.

But immigration is often used as an excuse for problems at home, both in the UK and around the world. The UK is labouring under a skills shortage that is hampering business and wearing away at the NHS. But the Home Office is focusing instead on ejecting long-term residents with shortfalls in paperwork. It is focusing on making its own processes convoluted solely to reduce net immigration to tens of thousands of people, a level that would cripple the nation before the office even got close. It is tilting at a windmill, albeit one that politicians themselves have built in the minds of many Britons.

Ms Rudd’s departure upset the delicate balance of remainers and leavers in the Cabinet, which is probably why Mrs May was so swift in appointing fellow remainer Sajid Javid as the new Home Secretary. It is a dangerous time for the government. The House of Lords has heavily amended the Brexit bill to ensure the UK does its utmost to retain access to a customs union with the EU, hemming Prime Minister Theresa May in over the Irish border. Added to that, local elections will be held this Thursday. All but two of the metropolitan boroughs will be voting, as will every London borough and a third of the unitary authorities and district/borough councils. The results will be seen as a litmus test for the government, probably unfairly, given the heavy skew to Labour-leaning London. We will be more interested in the regional voting, which could offer insight into how the country is feeling outside the bubble of London.

Last week’s GDP growth was disappointing, with construction and retail spending growth crimped by a particularly cold end to winter. However, we believe the weakness cannot be blamed solely on weather. One silver lining is that this month’s 20-basis-point fall in inflation to 2.5% means real wage growth is positive once again.

FTSE All-Share

1.6%

-0.8%

2.0%

7.7%

FTSE 100

1.9%

-0.7%

2.0%

7.9%

FTSE 250

0.4%

-0.9%

1.8%

6.1%

FTSE SmallCap

0.7%

-0.9%

1.8%

9.3%

S&P 500

1.6%

-4.1%

-1.0%

5.9%

Euro Stoxx

1.0%

-2.3%

-1.2%

9.6%

Topix

1.9%

-2.3%

0.6%

12.5%

Shanghai SE

1.1%

-11.3%

-10.1%

-0.7%

FTSE Emerging Index

0.5%

-7.0%

-0.5%

10.2%

Source: FE Analytics, data sterling total return to 27 April 

Homo economicus

We all know £2.99 is a bargain and £3.00 is a scandal. Whoever first realised the incredible value hidden in that one pence made a lot of money on our irrationality. Brokers are now probably making that much money again with investors trading feverishly as the 10-year US Treasury broke the 3.00% milestone for the first time in a bit over four years.

The benchmark yield has since fallen back below 3% after its sharp rise in late April. The spike in the 10-year yield helped increase its spread over the 2-year, taking it above 52bps for a couple of days before it slumped again to 47bps. This measure is important because if the spread falls to 0 or below – the yield curve inverts – this virtually always signals a recession is coming. We think a recession is unlikely and so we don’t expect the spread to turn negative; however, we are continuing to keep watch, given how low the spread has gotten.

With the US economy running smoothly and the Federal Reserve raising rates steadily (if extremely slowly), yields were going to continue rising. The average 10-year US yield between 1990 and today was 4.6% and going back to 1962 it was 6.2%. Three full percentage points is not a doomsday scenario. Yes, borrowing costs are rising, but US companies appear in pretty good shape. Some are over indebted and will topple as rising interest payments erode their cash flow, but most are posting strong numbers. Half of the S&P 500 has released first-quarter results, with almost 80% of them topping analysts’ expectations, according to FactSet. The blended growth rate is a whopping 23% with nine of 11 sectors boasting double-digit expansion in earnings. Energy companies have done extremely well, reporting earnings that are almost 90% higher than a year ago, while the materials sector has increased earnings by 41%. Technology remains the rocket ship powering the index higher, with its earnings up 32% on 12 months ago. Financials and industrials are also posting good numbers, with their earnings rising, roughly, by a quarter.

Companies are cautious about future earnings, however, citing the uncertainty of new tariffs with China and the general protectionist moves by the US government over the past few months. Some hope of a deal remains, hanging on Steven Mnunchin and his team who are said to be travelling to China this week to iron out a deal on trade. It is impossible to say what the outcome will be.

Higher borrowing costs will be most worrying for the US government. Having just splurged $1.5tn over the next decade on tax cuts, the Congressional Budget Office expects the US deficit to balloon to more than $1trn by 2020. With total US government public debt totalling roughly $16tn, back of the envelope math tells you that every 50bps increase in the 10-year yield adds an extra $70bn to its borrowing costs. The rough total for 3% interest payments is $480bn each year, or 14% of the $3.4tn tax revenue forecast for the coming year.

Bonds

UK 10-Year yield @ 1.45%
US 10-Year yield @ 2.96%
Germany 10-Year yield @ 0.57%
Italy 10-Year yield @ 1.74%
Spain 10-Year yield @ 1.23%
 

Economic data and companies reporting for week commencing 30 April

Monday 30 April

US: Personal Consumption Expenditures, Personal Income, Personal Spending, Chicago PMI, Pending Homes Sales 
EU: M3 Money Supply; GER: Retail Sales

Final results: Luceco
Trading update: WPP

Tuesday 1 May

UK: BRC Shop Price Index, Consumer Credit, M4 Money Supply, Mortgage Approvals, PMI Manufacturing
US: Auto Sales, PMI Manufacturing, Construction Spending, ISM Manufacturing, ISM Prices 

Interim results: Connect Group
Quarterly results: BP, Just Eat
Interim management statement: Virgin Money 

Wednesday 2 May 

UK: PMI Construction
US: MBA Mortgage Applications, Crude Oil Inventories
EU: PMI Manufacturing, Unemployment Rate, GDP (Preliminary); GER: PMI Manufacturing

Annual results: Sainsbury’s
Interim results: Sage Group
Quarterly results: Direct Line Insurance, Standard Chartered
Trading update: IWG, Next. Paddy Power Betfair 

Thursday 3 May

EU: Balance of Trade 
US: Continuing Claims, Initial Jobless Claims, PMI Composite, PMI Services, Factory Orders, ISM Non-Manufacturing

Trading update: Equiniti Group, Glencore, IMI, James Fisher & Sons, Smith & Nephew, Trinity Mirror

Friday 4 May

US: Non-Farm Payrolls, Unemployment Rate
EU: PMI Composite, PMI Services; GER: PMI Composite, PMI Services, Retail Sales 

Interim results: Numis
Quarterly results: International Consolidated Airlines Group, Smurfit Kappa Group