I was very humbled to to win the Print Journalist of the Year award from the Work Foundation's WorkWorld awards. It was for a piece written as the Stern Report on climate change was hot off the press about its nuts and bolts implications for business seeking to identify the winners and losers.
The citation follows below along with a link to the article
Print journalist of the year - Philip Thornton
Philip Thornton has a knack for telling big stories crisply - someone who puts the needs of his readers first. His writing is stylish and thoughtful. He has recently embarked on a freelance career after a stint as economics correspondent for The Independent, and the judges wished him success.
http://news.independent.co.uk/business/analysis_and_features/article1943362.ece
January 25, 2007
January 19, 2007
The mystery of the inverted yield curve
For anyone working in the financial markets, the inverted bond yield curve is a terrifying concept. For most, the fear comes simply from having to grapple with this odd-sounding but oft-repeated phrase. For those in the know, it claims to foretell doom and gloom.
For both groups, 2007 has got off to an unhappy start. When the yield on a long-dated government bond, such as the 10-year US Treasury, falls below that of its shorter-term sisters, such as the two-year, that is known as an inverted curve. Currently the difference is just 10 basis points (0.1 percentage point): 4.78% versus 4.88%.
This is unusual because a bond that matures in 10 years’ time should be a riskier bet than one which matures sooner as inflation can spike at any time over a decade. So investors normally demand a premium – a higher rent for taking out a greater risk – and a graph plotting yields against maturities (a yield curve) should show the latter rising as the former lengthen.
When the yield is lower long-term, it implies investors are rushing to buy long-dated bonds because they believe there is something nasty around the corner that will pull down inflation: a slowdown or recession.
Billions of pounds are invested in long-dated bonds so buying into low-yield, high-priced bonds carries a potentially expensive risk of a sudden snap-back if the outlook changes.
The American market, the largest and most complex, has had an inverted yield curve for more than a year. When it inverted just before New Year’s Eve 2005 it prompted a furious debate over its efficacy in forecasting recession. That debate is still under way a little over 12 months on.
Supporters of the standard view, such as Andre de Silva, a senior fixed-income strategist at HSBC, point out that the yield curve has correctly predicted recessions in 1973-1975, 1980, 1981-1982, 1990-1991 and most recently the mild downturn of 2001.
He sees the curve as supporting HSBC’s view that the US is headed for a slowdown to levels below the 2.3% average of forecasts logged by Consensus Economics.
Critics of the curve’s predictive merits point out that it is more than a year since inversion began and the US has posted growth above 3%. The latest figures point to an economy maintaining good speed in the face of a headwind from an ailing housing market.
Retail sales and recruitment are the latest in a litany of data pointing to an American economy heading for a soft, rather than a hard, landing. Meanwhile a substantial improvement in the budget deficit is likely to reduce supply of new short- and medium-dated issues. Little surprise short rates are rising.
So could there be any other explanations for the movement at the long-end? There are four factors that were less prevalent in previous economic cycles and which could point to a change in the fundamentals of supply and demand for long-dated paper.
The first is that major central banks can be credited for gaining the upper hand in the fight against inflation, at least when compared with the 1970s and 1980s. Investors can there-fore be more sanguine that the risk inflation will wipe out the value of their bond investments than they were in the previous three decades, even if British inflation is creeping up again (see Editorial, pages 8 and 9).
Second, China had led aggressive bond buying by Asian countries. These emerging economies have used their huge current account surpluses to build foreign currency reserves as insurance against a repeat of the 1997 East Asian currencies when they found their dollar debts became unbearable as their currencies collapsed. It has recently emerged that China had amassed $1 trillion of dollar assets (see Trusted Sources, p17).
A third and connected factor is the mass purchase of bonds by Opec countries keen to lock away their petrodollar windfall from record high oil prices as insurance against a collapse further out. Certainly yields on the 10-year Treasury points to more buyers than sellers.
Last, pension funds have either chosen – or, as in Britain, been compelled by regulators – to buy long-dated assets to match a shift in their liabilities created by the fact that people are living longer. Britain has an even more pronounced inversion than the United States, allowing the government to respond by issuing 50-year bonds. Demand was so strong it sold them for a real yield of 0.83%. Following last week’s surprise rate rise to 5.25% yields on the two-year gilt jumped to 5.35% while the 10-year was paying 4.85%.
Nick Stamenkovic, a seasoned bond analyst at RIA Capital Markets in Edinburgh, says there is less agreement now about the impact of the inverted yield curve. “Increasingly, the curve globally has been driven by the supply and demand picture,” he says.
Analysis by David Miles of Morgan Stanley shows low long-bond yields were the norm until the inflationary post-War period. Over the past 300 years, the average yield on long-term gilts has been close to the current level and in the 19th century were close to 3%.
In the United States, Ben Bernanke’s Federal Reserve has taken a dismissive stance of the relevance of the inverted yield curve, much as Alan Greenspan did under his reign.
So, who’s right – the Fed or the markets? The jury is still out but traders and analysts must beware. Investments tied up in global bond markets are huge and the consequences for financial markets being wrong-footed would be cataclysmic.
Inverted yield curves don’t last for ever, a lesson no investor should ever forget.
For both groups, 2007 has got off to an unhappy start. When the yield on a long-dated government bond, such as the 10-year US Treasury, falls below that of its shorter-term sisters, such as the two-year, that is known as an inverted curve. Currently the difference is just 10 basis points (0.1 percentage point): 4.78% versus 4.88%.
This is unusual because a bond that matures in 10 years’ time should be a riskier bet than one which matures sooner as inflation can spike at any time over a decade. So investors normally demand a premium – a higher rent for taking out a greater risk – and a graph plotting yields against maturities (a yield curve) should show the latter rising as the former lengthen.
When the yield is lower long-term, it implies investors are rushing to buy long-dated bonds because they believe there is something nasty around the corner that will pull down inflation: a slowdown or recession.
Billions of pounds are invested in long-dated bonds so buying into low-yield, high-priced bonds carries a potentially expensive risk of a sudden snap-back if the outlook changes.
The American market, the largest and most complex, has had an inverted yield curve for more than a year. When it inverted just before New Year’s Eve 2005 it prompted a furious debate over its efficacy in forecasting recession. That debate is still under way a little over 12 months on.
Supporters of the standard view, such as Andre de Silva, a senior fixed-income strategist at HSBC, point out that the yield curve has correctly predicted recessions in 1973-1975, 1980, 1981-1982, 1990-1991 and most recently the mild downturn of 2001.
He sees the curve as supporting HSBC’s view that the US is headed for a slowdown to levels below the 2.3% average of forecasts logged by Consensus Economics.
Critics of the curve’s predictive merits point out that it is more than a year since inversion began and the US has posted growth above 3%. The latest figures point to an economy maintaining good speed in the face of a headwind from an ailing housing market.
Retail sales and recruitment are the latest in a litany of data pointing to an American economy heading for a soft, rather than a hard, landing. Meanwhile a substantial improvement in the budget deficit is likely to reduce supply of new short- and medium-dated issues. Little surprise short rates are rising.
So could there be any other explanations for the movement at the long-end? There are four factors that were less prevalent in previous economic cycles and which could point to a change in the fundamentals of supply and demand for long-dated paper.
The first is that major central banks can be credited for gaining the upper hand in the fight against inflation, at least when compared with the 1970s and 1980s. Investors can there-fore be more sanguine that the risk inflation will wipe out the value of their bond investments than they were in the previous three decades, even if British inflation is creeping up again (see Editorial, pages 8 and 9).
Second, China had led aggressive bond buying by Asian countries. These emerging economies have used their huge current account surpluses to build foreign currency reserves as insurance against a repeat of the 1997 East Asian currencies when they found their dollar debts became unbearable as their currencies collapsed. It has recently emerged that China had amassed $1 trillion of dollar assets (see Trusted Sources, p17).
A third and connected factor is the mass purchase of bonds by Opec countries keen to lock away their petrodollar windfall from record high oil prices as insurance against a collapse further out. Certainly yields on the 10-year Treasury points to more buyers than sellers.
Last, pension funds have either chosen – or, as in Britain, been compelled by regulators – to buy long-dated assets to match a shift in their liabilities created by the fact that people are living longer. Britain has an even more pronounced inversion than the United States, allowing the government to respond by issuing 50-year bonds. Demand was so strong it sold them for a real yield of 0.83%. Following last week’s surprise rate rise to 5.25% yields on the two-year gilt jumped to 5.35% while the 10-year was paying 4.85%.
Nick Stamenkovic, a seasoned bond analyst at RIA Capital Markets in Edinburgh, says there is less agreement now about the impact of the inverted yield curve. “Increasingly, the curve globally has been driven by the supply and demand picture,” he says.
Analysis by David Miles of Morgan Stanley shows low long-bond yields were the norm until the inflationary post-War period. Over the past 300 years, the average yield on long-term gilts has been close to the current level and in the 19th century were close to 3%.
In the United States, Ben Bernanke’s Federal Reserve has taken a dismissive stance of the relevance of the inverted yield curve, much as Alan Greenspan did under his reign.
So, who’s right – the Fed or the markets? The jury is still out but traders and analysts must beware. Investments tied up in global bond markets are huge and the consequences for financial markets being wrong-footed would be cataclysmic.
Inverted yield curves don’t last for ever, a lesson no investor should ever forget.
January 11, 2007
A shock rise in interest rates
The Bank's of England's decision to raise interest rates to 5.25 per cent was such as a surprise that one City economist put out his initial reaction under a pre-prepared headline about a no-change decision. “It shows I had been expecting no change!!” he said later with understandable honesty.
But he was not alone. All but one of 50 economists polled by Reuters the week before the 11 January decision had predicted the same outcome, and for similar reasons. Yes, inflation was high and rising and, yes, growth was strong, house prices were booming and retailers were doing fine, but the big unknown was whether any of that would feed through to wage inflation in the current pay round.
It turned out that the Bank was not prepared to wait. Perhaps it knows something that the City does not either from next week's inflation data for December or the results of some of their own research. Either way it shows that the Bank is very worried about the inflation and inflationary pressures and a majority of its monetary policy committee is not prepared to take chances of it getting out of control.
While it might be a happy New Year for the one City economist, Simon Ward of New Star Asset Management, it could prove a very miserable 2007 for those people struggling to meet their credit cvard payments, or more importantly, their mortgage bills. The Bank is sanguine that there are a small number of people suffering a large amount of pain. The number of the former will rise and it is possible, as the Building Societies Association warns, that this will turn out to be the straw that breaks the camel's back.
More interestingly it shows a willingness at the bank to surpise the markets. At the last Inflation Report press briefing, Governor Mervyn King was asked about academic research showing there was a danger of central banks becoming too transparent as they would only see their own views reflected back at them by the markets. He said that all any commentator needed to know was what was in the Inflation report. Whether a shock January rate rise was in the report is open to debate. Either way it shows that the Bank is happy to get a double the “bang for its buck” by shocking the markets.
So where do we go from here? To some extent we are unchartered waters at least as far as they last couple of years are to go by. One the one hand it could be a sign that the Bank wanted to send a firm signal to wage setters during the current wage round - only nine deals have been done according to Incomes Data Services. On the other it could show a hawkish mission to curb the highest inflation for a decade. Roger Bootle, the economic adviser to Deloitte who ironically won a reputation with hi seminal book Death of Inflation, believes rates culd hit 6 per cent.
I think they are done and that rates will peak at 5.25 per cent.
But he was not alone. All but one of 50 economists polled by Reuters the week before the 11 January decision had predicted the same outcome, and for similar reasons. Yes, inflation was high and rising and, yes, growth was strong, house prices were booming and retailers were doing fine, but the big unknown was whether any of that would feed through to wage inflation in the current pay round.
It turned out that the Bank was not prepared to wait. Perhaps it knows something that the City does not either from next week's inflation data for December or the results of some of their own research. Either way it shows that the Bank is very worried about the inflation and inflationary pressures and a majority of its monetary policy committee is not prepared to take chances of it getting out of control.
While it might be a happy New Year for the one City economist, Simon Ward of New Star Asset Management, it could prove a very miserable 2007 for those people struggling to meet their credit cvard payments, or more importantly, their mortgage bills. The Bank is sanguine that there are a small number of people suffering a large amount of pain. The number of the former will rise and it is possible, as the Building Societies Association warns, that this will turn out to be the straw that breaks the camel's back.
More interestingly it shows a willingness at the bank to surpise the markets. At the last Inflation Report press briefing, Governor Mervyn King was asked about academic research showing there was a danger of central banks becoming too transparent as they would only see their own views reflected back at them by the markets. He said that all any commentator needed to know was what was in the Inflation report. Whether a shock January rate rise was in the report is open to debate. Either way it shows that the Bank is happy to get a double the “bang for its buck” by shocking the markets.
So where do we go from here? To some extent we are unchartered waters at least as far as they last couple of years are to go by. One the one hand it could be a sign that the Bank wanted to send a firm signal to wage setters during the current wage round - only nine deals have been done according to Incomes Data Services. On the other it could show a hawkish mission to curb the highest inflation for a decade. Roger Bootle, the economic adviser to Deloitte who ironically won a reputation with hi seminal book Death of Inflation, believes rates culd hit 6 per cent.
I think they are done and that rates will peak at 5.25 per cent.
January 4, 2007
Running table of like-for-like retail sales
Here is a running table of the annual incease like-for-like sales reported by major retailers over the Christmas period. I will update it as the results come through
Company period % rise
Majestic Wine 9 wks to 01.01 +4.4
Next 5 mths to 23.12 +2.8
of which stores -6.9
of which catalogue +9.3
Alexon 22 wks to 30.12 -4.0
House of Fraser 4 wks to 31.12 +7.3
Black's Leisure 5 wks to 30.12 -6.0
New Look n/a +3.2
Jessops 6 wks to 05.01 -6.9
Clinton Cards 5 wks to 24.12 +2.1
M&S 3 mths to 31.12 +5.6
of which food +3.6
of which general +7.1
Moss Bros 49 wks to 6.01 -1.4
JJB Sport 22 wks to 31.12 +6.3
Wm Morrison 6 wks to 7.01 +6.3
Sainsbury 12 wks to 30.12 +5.0
HMV 5 wks to 05.01 -0.8
Signet 9 wks to 30.12 +5.9
Alliance Boots 3 mths to 31.12 +1.5
Game Group 6 wks to 06.01 +15.6
Ann Summers 10 days to 24.12 +12.0
JD Sport 8 wks to 06.01 +4.5
Dobbies 10 wks to 10.01 +6.3
Carphone W 3 mths to 30.12 +7.3
Asos 4 wks to 10.12 +80*
Theo Fennell 3 wks to 24.12 +29
Tesco 6 wks to 06.01 +5.9
Debenhams 19 wks to 13.01 -4.0
Ted Baker 9 wks to 24.12 +11.0
Burberry 3 mths to 31.12 +25
Laura Ashley 50 wks to 13.01 +8.7
Woolworths 6 wks to 13.01 -4.6
DSG Int'l 8 wks to 06.01 +3.0
Home Retail 14 wks to 06.01 n/a
of which Argos +0.2
Homebase -2.9
Kesa (Comet) 9 wks to 08.01 +7.5
Mothercare 13 wks to 12.01 +0.8
WH Smith 20wks to 20.01 -6.0
of which high street -9.0
of which airports, rail +4.0
N Brown 21 wks to 21.01 +10.8
27 Jan Jessops
BRC month to 30.12 +2.5
ONS 5 wks to 30.01 +4.7**
*2005 affected by Buncefield fire
** total; not like-for-like
Company period % rise
Majestic Wine 9 wks to 01.01 +4.4
Next 5 mths to 23.12 +2.8
of which stores -6.9
of which catalogue +9.3
Alexon 22 wks to 30.12 -4.0
House of Fraser 4 wks to 31.12 +7.3
Black's Leisure 5 wks to 30.12 -6.0
New Look n/a +3.2
Jessops 6 wks to 05.01 -6.9
Clinton Cards 5 wks to 24.12 +2.1
M&S 3 mths to 31.12 +5.6
of which food +3.6
of which general +7.1
Moss Bros 49 wks to 6.01 -1.4
JJB Sport 22 wks to 31.12 +6.3
Wm Morrison 6 wks to 7.01 +6.3
Sainsbury 12 wks to 30.12 +5.0
HMV 5 wks to 05.01 -0.8
Signet 9 wks to 30.12 +5.9
Alliance Boots 3 mths to 31.12 +1.5
Game Group 6 wks to 06.01 +15.6
Ann Summers 10 days to 24.12 +12.0
JD Sport 8 wks to 06.01 +4.5
Dobbies 10 wks to 10.01 +6.3
Carphone W 3 mths to 30.12 +7.3
Asos 4 wks to 10.12 +80*
Theo Fennell 3 wks to 24.12 +29
Tesco 6 wks to 06.01 +5.9
Debenhams 19 wks to 13.01 -4.0
Ted Baker 9 wks to 24.12 +11.0
Burberry 3 mths to 31.12 +25
Laura Ashley 50 wks to 13.01 +8.7
Woolworths 6 wks to 13.01 -4.6
DSG Int'l 8 wks to 06.01 +3.0
Home Retail 14 wks to 06.01 n/a
of which Argos +0.2
Homebase -2.9
Kesa (Comet) 9 wks to 08.01 +7.5
Mothercare 13 wks to 12.01 +0.8
WH Smith 20wks to 20.01 -6.0
of which high street -9.0
of which airports, rail +4.0
N Brown 21 wks to 21.01 +10.8
27 Jan Jessops
BRC month to 30.12 +2.5
ONS 5 wks to 30.01 +4.7**
*2005 affected by Buncefield fire
** total; not like-for-like
January 3, 2007
Watching the Xmas trading statements
A month ago I said that the Christmas and New Year trading period would be OK for retailers – not brilliant but certainly better than the doom-mongers had forecast. Now is the time of reckoning is upon us. Majestic Wine became the first to issue a Christmas trading statement on 3 January and it was pretty robust.
Sales were up 4.4 per cent in the nine weeks to 1 January and 8 per cent. The chief executive later told Reuters that sales "over Christmas" were up 8 per cent. Significantly it said that sales were especially high among champagne brands, which tend to command the highest prices in its stores.
One positive result does not a good winter make, but it augurs well for the high street. Of course, each trading statement only really tells you something about that company. In this the case the heavy sales of champagne – the CEO indicated as much as 16 per cent growth – combined with the fact that more than a quarter of its stores are inside the M25 highlights the fact that strong sales were in the part of the UK that benefits most from City bonuses.
This bonanza will not be shared equally with all retailers. The profit warnings before Christmas had even begun were issued by HMV and Woolworths, two retailers with a customer-base more weighted towards low-earners.
On the same day that Majestic Wine reported it emerged that Music Zone, a private CD retailers backed by venture capital, was seeking administration.
These are early signs that this Christmas could be that separate the strong brands from the weak. Majestic Wine and John Lewis have done well while we are already know the identity of two of the losers. The Internet had helped create a "long tail" of small brands competing with each other for the consumers’ attention. Only so many can survive. The coming weeks could see the casualty list grow.
In the meantime I will update the incoming trading statements on a separate blog as they emerge over the coming days. In addition the Office for National Statistics, the CBI and the British Retail Consortium will publish their figures.
Sales were up 4.4 per cent in the nine weeks to 1 January and 8 per cent. The chief executive later told Reuters that sales "over Christmas" were up 8 per cent. Significantly it said that sales were especially high among champagne brands, which tend to command the highest prices in its stores.
One positive result does not a good winter make, but it augurs well for the high street. Of course, each trading statement only really tells you something about that company. In this the case the heavy sales of champagne – the CEO indicated as much as 16 per cent growth – combined with the fact that more than a quarter of its stores are inside the M25 highlights the fact that strong sales were in the part of the UK that benefits most from City bonuses.
This bonanza will not be shared equally with all retailers. The profit warnings before Christmas had even begun were issued by HMV and Woolworths, two retailers with a customer-base more weighted towards low-earners.
On the same day that Majestic Wine reported it emerged that Music Zone, a private CD retailers backed by venture capital, was seeking administration.
These are early signs that this Christmas could be that separate the strong brands from the weak. Majestic Wine and John Lewis have done well while we are already know the identity of two of the losers. The Internet had helped create a "long tail" of small brands competing with each other for the consumers’ attention. Only so many can survive. The coming weeks could see the casualty list grow.
In the meantime I will update the incoming trading statements on a separate blog as they emerge over the coming days. In addition the Office for National Statistics, the CBI and the British Retail Consortium will publish their figures.
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