Japan has put itself into rather a mess as the Japanese Yen weakens again

The pace of action is picking up and again we find ourselves looking East to the Pacific where economic events are in motion. I will look at the Bank of Japan statement in a bit but we can infer it from the response to it as explained by the Japanese owned Financial Times.

The yen fell to a new 34-year low on Friday after the Bank of Japan held interest rates near zero, despite rising pressure on the central bank to tighten its policy to prop up the currency. The Japanese currency fell to ¥156.13 against the dollar….

In fact it went as low as 156.82 this morning. What we are seeing here is the same forces at play that forced Bank Indonesia to raise interest-rates on Wednesday. The rise in US bond yields with the two-year passing 5% yesterday is applying what Hard-Fi described like this.

Can you feel it?
Feel the pressure…
Pushing down on me, oh, Lord!
Pressure, pressure
Pressure pressure pressure

On Wednesday I did point out that the Japanese authorities were taking quite a risk with statements like this.

JAPAN’S OCHI: USD/JPY MOVE TO 160 COULD TRIGGER ACTION; NO ACTIVE DISCUSSION YET ( @DeltaOne)

So let us take a look at what the Bank of Japan had to say.

Bank of Japan policy announcement

As you can see it is really rather brief.

At the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period:

The Bank will encourage the uncollateralized overnight call rate to remain at around 0 to
0.1 percent.

Regarding purchases of Japanese government bonds, CP, and corporate bonds, the Bank will conduct the purchases in accordance with the decisions made at the March 2024 MPM.

Actually I quite approve of a brief statement as central bankers often waffle on these days. But the crux of the matter is that interest-rates are unchanged and thus the gap to international ones and the US Dollar in particular remains very wide. We can look at it in terms of the two-year yield as currency players often park money in short-dated bonds and with Japan having a 0.3% bond yield we see a 4.7% gap with the US. Even economics 101 realises that you expect a lower exchange-rate from this.

The Financial Times expresses the official position below.

In March, the central bank ended its negative interest rate policy, raising borrowing costs for the first time since 2007.  In the wake of this historic shift to end its ultra-loose monetary policy, governor Kazuo Ueda has indicated he would like to move gradually to raise rates.

But rhetoric about an “historic shift” changed the maths by a mere 0.1% as traders do their calculations and with higher US bond yields in fact the situation is now worse.

Over to You Bank of Japan

Perhaps the new currency level suggested a loss of face as Bank of Japan Governor Ueda was speaking as we saw this.

BREAKING: YEN SWINGS FROM LOSSES TO GAINS IN SHARP MOVE. ( @financialjuice )

Some players got really rather excited.

JAPAN MOF TROLL ASS INTERVENTION

JPY SPIKE XXX

JPY 150-200 PIP DROP ( @Capital_Hungry )

For perspective let me take you back to March 29th.

“I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the US,” said Masato Kanda, vice finance minister for international affairs, in an interview Friday. “Many people think the yen is now moving in the opposite direction of where it should be going.” ( Bloomberg)

As Kanda-san is the man making the decisions here his thoughts are rather troubling. He has got the direction of monetary policy the wrong way around. I wonder who the “many people” are outside of his dinner guests? Not those who actually trade the currency as it was at 151 back then and the same Bloomberg article noted this.

The yen has lost about 7% this year against a broadly advancing dollar, making it among the weakest major currencies.

Also we see the problem with making grand statements.

“We are currently monitoring developments in the foreign exchange market with a high sense of urgency,” said Kanda. “We will take appropriate measures against excessive foreign exchange moves without ruling out any options.” ( Bloomberg)

You might be thinking he has acted today Shaun. But as I have been typing this the currency markets have returned the Japanese Yen to 156.66. So it was like a brief shower on a summer’s day and it was gone. It feels like the Bank of Japan was sent in to check prices but did not take the advice proffered back in the day by Nils Lofgren.

(Back it up baby) I found out love just ain’t enough
I need devotion to back it up (Back it up now)
I found out love just ain’t enough (Back it up baby)
I need devotion to back it up (Back it up now)

Comment

Let us now switch to the Japanese economy and we can start with a bit of an irony.

The core consumer price index (CPI) in Tokyo, a leading indicator of nationwide figures, increased 1.6% in April from a year earlier, slowing from a 2.4% gain in March. It was much lower than a median market forecast for a 2.2% rise.Services prices rose 1.6% in April from a year earlier, slowing from 2.7% in March, due largely to the Tokyo metropolitan government’s decision to make some tuition free, the data showed. ( Reuters)

As you can see there was a government intervention via an education subsidy but the leading indicator for Japanese inflation suggests it will be below the 2% target. Looking ahead there are upwards influences from the Yen decline and higher price of crude oil but at least Japan is facing it from a lower base.

As to economic growth the Bank of Japan is more downbeat.

Comparing the projections through fiscal 2025 with those presented in the previous Outlook Report, the projected real GDP growth rate for fiscal 2023 is lower, mainly
reflecting lower private consumption due in part to the effects of the suspension of production and shipment at some automakers. The projected growth rate for fiscal 2024 is somewhat lower, given that the GDP growth rate for the second half of fiscal 2023 is expected to be fairly lower than previously projected. The rate for fiscal 2025 is more or
less unchanged.

That is a lot of words to essentially say 1% per annum and remember it thinks that is fast.

Japan’s economy is likely to keep growing at a pace above its potential growth rate.

If we take all of this in the round there are consequences. I doubt many will be reporting that at 196 versus the Japanese Yen the UK Pound £ is now above pre-Brexit levels. Plus there is the issue of the currency war between the Chinese Yuan and the Yen. Here is how the Asahi Shimburn is covering the changes.

In February, Toyosu Senkyaku Banrai, a commercial facility with more than 50 eateries, opened on Tokyo’s waterfront, adjacent to the Toyosu Market.

When the line-ups of expensive menu items were revealed, many Japanese quickly made fun of them on social media, naming them “inbaun-don” (inbound-donburi)……..

Poh Meng Quek, 52, who came from Singapore, was enjoying a 2,900-yen kaisen-don at the facility with his work colleague Suzanne Lim, 63.

“It is very nice to be able to eat fresh, delicious fish at such a reasonable price,” Poh said.

He came to Japan before the COVID-19 pandemic. This time, Poh said, it felt comparably inexpensive, which is why he was frequently splurging on a taxi.

How the Euro area and ECB mislead people over the inflation numbers

This week has brought something of a confession from the European Central Bank. It relates to something that they and the Euro area establishment have kept out of their official inflation measure for 25 years now. It is owner occupied housing costs and they matter a lot which from time to time they confess as I recall a speech from Chief Economist Lane several years ago saying that they were up to a third of peoples spending. Since then the ECB has set out on a policy of making these costs higher via its interest-rate rises.

If we look at its mortgage interest-rate measure we are told this.

new loans to households for house purchase decreased by 4 basis points to 3.84%, driven by interest rate effect

The crucial point here is the level and as these are for February the recent rises in bond yields will mean we are now back to circa 4% ( the peak has been 3.97%). That compares with a long period where they have been below 1.5% and it only went above that level in April 2022. So in terms of the cost of living those paying a mortgage in the Euro area have seen an increase of 2.5% in round numbers which is a lot.

ECB Analysis

A couple of ECB economists have taken a look at the real world impact of this and unsurprisingly start with this.

In recent quarters, euro area households have been faced with higher housing costs, including mortgage costs.

You do not need a Phd to discover that! But then they start to pit some numbers on the actual impact.

Chart A, panel a), shows the dynamics of the overall monthly housing-related burden for outright owners, renters and mortgagors. In January 2024 households were paying an average of €765 per month in total housing-related costs, including utilities, home maintenance and rent or mortgage costs.

As you can see this is a major factor in people’s budgets and you should not ignore a large component of it. But then we get their view on hos much inflation in this area has been understated during the recent inflationary surge.

Over the period from July 2022 – the beginning of the interest rate hiking cycle – to January 2024, the average housing costs reported in the Consumer Expectations Survey rose cumulatively by around 10.2%, compared with a cumulative rise in the Harmonised Index of Consumer Prices (HICP) of 5.5%.

As you can see this is a big deal and later in the piece they confirm this as they get around to how much of an issue this is for household budgets.

Housing costs take up around 20% of disposable income for outright owners, 40% for renters and 35% for mortgagors.

If we were discussing any other area there would be screams for its inclusion. But because it has always been excluded then we are in the arena of the military dictum that one of the best ways of hiding something is to put it in plain sight. I think that modern culture leading to shorter attention spans and the decline of journalism have also contributed to the lack of criticism and analysis.

National Variations

Our 2 economists sort of get there.

For mortgagors in particular, the higher costs would seem to be driven by the upper end of the distribution, with the cost for the lower end remaining relatively constant.

In plain English some with fixed-rate mortgages will not have been affected, but those with variable-rate ones will have been severely affected. That brings me to something they will have missed as the situation in Portugal became so bad that the government changed the rules to allow some mortgage payments to be deferred.

A set of measures is in place until 31 December 2023 to mitigate the effects of the rise in interest rates on variable rate loans for the purchase or construction of permanent residential property with an outstanding value of €300,000 or less. ( Bank of Portugal)

There were other reliefs for larger mortgages but the point was that the rise in mortgage costs was so high in Portugal that the rules were changed to avoid an economic crisis. Actually we do see that in this report because it is for numbers up to January this year and Portugal has one of the lowest housing costs quoted at 600 Euros a month. That would mislead the unwary who do not realise that the numbers have been fudged! Or to be more specific that poor battered can has just been kicked again.

Anyway the report puts it like this..

With regard to individual euro area countries, Chart A, panel c), shows that there is significant cross-country heterogeneity in housing costs and that the difference between costs excluding mortgage payments and those including such payments is substantial, especially for countries such as Italy and Spain that tend to have a higher proportion of adjustable-rate mortgages.

Unfortunately we just get a chart rather than detailed numbers but their calculations are that Spain has monthly housing costs of 750 Euro a month if you include mortgages and 400 if you do not and for Italy it is just under 800 Euros a month with and 550 without. Ireland has the highest housing costs at 1200 Euros a month with mortgages and 900 without them.

Pinocchio Time

Our 2 economists must suddenly have realised the consequences of their work and feared being sent to the ECB cellar where the cake trolley with its espressos and croissants never arrives.

The housing cost ratio, defined as total housing costs divided by disposable income, has remained unchanged overall since the beginning of 2022.

So disposable income has magically risen by the same amount? What a happy coincidence. Funny how the wages figures have somehow missed this as we have been recording quite substantial falls in real wages in the Euro area and remember that is before you add mortgage costs to the inflation numbers.

Also this bit is rather inconvenient for the “remained unchanged” claim.

More households, and in particular lower-income households, have indicated in recent months that they expect to make late payments of their rent or mortgage and/or their utilities. Given the present and future effects of both increased interest rates and loss of purchasing power owing to inflation, the ability of households to meet their housing-related costs and mortgage payments is a source of concern, especially for lower-income households.

How does “remained unchanged” morph into “loss of purchasing power”?

“For, you see, so many out-of-the-way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” ( Lewis Carroll)

Comment

As you have seen the exclusion of owner-occupied housing costs means that the cost of living in the Euro area has risen by much more than what the official inflation rate has told us. In technical terms it is the difference between a macroeconomic measure and a cost of living one. Just because a central bank should ignore mortgage costs in its measure as otherwise it ends up rather chasing its tail, does not mean people are not facing a higher cost of living. Rather curiously the Bank of Canada either forgot or does not realise this.

But back to the central point the failure to include housing costs in a proper manner means that the cost of living in the Euro area has been severely understated. Today I have looked at the rise in mortgage costs over the past couple of years. But before that there were the rises in house prices driven by an official interest-rate of -0.5% and all the QE bond buying.

Has the Pacific switched to interest-rate rises rather than cuts?

As we approach summer in the Northern Hemisphere we can look back on a year that is not going as planned. We began 2024 with markets on a surge backed by anticipation of a succession of interest-rate cuts which were supposed to begin in March. Such thoughts may be causing a bit of an itch as we observe one piece of news from the Pacific this morning.

The Bank Indonesia Board of Governors (RDG) meeting on April 23-24 2024 decided to increase the BI-Rate by 25 bps to 6.25%, the Deposit Facility interest rate by 25 bps to 5.50%, and the Lending Facility interest rate by 25 bps to 7.00%.

For starters this completely wrong footed Bloomberg who as you can see below we heading in the opposite direction.

Indonesia’s central bank will likely postpone monetary easing to later this year, if not early 2025, as it waits out uncertainty around the Federal Reserve’s rate path and the continued fighting in the Middle East.

Although I suppose they were right about this.

The survey results underline how the bar for rate cuts is getting higher

What is going on?

The Bank Indonesia explanation starts by looking to cover every base it can.

This interest rate increase is to strengthen the stability of the Rupiah exchange rate from the impact of worsening global risks and as a pre-emptive and forward looking step to ensure inflation remains within the target of 2.5 ± 1% in 2024 and 2025 in line with the pro-stability monetary policy stance

Let us start with inflation which according to the Indonesian statistics office is doing this.

The year-on-year (y-on-y) inflation rate in March 2024 was 3.05 percent, with a Consumer Price Index (CPI) of 106.13. The highest inflation by province was seen in Papua Barat Province at 4.78 percent with a CPI of 106.61, while the lowest was seen in Papua Barat Daya Province at 1.42 percent with a CPI of 103.82.

So as you can see it not only has quite wide regional variations but the headline is moving towards the upper end of the targeted range especially if we note the monthly move.

The month-to-month (m-to-m) inflation rate in March 2024 was 0.52 percent, and the year-to-date (y-to-d) inflation in March 2024 was 0.93 percent.

Also look at what is in the van of the annual inflation rise.

Inflation occurred as the prices went up, as indicated by the increase in most expenditure groups indices, namely: Food, Beverages, and Tobacco Group of 7.43 percent;

Along the way they have swerved the danger of an “I cannot eat an I-Pad” moment.

Meanwhile, Information, Communication, and Financial Services Group recorded a deflation of 0.13 percent.

But whilst that works an interest-rate of 6% should be well into restrictive territory so there is another explanation.

Indonesian Rupiah

We only need to go back to Sunday to see that something was going on.

Jakarta (ANTARA) – The government is currently devising strategies for protecting the exchange rate of rupiah from adversary impacts of the Iran-Israel conflict, Finance Minister Sri Mulyani Indrawati has said.

Those who have followed the use of the word resilient in financial matters such as the Irish banks and Greece will have been immediately on alert as she added this.

“I believe that Indonesia will stand resilient in the midst of this situation,” she said.

We can look at it another way as despite the rhetoric below foreign exchange reserves are on the decline.

The position of reserve assets in Indonesia remained high at the end of March 2024, totalling USD140,4 billion, despite retreating from USD144,0 billion at the end of February 2024.

We are back to themes of 2024 that has so far not turned up as one from 2023 remains.

Bank Indonesia’s  exchange rate policy  continues to be directed at maintaining Rupiah stability  from the impact  of a broadly strengthening US dollar .

That of course means trying to stop it declining and one way today’s statement tries that is to make comparisons.

 This development put depreciation pressure on almost all world currencies , including the Rupiah exchange rate. The Japanese Yen and New Zealand Dollar each weakened 8.91% and 6.12% (ytd), while regional currencies, such as the Thai Baht and Korean Won weakened 7.88% and 6.55% (ytd) respectively. . Meanwhile, the weakening of the Rupiah up to April 23 2024 was recorded to be lower, namely 5.07% (ytd).

Unfortunately they then rather torpedo the Rupiah ship of state as they reveal they have been on the bid.

Bank Indonesia continues to strengthen its Rupiah exchange rate stabilization policy by optimizing all available monetary instruments, both through intervention in the spot and DNDF foreign exchange markets, purchasing SBN from the secondary market if necessary, adequate liquidity management, and other necessary steps.

That rather contrasts with Japan for example which as I have pointed out many times has been trying to get a weaker Yen. We have seen another example of that this morning.

JAPAN’S OCHI: USD/JPY MOVE TO 160 COULD TRIGGER ACTION; NO ACTIVE DISCUSSION YET ( @DeltaOne)

That is almost asking foreign exchange markets to send it there.

But if we return to the Rupiah we see that an exchange rate of 16,149 versus the US Dollar is in sight of the pandemic lows and may even evoke fears of the 1998 currency crisis. I mean in terms of fall not levels as the direction of travel has overall been lower.

I do not know about you but looking at the moves a 0.25% change is minor and unlikely to change much. Or putting it another way if 6% is not enough exactly how does 6.25% fix it? So as I have pointed out before you can end up on a slippery slope where you keep raising rates.

Credit

Currency falls are regularly associated with a credit boom. Or if you prefer a part of economics 101 that frequently works as in more of a currency lowers its price.

Bank credit growth continues to increase.  In the first quarter of 2024, credit grew high by 12.40% (yoy) driven by credit growth in almost all economic sectors.

Indonesia has a good economic growth rate at 5.04% at the end of last year bit that still looks rather hot. So we have a yes and it comes with something else which is troubling.

banks are optimizing credit funding through asset management strategies by paying attention to aspects of  safety ,  liquidity  and  profitability .

We now what statements like that are often followed by…

Comment

Today we have looked at Indonesia specifically but we have also seen the general theme of currency weakness against the US Dollar more generally in play. Now let me head south to a land down under. Because last month the Reserve Bank of Australia told us this.

Recent information suggests that inflation continues to moderate, in line with the RBA’s latest forecasts. The headline monthly CPI indicator was steady at 3.4 per cent over the year to January, with momentum easing over recent months, driven by moderating goods inflation.

Whereas this morning we were told this.

• The Consumer Price Index (CPI) rose 1.0% this quarter.
• Over the twelve months to the March 2024 quarter, the CPI rose 3.6%.
• The most significant price rises this quarter were Rents (+2.1%), Secondary education (+6.1%), Tertiary education (+6.5%) and Medical and hospital services (+2.3%). ( ABS)

It is the 1% quarterly rise that attracts my attention. Also the numbers are worse than they look because the government is subsidising energy prices which would otherwise be higher.

Are you thinking what I am thinking?

As the UK government seems addicted to borrowing today’s economic growth news is especially welcome

This morning has brought the latest update on the UK public finances and after some more welcome numbers today’s is more nuanced.

Borrowing – the difference between public sector spending and income – was £11.9 billion in March 2024, £4.7 billion less than in March last year.

The lower borrowing from last year is welcome although once we are out of the taxpaying season one might have hoped for monthly borrowing to continue to be below £10 billion.

If we look into the revenue side it looks pretty strong.

Central government’s receipts were £90.6 billion in March 2024, £6.6 billion more than in March 2023. Of this £6.6 billion increase in revenue:

The breakdown is below and overall continues that theme.

central government tax receipts increased by £6.0 billion to £68.1 billion, with increases in Income Tax, Corporation Tax and Value Added Tax (VAT) receipts of £3.1 billion, £1.5 billion and £0.8 billion respectively

compulsory social contributions (largely National Insurance contributions) increased by £0.1 billion to £17.4 billion.

So the revenue figures look pretty strong especially if we allow for the fact that the first cuts in National Insurance ( just under half of the total) will already have been in play.

Switching to expenditure the story starts well.

Central government’s total expenditure was £102.5 billion in March 2024, £0.4 billion less than in March 2023. Of this £0.4 billion decrease in spending:

Especially as the inflation surge is again in play.

net social benefits paid by central government increased by £3.5 billion to £23.7 billion, largely because of inflation-linked benefits uprating.

central government departmental spending on goods and services increased by £2.2 billion to £36.2 billion, as inflation increased running costs.

The real change in this area has essentially been the end of the major energy subsidies.

subsidies paid by central government reduced by £5.5 billion to £2.4 billion, largely because of the cost of the Energy Price Guarantee (for households), as explained on GOV.UK, and the Energy Bill Relief Scheme (for businesses), as explained in GOV.UK guidance, affecting this month the previous year.

In fact this concept pops up elsewhere in the figures too.

payments recorded under central government “other current grants” reduced by £2.4 billion to £1.6 billion, largely because of the cost of the previous year’s Energy Bills Support Scheme, as explained on GOV.UK, when six relief payments were made directly to households monthly between October 2022 and March 2023, affecting this month the previous year.

Debt Interest 

This area has been of more interest after the impact of inflation on it. But there is also something curious about this month’s release. It starts with a pretty standard statement.

interest payable on central government debt increased by £0.4 billion to £2.5 billion, largely because the interest payable on index-linked gilts rises and falls with the Retail Prices Index.

But this is the issue I have because if it was index-linked gilts how does that work when inflation is falling? Elsewhere the release admits that.

Capital uplift was negative in March 2024, with a reduction of £1.6 billion reflecting the 0.3% decrease in the RPI between December 2023 and January 2024..

They then refer you to a table which says the number was -£9.6 billion!

A monthly time series of the total capital uplift on the index-linked gilts in issue is available as series identifier code MW7L.

So these numbers look very confused to me. What attracted my attention was the claim that inflation linked payments were higher which are not consistent with what we know RPI inflation has done and indeed they later state that. Looking through the series it may well be that it was March 2023 that had the wrong number as the other interest component which otherwise has been consistently above £4 billion was only £1.8 billion which rather stands out.

The Year 2023/24 as a whole

We can move on from the monthly numbers to take a look at the more important annual comparison, where the monthly swings and revisions are not quite so important.

Our first estimate for the total borrowed in the financial-year-ending (FYE) March 2024 is £120.7 billion. This reflects the £11.9 billion borrowed in March 2024, as well as an upward revision of £1.9 billion to our previously published financial year-to-February 2024 borrowing estimate.

The first impression here is that it is a lot of money to borrow even in these inflated times. Plus there are still revisions which I can highlight via what we were told at this time last year.

The £21.5 billion borrowed in March 2023 combined with a reduction of £14.6 billion to our previously published financial year-to-February borrowing estimate brings the total borrowed in the financial year ending (FYE) 2023 to £139.2 billion.

So relative to what we thought at the time we are around £20 billion better off. But whilst this time around the revision was unfavourable overall the have been pretty favourable.

£7.6 billion less than in the same twelve-month period a year ago

Awkward isn’t it when we have so many moving parts?! You may note that the March borrowing last year was a lot higher than we think now. We can put the annual figures in another form as we thought back then we had borrowed 5.5% of GDP in the fiscal year whereas this time around we think this.

Compared with the annual value of the UK’s economy, borrowing in the FYE March 2024 was provisionally estimated at 4.4% of the UK’s gross domestic product (GDP), 0.6 percentage points less than in the same twelve-month period a year ago.

So now we are comparing with 5%.

Oh and politicians like to concentrate on the current budget deficit. Can anybody think why?

In FYE March 2024, the public sector current budget deficit was £51.1 billion, £31.2 billion less than in FYE March 2023.

Compared with the annual value of the UK’s economy, borrowing in the FYE March 2024 was provisionally estimated at 1.9% of the UK’s gross domestic product (GDP), 1.3 percentage points less than in FYE March 2023.

National Debt

You can take these numbers with and without the Bank of England.

Public sector net debt excluding public sector banks (debt) at the end of March 2024 was provisionally estimated at 98.3% of GDP; this was 2.6 percentage points more than at the end of March 2023, and remains at levels last seen in the early 1960s.

Excluding the Bank of England, debt was 89.4% of GDP, 8.9 percentage points lower than the wider debt measure.

I have never thought that the Term Funding Scheme should be included and allowing for that our debt to GDP ratio is 93%.

Comment

As I have already explained the March numbers were a little disappointing as we had been in an improving trend. Although in comparison to where we thought we were this time last year they are rather good. I am afraid it is often like that when analysing the public finances when due to revisions there is much less certainty than many would have you believe. Indeed as I explained in my analysis of debt interest last March seems to have the wrong numbers as the other category was initially reported as £3.6 billion not the £1.8 billion in today’s release.

If we step back for some perspective we seem to have become rather addicted to public borrowing. Thus we badly need some economic growth so let us hope that this morning’s S&P Global PMI release is right about this.

Early PMI survey data for April indicate that the UK
economy’s recovery from recession last year continued to
gain momentum. Improved growth in the service sector
offset a renewed downturn in manufacturing to propel
overall business growth to the fastest for nearly a year,
indicating that GDP is rising at a quarterly rate of 0.4%
after a 0.3% gain in the first quarter.

That is a positive theme for St. George’s Day and let me wish you all a happy one.

business, debt, economy, Expenditure, Finance, Fiscal Policy, Investing, news, revenue, UK Public Finances

The Bank of England sets out a road map for UK interest-rates to fall to 4%

On Friday evening we got quite a significant policy speech from the Bank of England. This is partly because of its structure as of the 9 members of the Monetary Policy Committee some 5 of them are “insiders” under the patronage of the Governor. So if the operate as a pack which they usually do they can overrule the 4 external members in theory. In practice we have a situation where Governor Bailey has suggested he may soon be considering interest-rate cuts and we already have one external member ( Swati Dhingra) voting for them.

So when the “markets and banking” Deputy Governor Dave ( Sir David to his friends) stood up to speak in Washington there was interest. Not least as to how he got there as the Bank of England is a committed climate change warrior?

Our climate objective is to play a leading role, through our policies and operations, in ensuring the financial system and the Bank of England itself are resilient to the risks from climate change and in understanding its macroeconomic implications. Where there is alignment with the Bank’s objectives and legal framework, it acts to support the transition to a net-zero emissions economy.

Of course they do not mean for themselves they mean for plebs like us.Although as the “markets man” Dave will this afternoon be again demonstrating how he bought the UK bond market at the top as the Bank of England charged into the market like a headless chicken and is now selling at the bottom. Another £800 million will be sold this afternoon and the price will be lower due to the rises in US bond yields.

Inflation 

Although he does not put it in such words the speech highlights another failure by Dave.

Throughout much of 2023 I was worried that the UK was an outlier among advanced economies, diverging in terms of inflation performance and the degree of persistence.

There is particular significance in this as the speech was given at the Peterson Institute headed by Adam Posen who was regularly quoted in the mainstream media saying this. Unfortunately neither Dave nor the MSM bothered to check that Mr,Posen left the Bank of England because his inflation forecasts went very wrong. Those who were aware of that would not be surprised by this.

But over the last few months I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding, helped by improved inflation
dynamics.

Actually I had been making the point all along with particular reference to weak and at times declining numbers for the money supply. But I can agree that Dave deserves a large slice of humble pie.

.But we should travel with a high degree of humility, given
the ongoing uncertainties and complexities we face in forecasting inflation.

What Next?

The crucial moment in the speech came here.

.For me the balance of domestic risks to the outlook for UK inflation, relative to the February MPR forecasts, is now tilted to the downside, with a scenario where inflation stays close to the 2% target over the whole forecast period at least as likely.

So with inflation forecasted to be close to 2% then an interest-rate of 5.25% is 3.25% over that. Putting it another way if you wish to bear down on inflation the rule of thumb is that you put interest-rates 2% above it. So we have an upper tier for future UK Bank Rate of 4% to 4.25% and remember that if you are on target you do not really need  to near down on inflation so minds will shift to an interest-rate beginning with a 3. There are consequences from such thinking but let us stay for the moment with the speech.

In case you are wondering why the thoughts of Adam Posen has disappeared from the MSM this is pretty devastating.

This leaves the UK as less of an outlier and more of a laggard in terms of recent inflation performance, and one that is now catching up quickly.

He gets to my points above here.

The MPC’s assessment of the risks emphasised three key indicators of persistence: labour market tightness, private sector wages and services inflation. Trends in these indicators have also played an important part in the MPC’s decision to hold Bank Rate at 5.25% since last August, alongside communications which have stressed the
need for monetary policy to remain restrictive for an extended period of time, in order to
slow the economy and bring inflation sustainably back to the 2% target.

The next bit is really rather basic and we have been on the case for around a year now but for devotees of the Adam Posen line it has come as a surprise.

 This divergence was broad based but also in part reflected the timing of UK energy interventions relative to those across Europe which prolonged the impact of high energy
prices on UK inflation.

Also he confesses that I was right all along and that the wages growth they were concentrating on was a lagging and not a leading indicator.

More recently, I’ve started to focus more on
shorter-term expectations given the closer correspondence to headline inflation and importantly their significance in our understanding of wage dynamics.

You might have thought that basic competence would mean a policymaker had spent quite a lot of time thinking about and looking at wage dynamics but apparently not Dave. He has been singing along with Diana Ross.

Upside down
Boy, you turn me
Inside out
And round and round

Now the real world has not changed simply Dave’s perception of it with wages now following rather than leading.

But there is also analytical evidence that services inflation has been determined to a
greater extent by the energy prices shock

Or if you prefer what has been my point all along. In terms of the detail we get it here.

For example, by estimating the effect using the
most recent data and exploiting the cross-country differences in energy prices my former
MPC colleague Jan Vlieghe finds energy prices to be more important in driving services.

Actually there is something worse for the Bank off England which has previously been ignoring its own research.

And the Bank’s neural network model for services inflation, one of the recently developed cross-check modelling approaches the MPC deploys, also finds a significant role for energy prices.

Comment

This speech sets out a road for UK Bank Rate to decline to 4% and in reality to have a big figure beginning with 3. The problem with that comes from the market response as the “markets” man put the skids under the UK Pound £ as it fell below US $1.24. Someone needs to tell Dave that foreign exchange markets do not observe civil service hours.

One area of concern is how the “markets” man has no market experience at all.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017……….Previous to that he held a number of civil service roles including leading the Treasury work advising on whether the UK should join the Euro.

If I was intervening in markets on such a grand scale I would want someone experienced and battle-hardened.

This is part of two basic themes at the Bank of England where HM Treasury has in effect taken it back. Three of the four Deputy Governors are alumni of HM Treasury. Also how did we get to having four Deputy Governors as we have seen clear inflation in this area? This is also how they claim to have taken only small pay rises as they get promoted and this more pay instead.

Let me leave you with a final point. If they now believe inflation will be on target why are they still racking up large losses by selling UK bonds via QT? One for the markets man I think….

Podcast

UK March Retail Sales are either flat (seasonally adjusted) or up 4.3%

This morning has seen the latest UK Retail Sales release and on the surface not much is happening.

Retail sales volumes (quantity bought) were estimated to be flat (0.0%) in March 2024, following an increase of 0.1% in February 2024 (revised from 0.0%).

In literal terms there is an improvement via the February revision but it is very marginal especially for such a volatile series. However it does mean that the positive vibe for the UK’s first quarter GDP numbers continue.

Looking at the quarter, sales volumes increased by 1.9% in the three months to March 2024 when compared with the previous three months. This was following low sales volumes over the Christmas period for retailers.

So a 1.9% rise for this sector will feed into the GDP release. However the last sentence of the quote above is a reminder that it looks as though the seasonality calculations were sung about by Lyndsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

The collapse in December followed by the surge in January does look like it was created by the statistical methodology rather than reality. So it is more precise to say that with the official release showing a decline in GDP for the last quarter things look set for it to be offset as 2024 starts.

What happened in March?

Whilst the headline was unchanged there was quite a bit going on within the numbers.

Within retail, sales were mixed, with automotive fuel and non-food stores sales volumes rising by 3.2% and 0.5%, respectively. This was offset by falls in food stores and non-store retailers of 0.7% and 1.5%.

Maybe people were loading up with fuel ready for trips and holidays over Easter.

Automotive fuel sales volumes rose in March 2024 to reach their highest index level since May 2022. Retailers reported that this rise was linked to increased footfall on their forecourts.

For once there was a little bit of good news for the high street.

Non-food stores sales volumes (the total of department, clothing, household and other non-food stores) rose by 0.5% over the month, with increased footfall reported by some retailers. This is consistent with the rise in footfall on the high street, as seen in the national retail footfall data in our Economic activity and social change in the UK, real-time indicators bulletin. Rises were seen in secondhand goods stores (which includes antiques and auction houses), hardware and furniture stores, and clothing stores.

Although not for department stores per se.

Offsetting these rises, department stores, food stores and non-store retailing sales volumes all fell over the month with retailers suggesting that increased prices were affecting consumer spending habits.

It is good to see that our official statisticians have fallen in with my long-running theme that inflation is bad for Retail Sales volumes. But it is also awkward for the argument that inflation is ending. This led to me take a look at the deflator which calculates inflation for the retail sector. We see that the annual rate peaked at 12.4% in July of 2022 which was in the middle of a year of essentially ( the low was 9.7%) double digit rises. So prices are higher. The annual rate is much lower now (2.2% in March), but the monthly rise was 0.6% which after February’s 0.9% shows a reacceleration perhaps.

The online numbers were a little discouraging for the previous glimmer of hope for the high street.

As total spend showed no growth on the month, the 0.1% rise in the amount spent online increased the proportion of sales made online, from 25.8% in February 2024 (revised from 25.7%) to 25.9% in March 2024.

Seasonal Adjustment

Harvir Dillon of the British Retail Consortium makes a fair point.

Surely there has to be a distinction made between what *actually* happened and what happened after a statistical adjustment? Shoppers didn’t *actually* cut back, last month. And consumed more food than they did during the same time, last year.

Let me illustrate with the unadjusted index numbers. 110 ( November ). 113.1 , 88.7.90.7 and now 94.6 for March.  On this basis we saw a rise of over 4% in March on a monthly basis. In a way such numbers mae the case for seasonal adjustment as otherwise every December would be a monthly triumph and every January a disaster. But it is also true that the seasonally adjusted series is plainly struggling and in my view has been misleading.

Perspective

The official view is this.

Volumes rose 0.8% over the year to March 2024, while remaining 1.2% below their pre-coronavirus (COVID-19) pandemic level in February 2020.

If we take the non seasonally adjusted numbers we had a 1.8% rise on the year and are 2.8% above February 2020.

The chart below shows something in addition to the impact of the recent inflationary burst which is that Retail Sales are at 98% of 2019 levels,

Comment

On the face of it the UK economy had a much better first quarter in terms of Retail Sales and likely also GDP growth. Although as we have seen some of that is a statistical artifact as the seasonal adjustments look to have overstated both the December fall and the January rally. If we look ahead then the improving news on real wages looks set to continue to help the Retail Sales numbers.

On the other side of the coin is the US driven rise in international bond yields which has seen my leading indicator for UK mortgages ( our five-year yield) be around 4.2% recently. Thus I am expecting more of this from Mortgage Strategy.

Principality Building Society will raise selected residential fixed-rate home loans by up to 21 basis points, while Accord will lift some landlord and product transfer deals by as much as 19bps. 

The mutual increases, which come to market tomorrow (18 April)

Co-operative Bank has warned brokers that current rates will be withdrawn at 5pm tomorrow to make way for price increases of up to 41 basis points.

This morning Barclays have joined in.

Two and five-year mortgage rates have been increased, Barclays announced on Friday, as it unveiled sweeping product changes, which included some cuts.

The lender started charging 4.98% on a 75% long-to-value two-year fixed mortgage from Friday under the move, while five-year deals now include rates of up to 4.8% ( Proactive Investors)

 

 

US fiscal policy has juiced bond yields, interest-rates and economic growth

The economic story of 2024 is again being driven by the US economy. Back on the 4th of this month we were ahead of the game.

The Bond market sold off in response to the above and the thirty-year yield has moved above 4.5%. Or if you prefer the bond market was not buying what Jerome Powell was selling. Money markets moved as well.

In fact the US thirty-year yield is 4.7% as I type this so the heat has been on in the meantime. Along the way it has been above 4.75%. There are quite a few consequences from this and let us start with the ones domestic to the US economy.

The IMF has warned the US that its massive fiscal deficits have stoked inflation and pose “significant risks” for the global economy.
The fund said in its benchmark Fiscal Monitor that it expected the US to record a fiscal deficit of 7.1 per cent next year — more than three times the 2 per cent average for other advanced economies. ( Financial Times)

I have pointed out before the dangers of using higher bond yields as a permanent signal as opposed to a potentially temporary one.But it is also true that the US economy has been juiced by quite a bit of fiscal stimulus under President Biden.

But the IMF said the US had exhibited “remarkably large fiscal slippages”, with the fiscal deficit hitting 8.8 per cent of GDP last year — more than double the 4.1 per cent deficit figure recorded for 2022.

This is a change for the IMF because when I recently looked at their database they were suggesting deficits more like 6% of GDP for the US. Interestingly they added an estimate of the inflationary impact of all of this.

The IMF said the country’s fiscal deficit had contributed 0.5 percentage points to core inflation — a measure of underlying price pressures that excludes energy and food.

Being the Financial Times there is an attempt to blame The Donald.

The presumptive Republican presidential nominee Donald Trump has pledged to make his 2017 tax cuts permanent, a move the Committee for a Responsible Federal Budget think-tank expects to cost $5tn over the next decade.

Whilst The Donald is a man of extensive debt experience he is not the President responsible for the surge in US borrowing. Also as I pointed out on the 4th of this month the Biden administration has been issuing debt in a risky way.

Back on the 26th of March I pointed out that the US is borrowing short by the issuance of lots of Treasury Bills thus making things more unstable.

So with bond yields higher things are both riskier and more expensive in the long-term. Also those looking for a mortgage will be facing higher interest-rates.

The bad times keep rolling for mortgage rates with the average conventional 30yr fixed rate back up to 7.5% according to our daily index.  ( Mortgage Daily News on Tuesday)

In the end this all depends on economic growth as along the way decent growth fixes pretty much everything.

IMF FORECASTS US 2024 GROWTH AT 2.7% VS 2.1% IN JANUARY FORECAST; 2025 GROWTH AT 1.9% VS 1.7% IN JANUARY ( @FirstSquawk)

Problems will arise pretty quickly should growth stop though.

Problems for Jerome Powell

The Chair of the US Federal Reserve was at the IMF meeting and used it to give his view.

Powell on Tuesday signaled the Fed will wait longer than previously anticipated to cut borrowing costs following a series of surprisingly high inflation readings — marking a notable shift from his December pivot toward easing. ( Bloomberg)

That was rather awkward for him personally. But we have been guided towards interest-rate cuts in March and then June and now we will get neither. As we seem to be progressing quarterly that now brings September into the frame. Except then we will be in the election campaign I am sure The Donald will be all over the implications of any interest-rate cuts for that.

Looking at the economics what makes me uncomfortable is that central bankers are again looking backwards to past inflation prints when the real issue is what will happen in 2025/26. They are what it can influence but they keep doing this.

I keep forgettin’ we’re not in love anymore
I keep forgettin’ things will never be the same again
I keep forgettin’ how you made that so clear
I keep forgettin’ ( Michael McDonald)

The US Dollar

The factors above mean we have returned to the phase of King Dollar

The US dollar is on track for its best 5-day run since February 2023. The Bloomberg Dollar Spot Index has risen by ~2% over the last 5 trading days, the most in 14 months. Meanwhile, the US dollar index is up ~5% year to date. ( KobeissiLetter)

This has tightened the noose on everyone else just as 2024 was supposed to be the year of lower interest-rates and a weaker US Dollar. Yet we have instead seen this.

• The Japanese Yen has continued to show weakness against the U.S. Dollar following last week’s USD/JPY breakout to fresh 34-year highs. ( forex.com)

In Japanese terms this is awkward on several levels. Their change to a positive interest-rate was supposed to calm things. Then Finance Minister Suzuki indulged in some open mouth foreign exchange interventions. As we stand at 154.25 he has only succeeded in putting his foot in it.

Whilst the situation is not as acute in Europe many central banks there are in the process of having itchy shirt collars due to the strength of the US Dollar. The ECB has guided people as directly as it can towards an interest-rate cut in June where it expected to be accompanying the Federal Reserve. The Swedish Riksbank guided towards May or June. Both will now fear further currency weakness and in an irony might even welcome this.

Purposely devaluing the U.S. dollar by pressing other countries to alter their own currency values would represent the most aggressive proposal yet in Trump’s attempts to reshape global trade……… A weaker dollar would make U.S. exports cheaper on the world market and potentially reduce the U.S.’ yawning trade deficit. ( Politico)

I mean the policies as in an extraordinary statement for a central banker President Lagarde has expressed her hatred of The Donald more than once. The problem with this is that any Dollar decline is likely to come quite some time after the ECB wants ( and indeed needs) to cit Euro area interest-rates.

Comment

There are clear elements of groundhog day here as in some ways we have gone back to last autumn. Higher bond yields leading to fears about the US deficit. Stronger US growth giving us a higher Dollar and so on. Actually also for the Federal Reserve where “higher for longer” which was only a PR phrase has returned.

Some of the implications are welcome, for example US economic growth. But there are risks as we wonder about those who borrow in US Dollars? Plus there are the issues with US regional banks and commercial property. Other countries need interest-rate cuts due to weak economic growth but now also have currency risks. Plus there is the US itself as its numbers will deteriorate fast in the next recession. Which makes fiscal stimulus even more likely as it strives ever harder to avoid it.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” (The Mad Hatter)

UK Inflation continues to improve but the cost of living remains high

This morning has brought some better news for the UK on the inflation front.

The Consumer Prices Index (CPI) rose by 3.2% in the 12 months to March 2024, down from 3.4% in February.

So we have seen quite a decline since the 11.1% peak in annual terms and considering the nature of the inflation pattern these days ( some contracts being inflation plus an extra (3.9% for my broadband and mobile phone) the monthly number was not too bad.

On a monthly basis, CPI rose by 0.6% in March 2024, compared with a rise of 0.8% in March 2023.

As it has been a cost of living crisis we can start our analysis with one of the basics of life or what central bankers call “non-core” which is food.

Prices rose by 0.2% between February and March 2024, compared with a monthly rise of 1.1% a year ago. Prices have been relatively high but stable since early summer 2023, rising by less than 2% between May 2023 and March 2024.

So quite an improvement but we still are looking for any sign of the falls suggested by the United Nations FAO survey.

The index, although it registered a first uptick in March following a seven-month long declining trend, was down 9.9 points (7.7percent) from its corresponding value one year ago.

In terms of individual products we are told this.

Prices for bread and cereals rose by 0.2% on the month, compared with a rise of 2.2% a year ago, resulting in an annual rate in March 2024 of 4.0% – the lowest since January 2022. Prices of some bakery products, such as chocolate biscuits and crumpets, fell between February and March 2024 but rose between the same period a year ago.

The chocolate biscuit move seems a little curious considering the price of cocoa but may be reflecting that own brand dark chocolate ones have returned to the supermarket shelves after disappearing for a while. Carnivores got some outright good news.

Meat prices fell by 0.5% between February and March this year, compared with a rise of 1.4% a year ago……, the lowest rate since November 2021. The main downward effect behind the easing in the rate came from pork products.

Of the risers there is one I expect to be in play next month if what I paid for some potatoes at the weekend is any guide.

Overall, the annual rate eased in 8 of the 11 food and non-alcoholic beverages classes, the exceptions being vegetables, hot beverages, and soft drinks.

Another area which has been pulling down on the inflation rate is furniture.

Prices of furniture and household goods fell by 0.9% in the year to March 2024, compared with a small rise of 0.1% to February…….On a monthly basis, prices rose by 0.3% between February and March 2024, compared with a rise of 1.3% a year ago.

Whilst it rose clothing may offer a little hope as it tends to see seasonal rises for new stock in March.

On a monthly basis, prices rose by 0.6% between February and March 2024, compared with a rise of 1.6% a year ago…..The downward effect came principally from women’s clothing and footwear, with prices rising on the month but by less than a year ago.

With the monthly rise seen overall therehad to be something giving it a push and here it is.

The average price of petrol rose by 2.6 pence per litre between February and March 2024 to stand at 144.8 pence per litre, down from 146.8 pence per litre in March 2023. Diesel prices rose by 2.8 pence per litre in March to stand at 154.1 pence per litre, down from 166.5 pence per litre in March 2023.

The troubles in the Middle East have affected the price of motor fuel.As car insurance has been debated in the comments prices fell by 0.4% in March reducing the annual rate from the peak of 53% last June to 29.6% now. Remember this is reflected fully in the RPI (gross) but downgraded to net via subtracting payouts in CPI. Overall the transport number was in annual terms pulled lower by airfares.

Air fares rose by just 0.1% between February and March this year, compared with a 7.7% monthly increase a year ago, with the main downward effect coming from European routes.

CPIH

The clearest signal about this measure is below.

This release has been discontinued. The last planned release was on 14 February 2024. These statistics have been superseded by the new, monthly “Private rent and house prices, UK” bulletin…..

For newer readers this inflation measure was based around the idea of Rental Equivalence where even though house and flat owners do not pay rent you assume that they do. You also assume that the “rent fairy” will mean it matches the costs they do pay. However supporters of this idea such as HM Treasury, the Paul Johnson Inflation Review and the former economics editor of the Financial Times Chris Giles are probably hoping that people will not realise what a mess has been made of this. I pointed out to all of them a decade ago the rental series was flawed.

Those with a wry sense of humour can enjoy the fact that the measure which was designed to produce a lower inflation number and thus flatter the work of HM Treasury is presently producing a higher one!

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.8% in the 12 months to March 2024, unchanged from February.

The individual responsible if presently working in the Treasury cellar in an area where the cake trolley never goes.

The biggest irony of all is that it may for once in its life be presenting a realistic inflation measure. But it is a fluke.

Average UK private rents increased by 9.2% in the 12 months to March 2024 (provisional estimate), up from 9.0% in the 12 months to February 2024.

I realise that the media presents these numbers as a fact but the official series is lagged by a around a year. So it is picking up the rises shown by the private-sector measures last year and reporting  a peak as they are seeing the annual rate fall for example Homelet at 7.5% and Goodlord at 6%.

I would say you really couldn’t make it up but….

Producer Prices

These are continuing to suggest a much lower path for inflation.

On a monthly basis, producer input prices fell by 0.1% but output prices rose by 0.2% in March 2024.

So pretty much flat overall for March. I was expecting the oil price to affect the input numbers but there was another factor in play.

Chemical prices fell by 6.9% in the year to March 2024 (Table 2), with falls in the prices of “other organic basic chemicals”, which survey respondents noted were the result of market dynamics (supply and demand) and falling gas prices.

The annual producer price numbers continue to suggest lower inflation.

Producer input prices fell by 2.5% in the year to March 2024, down from a revised fall of 2.2% in the year to February 2024.

Producer output (factory gate) prices rose by 0.6% in the year to March 2024, up from a rise of 0.4% in the year to February 2024.

Comment

The outlook for UK inflation is brightened by the fact that next month’s release will include the 12% fall in domestic energy prices from the 1st of this month. That means that the CPI measure will see a monthly decline of 0.4% from this and as we know the overall monthly rise was 1.2% last April you can see why it is quite likely we will be on target (2%) or so next month.

Whilst that is welcome I spotted a fly in the ointment not mentioned by the ONS and it relates to an utter failure by our political class allowing inflation plus (usually 3% to 4%) contracts.

with the main upward contributions coming from mobile phone applications and mobile phone.

It was 1.8% on a monthly basis in March and I expect another chunky rise for April. According to MoneySavingExpert O2,Vodafone and Three raised prices on April Fools Day.

Finally let me finish with what has been the UK’s best measure of the cost of living crisis. No inflation measure is perfect and you can debate the changes suggested by Andrew Baldwin in the comments yesterday. Nit strategically it gets a lot right and today’s examples ( gross insurance premiums and actual housing costs) have been very much in play.

The all items RPI annual rate is 4.3%, down from 4.5% last month.

 

 

 

Is it a coincidence that UK unemployment has risen following a methodological change or an effect of it?

This morning’s UK laboir market release is a bit of a change on what we have become used to. But we can start with something that is both familiar and in my opinion good news.

Annual growth in regular earnings (excluding bonuses) was 6.0%, and annual growth in employees’ average total earnings (including bonuses) was 5.6%.

Wage growth remains strong and with inflation fading brings with it the prospect of some decent real wage gains. There is a small fading of the monthly growth rate to 5.4% in February but for this series 5.9%,5.5% and now 5.4% for the monthly rates is in fact pretty stable.

We can continue that theme into the initial breakdown.

Annual average regular earnings growth for the public sector remains relatively strong at 6.1% in December 2023 to February 2024 (Figure 4). For the private sector this was 6.0%, and growth was last lower than this in April to June 2022 (5.4%). Annual average total earnings growth for the private and public sector was 5.6% and 6.0%, respectively, in December 2023 to February 2024.

So they are very similar which is a change on what we saw at times last year. In fact that pattern continues as whilst the official release shows a difference in regular pay as shown below the total pay figures are quite similar.

In December 2023 to February 2024, the manufacturing sector saw the largest annual regular pay growth at 6.9%. The finance and business services sector, and wholesaling, retailing, hotels and restaurants sector both followed at 6.8% and 6.4%, respectively

The stand out is construction where total pay rose by only 3.1%.Perhaps it was affected by the rain we noted when looking at the GDP release for February.

Overall there was even some good news for the Bank of England.

 If we compare the latest three months with the three months that preceded them, and then annualise this growth rate, nominal regular average weekly earnings grew by 4.8%.

Real Pay

Here the official release brings us two choices.

In real terms (adjusted for inflation using the Consumer Prices Index including owner occupiers’ housing costs (CPIH)), total real pay was 1.6% in December 2023 to February 2024……. Regular real pay was 1.9%;

The problem with CPIH as a measure is that nobody with any series believes its imputed rent driven version of housing costs. But as it happens the two official series are giving results not that different.

Using CPI real earnings, in December 2023 to February 2024, total pay was 1.8%…. Regular pay was 2.1%;

The nuance is that from an establishment point of view this is a failure as CPIH was designed to give lower inflation and this higher real wages figures. But even if we use an inflation measure that is much more realistic for the housing sector we see that the annual rate for the RPI was falling from 5.2% in December to 4.5% in February so we had real wages growth here too.

Employment

Switching from the quality to quantity numbers we get a little bit of a jolt.

Payrolled employees in the UK fell by 18,000 (0.1%) between January and February 2024, but rose by 352,000 (1.2%) between February 2023 and February 2024.

The situation had showed slower employment growth but if we now add in the provisional March figures we see that both numbers show a change of direction this time around.

The early estimate of payrolled employees for March 2024 decreased by 67,000 (0.2%) on the month but increased by 204,000 (0.7%) on the year to 30.3 million.

Regular readers will be aware I find it disappointing that the official release guides us towards payroll employment these days rather than the wider overall employment. In these numbers it is material as some would gleam from this.

The UK employment rate for December 2023 to February 2024 (74.5%) remains below estimates a year ago (December 2022 to February 2023), and decreased in the latest quarter.

As that is rather vague let me help out. as this is some 0.5% lower than a quarter ago and 0.8% lower than a year ago. Or employment has fallen by 156,000 in this period making it 195,000 lower than a year ago. These numbers are significant in themselves but also have further consequences. For example just as the GDP numbers have shown a return to growth we are seeing employment falls. Also we now have employment back below ( by 110,000) pre pandemic levels. If you wish a silver lining in this cloud then productivity has just improved.

Population Problems.

This is a contentious area as in party because the government is not keen to reveal its failures on migration we do not really know what the UK population is. In my own location of Battersea it feels like even more people have arrived and I am not making a value judgement simply stating what is reality albeit something of an anecdote. If you want an official confirmation of this it is here.

From our February 2024 labour market release, LFS periods from July to September 2022 onwards have been reweighted to incorporate the latest estimates of the size and composition of the UK population. This reweighting creates a discontinuity between June to August 2022 and July to September 2022.

If we switch to football terms a discontinuity is the sort of thing that would have fans chanting “You don’t know what you’re doing.” Ican take that further because since the pandemic we have seen employment dip by just over 0.3% but the employment rate fall by 1.7% meaning the labour force has risen by around 1.4%. That is different to the population growth but we can infer what it has been doing from this.

Unemployment

With employment now falling the number below should not unduly surprise in terms of direction but the size of the move is noticeable.

The UK unemployment rate for December 2023 to February 2024 (4.2%) is above estimates a year ago (December 2022 to February 2023), and increased in the latest quarter.

As the release seems a little reticent it rose from 3.9% to 4.2%. Putting it another way unemployment rose by 85,000 to 1.44 million in the latest quarter.

Comment

Over the time I have been writing this blog there have been many disappointments in the standards of official statistics. Right now is another one as we see the Bank of England getting out its electron microscope to examine numbers which the official release describes like this.

Therefore, we advise increased caution when interpreting short-term changes in series and recommend using them as part of a suite of labour market indicators……

Have the methodological changes caused the recorded changes in employment rather than reality? It is a little awkward at a time when GDP is growing again although they have been out of phase before.Plus the hours worked figures are more consistent with the GDP ones.

In the latest period (December 2023 to February 2024), total actual weekly hours worked increased on the quarter, to 1.06 billion hours, and are above the level a year ago (December 2022 to February 2023). Both men’s and women’s hours worked increased on the quarter.

Up by 13.2 million in fact.

Also returning to the strategic position there is this I pointed out on the day of the last release ( March 12th).

In summary, if the WFJ estimate is used to provide the overall picture, there are likely to be around one million more jobs than at the start of the pandemic instead of an LFS-based picture of employment stagnating since mid-2021 and even now only just attaining prerecession levels.

As the series Soap used to regularly remind us.

Confused? You will be….

What can we learn from the Bernanke Review of Bank of England Forecasting?

Friday brought something which could have come straight from the pages ( or tv programmes) of Yes Minister. What I mean by that is releasing the Bernanke Review at Midday on Friday meant many minds were already drifting towards the weekend. Especially for those who still observe the Friday lunchtime pub run. Also there was always a chance that events over the weekend would be a further distraction. Whilst I doubt that the Bank of England was on the list of those warned about Iran making a drone and missile attack on Israel, it will have had a wry smile at a job well done by its planning department in terms of distraction.

If we switch to the Bernanke Review itself then there was something which really caught my eye as the sentence below went on and on and on.

 The Bank has important institutional and practical safeguards against groupthink, including the inclusion of four external members on the MPC, the principle of individual responsibility (and attributed voting) of MPC members in policy decisions, the leeway given to Bank research staff to choose the topics they analyse and the outside experts with whom they work, visits by MPC members to various parts of the country to hear local views and see the state of the economy up close, and regular consultations of MPC members and staff with Agents, businesspeople, outside economists, other experts, and non-economists (as represented by the Citizens’ Forums, for example).

We can stay with the Yes Minister theme here because the words of Jim Hacker “Never believe anything until it is officially denied” come to mind. Indeed the analysis goes further in this regard by the mention of global energy prices which has been the central banking excuse for all their failures.

That said, the analysis of forecast errors and potential structural change provides another possible test of the groupthink hypothesis. If the Bank’s forecast errors are largely unavoidable, eg, resulting from unpredictable moves in exogenous variables like global energy prices, then groupthink is probably not an issue.

Buy whilst the Review tries to place thoughts like this in our minds ( something which is continued with the comparisons with other forecasters who were no doubt carefully selected) it cannot avoid recommending this. The emphasis is his.

The staff should be charged with highlighting significant forecast errors and their sources, particularly errors that are not due to unanticipated shocks to the standard conditioning variables.

Foresight is presented as Hindsight

Please hold the groupthink issue in your minds as you read what maybe the key sentence in the report.

The figure confirms that, with the substantial benefit of hindsight, all the central banks in our comparison set were relatively slow in responding to the post-pandemic rise in inflation, beginning rate increases in late 2021 or early 2022. The Bank of England.

But on here we were pointing out that problems were on their way. Here is part of my comment on the words of the then Bank of England Chief Economist Andy Haldane.

So our “loose cannon on the decks” has spoken and it seems he is as detached from reality as ever. For example the issues with inflation are two-fold. The first is that the Bank of England has given the economy quite a monetary push with the annual rate of broad money ( M4) growth at 13.1%.

If we look at developments then we were seeing quite a warning from the UK money supply data for broad money. It was warning that an inflationary burst was on its way in 18/24 months. Any logical analysis would conclude that it performed well as it is signalling a lot of inflation and literally it heading to double-digits which of course it did. One attempt to obfuscate in this area came from the absent-minded professor Deputy Governor Ben Broadbent when he claimed in a press conference that no indicators had predicted the inflation burst precisely.

But the main thrust of my point is that we have groupthink and forecasting failure as conjoined twins as where was the monetary analysis at the Bank of England? One might reasonably wonder why none of the 5 insider policy makers look at it. But that being so surely at least one of the external members should be someone who pays attention to monetary data?

The essential central banking problem is that they did it.

The first is that the Bank of England has given the economy quite a monetary push.

Next up when it became apparent that inflation was on the march they panicked on two fronts. Firstly they were afraid that all their reflationary policies might not get the economy back to pre pandemic levels of economic output. Secondly that they would get the blame via their implicit monetisation of government borrowing. That is put like this by the Bernanke Review.

The Bank of England began its rate increases relatively early – slightly later than the central banks of New Zealand and Norway (although the Bank would ‘pass’ the Norges Bank by mid-2022), but earlier than the Bank of Canada, the Fed, the Riksbank, and the ECB.

Indeed the Bank of England is positioned as being hardcore in its interest-rate increases.

The Bank’s peak rate (as of this writing) of 5.25% is close to the maximum of any bank (the Reserve Bank of New Zealand’s policy rate is currently 5.5% and the Fed’s target range for its policy rate is 5.25% to 5.5%).

The problem here was summarised by JoJo

I’m gonna say this now
Your chance has come and gone
And you know
It’s just too little too late.

Firstly it must have slipped Ben Bernanke’s mind to point out that the first interest-rate increase by the Bank of England was a mere 0.15%. It’s smallest increase ever! That was clearly too little at the time and got worse and worse as inflation soared. Remember you need to act as early as possible which means that the early interest-rate rise should be the largest ones not the smallest. That was why back then I was arguing the first move should be to put interest-rates back to the pre pandemic level of 0.75% so a 0.65% rise.

Next up is the too late bit and as you can see the money supply was running hot, in fact white hot by late 2020, but there was no interest-rate rise until December 2021.

Comment

It is not fair to say that nothing is achieve by this Review. For example no doubt Ben Bernanke will have seen his pension pot significantly boosted. No doubt Bank of England Governor Andrew Bailey anticipates his own Retail Price Index linked pension seeing a boost in return one day. This is how things operate as we see them turning down pay rises for the PR benefits but making sure they get more pay via other routes. I looked at this recently in the case of Deputy Governor Sarah Breedon who has seen her pay soar whilst apparently getting only minor rises.

As to the Review itself it looks at technical issues to put a smokescreen over the policy failures that took place. Or in Yes Minister terms the issues are kicked into the long grass. The major failings were deliberate as we do get told in a roundabout way.

Reducing the risks of excessive incrementalism and over-reliance on stale judgements will require a focused effort.

Plus there is something really awkward because if we look at the recent phase of monetary policy we see that the Review should have interviewed the man most responsible for both them and the inflationary surge they pump-primed. Some chap called Ben Bernanke.

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