The ECB has it successes but also plenty of problems

Let is continue the central banking season which allows us to end the week with some good news. As this week has developed there has been good news about economic growth in the Euro area.

The Federal Statistical Office (Destatis) reports that, in the third quarter of 2017, the gross domestic product (GDP) rose 0.8% on the second quarter of 2017 after adjustment for price, seasonal and calendar variations. In the first half of 2017, the GDP had also increased markedly, by 0.6% in the second quarter and 0.9% in the first quarter.

It has been a strong 2017 so far for the German economy but of course whilst analogies about it being the engine of the Euro area economy might be a bitter thinner on the ground due to dieselgate there are still elements of truth about it. But we know that a rising tide does not float all economic boats so ECB President Mario Draghi will have been pleased to see this about a perennial struggler.

In the third quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.5 per cent with respect to the second quarter of 2017 and by 1.8 per cent in comparison with the third quarter of 2016.

Of course Mario will be especially pleased to see better news from his home country of Italy especially at a time when more issues about the treatment of non-performing loans at its banks are emerging. Also this bank seems to be running its own version of the never-ending story, from the Financial Times.

A group of investors in the world’s oldest bank, Italy’s Monte dei Paschi di Siena, have filed a lawsuit in Luxembourg after it announced bonds would be annulled as part of a state-backed recapitalisation.

But in Mario’s terms he is likely to consider the overall numbers below to be a delivery on his “whatever it takes” speech and promise.

Seasonally adjusted GDP rose by 0.6% in the euro area…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.5% in the euro
area.

Inflation

This is a more problematic area for Mario Draghi as this from his speech in this morning indicates.

According to a broad range of measures, underlying inflation has ticked up moderately since the start of this year, but it still lacks clear upward momentum.

This matters because unlike the Bank of England the ECB takes inflation targeting seriously and a past President established a rather precise estimate of it at 1.97% per annum. We seem unlikely now to ever find out how Mario Draghi would deal with above target inflation but he finds himself in what for him maybe a sort of dream. Economic growth has recovered with inflation below target so he can say this.

This recalibration of our asset purchases, supported by the sizeable stock of acquired assets and the forthcoming reinvestments, and by our forward guidance on interest rates, helps to maintain the necessary degree of accommodation and thereby to accompany the economic recovery in an appropriate way.

So we will get negative interest-rates ( -0.4%) for quite a while yet as he has hinted in the past that they may persist past the end of his term. Also of course whilst at a slower rate ( 30 billion Euros a month) the QE ( Quantitative Easing) programme continues. Even that has worked out pretty well for Mario as continuing at the previous pace seemed set to run out of German bonds to buy.

Consequences

However continuing with monetary expansion into a boom is either a new frontier or something which later will have us singing along with Lyndsey Buckingham.

(I think I’m in)(Yes) I think I’m in trouble
(I think I’m in) I think I’m in trouble

Corporate Bonds

When you buy 124 billion Euros of corporate bonds in a year and a few months there are bound to be consequences.

“Tequila Tequila” indeed. What could go wrong with this.?

OK, we are officially in la la land. A BBB rated company just borrowed 500 million EUR for 3 years with a negative yield of -0.026 %. A first..  ( h/t @S_Mikhailovich )

You can take your pick whether you think that Veolia is able to issue debt at a negative interest-rate or at only 0.05% above the swaps rate is worse.

Mario Draghi explained this sort of thing earlier in a way that the Alan Parsons Project would have described as psychobabble.

By accumulating a portfolio of long-duration assets, the central bank can compress term premia by extracting duration risk from private investors. Via this “duration extraction” effect, the central bank frees up risk bearing capacity in markets, spurs a rebalancing of private portfolios toward the remaining securities, and thus lowers term premia and yields across a range of financial assets.

Moral hazard anyone?

The dangers of this sort of thing have been highlighted by what has happened to Carillion this morning.

The wages problem

It is sometimes argued in the UK that weak wage growth is a consequence of high employment and low unemployment. But we see that there are issues too in the Euro area where the latter situations whilst improved are still poorer.

A key issue here is wage growth.Since the trough in mid-2016, growth in compensation per employee has risen, recovering around half of the gap towards its historical average. But overall trends remain subdued and are not broad-based.

Indeed if we look back to late May Mario gave us a rather similar reason to what we often here in the UK as an explanation of weak wages growth.From the Financial Times.

Mr Draghi also acknowledged concerns that sinking unemployment was not leading to a recovery in well-paid permanent jobs………….Mr Draghi said he agreed. “What you say is true,” he said. “Some of this job creation is not of good quality.”

The Italian Job

As I hinted earlier in this piece there are ever more signs of trouble in the Italian banking sector. There have been many cases of can kicking in the credit crunch era but this has been something of a classic with of course a dash of Italian style and finesse. From the FT.

Mid-sized Genoan bank Carige’s future looked uncertain this week after a banking consortium pulled its support for a €560m capital increase demanded by European regulators. Shares in another mid-sized bank Credito Valtellinese fell 8.5 per cent to a market value of €144m after it announced a larger than anticipated €700m capital raising to shore up its balance sheet.

There are issues with banks elsewhere as investors holding bonds which were wiped out insist on their day in court.

Comment

As you can see there is indeed good news for Mario Draghi to celebrate as not only is the Euro area seeing solid economic growth it is expected to continue.

From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward.

The problem though is where does it go from here? Even Mario himself worries about the consequences of monetary policy which has been so easy for so long and is now pro cyclical rather than anti cyclical before of course dismissing them. But unless you believe that growth will continue forever and recessions have been banished there is the issue of how do you deal with the latter when you already have negative interest-rates and ongoing QE?

Also the inflation target problem is covered up by describing it is price stability when of course it is anything but.

Ensuring price stability is a precondition for the economy to be able to grow along a balanced path that can be sustained in the long run.

Wage growth would be improved in real terms if inflation was lower and not higher.

Also Mario has changed his tune on the fiscal situation which he used to regularly compare favourably to elsewhere.

This means actively putting our fiscal houses in order and building up buffers for the future – not just waiting for growth to gradually reduce debt. It means implementing structural reforms that will allow our economies to converge and grow at higher speeds over the long-term.

Number Crunching

This from Bloomberg seemed way too high to me.

Italy’s failure to qualify for the soccer World Cup finals for the first time in 60 years may cost the country about 1 billion euros ($1.2 billion), the former chairman of the national federation said.

Me on Core Finance

http://www.corelondon.tv/2-uk-growth-cap-unreliable-predictive-bodies-bad/

 

 

 

 

 

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Why does the Bank of England lack credibility these days?

As it is open season at the Bank of England in terms of media appearances and speeches even the absent-minded professor has been spotted. Actually these days he seems to be performing the role of Governor Carney’s messenger boy and as you can see below this was in evidence yesterday,

The effects of Brexit on inflation, and ultimately on the appropriate level of interest rates, are altogether more
uncertain and more complex. They’re certainly too complex to justify the simple assertion that Brexit necessarily implies low interest rates.

I am not sure what world Ben Broadbent lives in as of all the things Brexit might effect I would imagine low interest-rates was a long way down most people’s lists. Also as to the direction of travel well we were told before the referendum by Governor Carney that interest-rates were likely to rise should the vote be to leave.  Of course he then cut them!

But if we continue with what was supposed to be the theme of yesterday’s speech there was also this.

The MPC explained over a year ago that
there were “limits to the extent to which above-target inflation [could] be tolerated” and that those limits
depended on the degree of spare capacity in the economy. In March, eight months ago, it said in its
Monetary Policy Summary that, if demand growth remained resilient, “monetary policy may need to be
tightened sooner” than the market expected. Similar points were made in the intervening months.
Yet, even as inflation rose, and the rate of unemployment fell further, interest-rate markets continued to
under-weight the possibility that Bank Rate might actually go up this year.

This bit is significant because interest-rate markets are again saying “we don’t believe you” to the Bank of England. The clearest example of that is the two-year Gilt yield which at 0.48% is below the current Bank Rate let alone any possible increases. Even the five-year Gilt yield at 0.75% is only pricing in maybe one increase. Thus the message that further Bank Rate increases are on the cards has not convinced.

Mixed Messages

The problem with sending out an absent-minded professor to deliver a message is that they are likely to be, well, absent-minded!

I’m certainly not going to argue here that interest rates will inevitably rise as Brexit proceeds.

If we skip his apparent Brexit obsession that rather contradicts the message he was sent out to put over and later there was more.

However, my main point is that, given all the moving parts, even the marginal impact of EU withdrawal on the
appropriate level of UK interest rates is ambiguous

And more.

These pull in different directions: holding fixed the other two, weaker demand tends to
depress inflation and interest rates, declines in productivity and the exchange rate do the opposite. There
are feasible combinations of the three that might require looser policy, others that lead to tighter policy.

This is classic two handed economics as in one the one hand interest-rates might rise but on the other they might fall.

And more.

Predicting others’ predictions isn’t easy, and I don’t think the balance of risks to inflationary pressure, and
therefore future interest rates, is obvious.

The essential problem faced here is back to the credibility issue that Sir Jon Cunliffe was boasting about in his speech on Tuesday. You see markets have problems but are usually not stupid and they will see through this.

It won’t have escaped your attention that the MPC raised interest rates earlier this month. It did so, in part,
because of the referendum-related decline in sterling’s exchange rate. That has pushed up CPI inflation and
will continue to do for some time yet, as the rise in import costs is passed through to retail prices.

When the Bank of England raised Bank Rate the effective or trade-weighted index for the UK Pound £ was 78 but it had cut Bank Rate in August 2016 when it was 79! So if it raised Bank Rate in response to a one point fall why did it cut it in the face of the 9 point fall that has followed the EU leave vote? Best to leave our absent-minded professor in his land of confusion I think. The statement also ignores that fact that to defeat an inflationary push you need to get ahead of events not be some form of tail end charlie chasing them.

Back in August 2016 Ben Broadbent and his colleagues gambled and we lost.

The MPC eased policy in August 2016 not because of the referendum result but because of the steep fall in measures of business and consumer confidence that followed it.

So in terms of credibility I would say that in modern language they are in fact uncredible.

Retail Sales

These numbers remind us of why Ben Broadbent is so uncredible. You see after the EU Leave vote he decided to ignore signals that the Bank of England previously used and concentrate on business surveys. Markit reported this in July.

UK economy contracts at steepest pace since early-2009

Both they and Ben are probably desperately hoping that people will be absent minded about this as of course the UK economy in fact continued to grow. In particular we saw this happen towards the end of the year as we focus in on Retail Sales.

In October 2016, the quantity of goods bought (volume) in the retail industry was estimated to have increased by 7.4% compared with October 2015; all store types showed growth with the largest contribution coming from non-store retailing. This is the highest rate of growth since April 2002.

That is one of the biggest booms we have ever had and thank you ladies as it your enthusiasm for clothes and shoes shopping that helped give the numbers a push.

That perspective brings us to today’s numbers which reflected the boom last year.

The longer-term picture as shown by the year-on-year growth rate shows the quantity bought fell by 0.3% in comparison with a strong October 2016;

At this point a cursory glance might make you think that the numbers are badly and are in line with some of the surveys we have seen. Except if we look closer maybe not.

The underlying pattern in the retail industry in October 2017, as suggested by the three-month on three-month measure is one of growth, with the quantity bought increasing by 0.9%………The quantity bought in October 2017 increased by 0.3% compared with September 2017;

If you look at the series it was in fact September which was the weak month as was the opening of 2017 and October was a little better. Also we saw another possible confirmation of my argument that higher inflation leads to weaker volumes.

The main contribution to the overall year-on-year decrease of 0.3% in the quantity bought in retail sales came from food stores, providing a negative contribution of 0.9 percentage points;

The inflation data on Tuesday signalled higher food inflation ( 4.2%) and it may well be more than a coincidence that we are seeing lower volumes. Rather curiously the strong point in October was this.

in particular second-hand goods stores (charity shops, auction houses, antiques and fine art dealers) provided the largest contribution to this growth.

Comment

A theme of my work over the past year and a half or so is to be sanguine about the impact of an EU Leave vote. Yes there are impacts due to higher inflation reducing real wage growth but the economy has in fact grown fairly steadily albeit at no great pace. Regular readers will recall that I pointed out that UK economic history showed that a lower Pound £ has a powerful impact. Ironically that is only partly shown by the trade figures where you might expect to see it first but we do seem to have seen it elsewhere. As to the statistics we receive well they can be solved by a stroke of the pen apparently.

Having carried out an assessment on the additional information, ONS has determined that if the
proposed regulations come into force as proposed then local authority and central government influence
in combination with the existence of nomination agreements would not constitute public sector control,
and English PRPs would be reclassified as Private Non-Financial Corporations (S.11002).

About £60 billion I think and it looks a little like a merry-go-round as they put the national debt up and then change their minds.

Meanwhile I expect the speeches from the Bank of England to get ever more complex so that they paper over the issue that they have got the basic wrong. Let me add one more problem to the list by pointing out something it tries to look away from, here are some wealth effects from what is a fair bit of the QE era.

 

 

What does the Bank of England think about UK wage growth prospects?

A sense of perspective can give us also a direction of travel so here is this from Sir Jon Cunliffe of the Bank of England yesterday.

The unemployment rate in the UK today is 4.3%. The last time it was that low was 1975 – the year I
graduated from university.
That year, average wages grew by 24%. 42 years later, with unemployment at the same level, whole
economy average weekly earnings grew by 2.2%

Oh and just as a reminder as Sir Jon omitted this bit the wage rises were not a sign of economic triumph as inflation ( measured by the Retail Price Index or RPI) rose to 26.9% in August of that year. Also this is an innovative way of describing a period when RPI inflation went over 5% for a while as the Bank of England sat on its hands.

 energy price inflation between 2010 to 2013;

Actually innovative ( for newer readers this word was twisted in the Irish banking crisis and now in my financial lexicon for this times has an ominous portent to it) move was to claim this.

That is why the Bank of England has a clear primary objective of price stability and a forward-looking inflation
targeting remit. We have an objective to support the government’s economic policy but it is a secondary
objective and subject to the first.

The truth is that it is the other way around as the inflation surge in 2011 that I pointed out earlier or the current phase where the Bank of England cut Bank Rate and expanded QE into an inflation target overshoot proves. In terms of Yes Prime Minister being willing to state things like that would be a qualification for a knighthood or as it described it a K. Indeed another potential qualification for a K might be to write and say this.

Central bank credibility is crucial to anchoring inflation expectations………. Arguably we are only now discovering the impact at very low levels of unemployment of the Bank of England’s credibility as an inflation anchor.

Apparently it is doing this right now while inflation is overshooting! Quite how this triumph fits with the credit crunch era is another fantasy which skips reality.

Wage Growth

There is reality expressed here.

Equally strikingly, that 2.2% is about the same rate of wage growth as in 2011 when unemployment rose
above 8% for the first time since the mid-1990s. Over the following 6 years unemployment has fallen quickly
and continuously but nominal pay growth has largely remained bound between 1 and 3%.

If you think this through logically then this is a basis for my argument that rather than aiming for an inflation rate of 2% per annum you should go lower and then we should find some real wage growth. Also it is sad to see a policymaker skip what are the major issues and causes of what is happening.

I noted above that changes in the world of work have very possibly changed the pricing power of labour and
workers’ appetite for risk (i.e. job insecurity). This is in itself a large area of current debate and I do not want
here to go into these in great detail.

The theme seems to be why look at relevant issues when you can continue to chew over the continuing failure of the Phillips Curve which gets pages and pages as opposed to this one paragraph below.

Some of these important changes in the structure of the labour market, such as the rise in self-employment
and decline in union membership, predated the financial crisis. Others, like the rise in temporary work and
zero hours contracts, are more recent. Technology – and the rise of the gig economy – has further
increased what my colleague Andy Haldane has called the ‘divisibility’ of labour.

Real Wages

It is simply astonishing that a man who voted for the monetary policy easing in August 2016 ignores its role in this.

Inflation is currently above target as a result of the post referendum depreciation of sterling and forecast, for
that reason, to remain so over the next three years.

I find it odd that they forecast the fall in the Pound will keep inflation above target for the next three years because as I explained yesterday the major effects are pretty much behind us now. The inflation Forward Guidance gets odder and indeed somewhat bizarre when you read this.

Domestically generated inflation pressure, however, appears low……..Bank staff calculations suggest that adjusted for this effect indicators of domestic inflation pressure are below levels consistent with the 2% target.

Oh and those who had to make calculations back when inflation was just below 27% are permitted a wry smile at this description of 4% inflation ( using the RPI index).

Measuring domestically generated
inflation when externally generated inflation pressure is high, as at present, is not straightforward.

The general Bank of England view is that wage growth is about to pick up and of course that has been true for years now but specifically it is based around this.

3 month on 3 month annualised AWE growth for regular pay is 2.9%.

As ever central bankers are cherry-picking the data as individuals will care most about total pay. However Sir Jon is less convinced by thoughts of a rise in wages although whilst he does not put it this way they are likely to be supported by lower inflation.

there is in my view a not immaterial risk that the
trade-off is not as it currently appears and that domestic inflation pressure will undershoot the Committee’s
collective expectation.

Today’s Data

This was another disappointing day for the Forward Guidance of the Bank of England.

Between July to September 2016 and July to September 2017, in nominal terms, both regular pay and total pay increased by 2.2%, little changed compared with the growth rates between June to August 2016 and June to August 2017.

This meant that real wages did this and for fans of the RPI subtract around 1%.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.4% including bonuses, and fell by 0.5% excluding bonuses, compared with a year earlier.

Comment

There is fair bit to consider here. In my view the views of the Bank of England are driven mostly by an attempt to avoid having to say that the monetary policy easing of August 2016 was a mistake. The majority in favour of this month’s Bank Rate rise do so by optimism on the wages front although of course there is a weakness there as we currently have fallen real wages. Sir Jon Cunliffe avoids it by thinking that inflation will be weak looking ahead.It remains a shame that whatever their views they continue to persist in their beliefs around the Phillips Curve. Sometimes I wonder what it would take for them to abandon it and put it in the recycling bin?

There was a hopeful sign in today’s data which is summarised below.

*U.K. 3Q OUTPUT PER HOUR RISES 0.9% Q/Q, FASTEST SINCE 2Q 2011 ( h/t @stewhampton)

Economics is not called the dismal science for nothing as we note a possible trajectory change as there were fewer hours worked  ( and indeed a 14000 fall in employment). But we have been looking for a productivity rise and this is one of the first signs of it and any continuation would be welcome. Also my first rule of OBR Club may well be in play as of course it ( and the Bank of England) have just downgraded the UK productivity outlook. Sometimes you really couldn’t make it up!

 

 

 

 

 

 

Has UK inflation peaked?

Yesterday we heard from Bank of England Chief Economist Andy Haldane.

On 3 November, I visited Greater Manchester on the latest of my Townhall tours.

He makes himself sound like a rock band doesn’t he? It is good to see him get out and about after years and indeed decades of being stuck in a bunker in the depths of the Bank of England. Although sadly for him the hopes of becoming Governor via a “man of the people” approach seem to be just hopes. I do hope that he takes the message below back to his colleagues as not only would some humility be welcome but the reality encapsulated in it would be too.

For most of the people I spoke with, small adjustments in the cost of borrowing were unlikely to have a significant impact on their daily lives.  The borrowing costs they faced for access to consumer credit were largely unaffected by changes in Bank Rate

The latter point was one of my earliest themes when I started this website which had its 7th anniversary over the weekend so you can see that our Andy is not the quickest to pick things up.

Moving to today’s theme of inflation Andy did have some thoughts for us.

It is well-known that increases in the cost of living hit hardest those on lowest incomes.  Rising inflation worsens the well-known “poverty premium” the poorest in society already face in the higher costs they pay for the everyday goods and services they buy.

I hope that Andy thought hard about the role his “Sledgehammer QE” and “muscular” monetary easing in August 2016 had in making the lot of these people worse by contributing to the fall of the UK Pound and raising UK inflation prospects. Speaking of inflation prospects what does he think now?

 Price rises across the whole economy are currently running well above the 2% inflation target and are expected to remain above-target for the next few years.

That is not cheerful stuff from Andy but there are several problems with it. Firstly you cannot forecast inflation ahead like that in the credit crunch era as for example you would have been left with egg on your face when oil prices dropped a couple of years ago. In addition Andy’s own record on forecasting or if you like Forward Guidance is poor as in his role of Chief Economist he forecasts an increase in wage inflation every year and has yet to be correct. Of course when you take out a lottery ticket like that you will eventually be correct but that ignores the years of failure.

International Trends

This mornings data set seems to indicate a clear trend although there is a lack of detail as to why Swedish inflation fell so much.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.7 percent in October 2017, down from 2.2 percent in September.

Germany saw a smaller decline but a decline nonetheless.

Consumer prices in Germany were 1.6% higher in October 2017 than in October 2016. The unflation rate, as measured by the consumer price index, was +1.8% in both September and August 2017.

Today’s data

This will be received in mixed fashion at the Bank of England.

The all items CPI annual rate is 3.0%, unchanged from last month.

The Governor Mark Carney will be pleased that his quill pen and foolscap paper will not be required for an explanatory letter to the Chancellor of the Exchequer whereas Andy Haldane will mull that his Forward Guidance has not started well as a rise was forecast this month.

The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.

The factors keeping inflation up were as shown below/

In October 2017, the food category, which grew by 4.2% since October 2016, contributed 0.3 percentage points to the overall 12-month growth rate……Recreation and culture, with prices rising by 0.5% between September and October 2017, compared with a smaller rise of 0.2% a year earlier.

There was also a rise in electricity prices. On the other side of the coin we saw transport and furniture and household services pulling in a downwards fashion on the annual inflation rate.

CPIH

The additional factor in CPIH which is the addition of rents which are never paid to the owner occupied housing sector did its planed job one more time in October.

Housing and household services, where owner occupiers’ housing costs had the largest downward effect, with prices remaining unchanged between September 2017 and October 2017, having seen a particularly large increase of 0.4% in the same period a year ago.

This is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.5% in the 12 months to October 2017; this is down from 1.6% in September 2017.

I would be interested to know if those who rent are seeing lower inflation but also you can see how this pulls down the annual inflation rate. Fair enough ( if accurate as our statisticians have had problems here) for those who rent but the  impact is magnified by the use of Imputed Rent for those who own their property so the measure of inflation is pulled down even more.

The OOH component annual rate is 1.6%, down from 1.9% last month.

This means that what our official statisticians call our “most comprehensive” measure tells us this.

The all items CPIH annual rate is 2.8%, unchanged from last month.

Now let me take you to a place “far,far away” where instead of fictitious prices you use real ones like those below. What do you think the effect would be?

Average house prices in the UK have increased by 5.4% in the year to September 2017 (up from 4.8% in August 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Thus the inflation measure would be higher with the only caveat being the numbers are a month behind the others. As owner occupied housing costs are 17.4% of the measure you can see that it would have a big effect. Up is the new down that sort of thing.

The whole episode here has reflected badly on the UK statistics establishment as this new measure is mostly being ignored and CPI is used instead as this from the BBC demonstrates.

The UK’s key inflation rate remained steady at a five-and-a-half-year high of 3% in October, according to official figures.

The use of the word “key” is a dagger to the heart of the plans of the Office for National Statistics.

The trend

This mornings producer price dataset suggested that the inflation peak has passed.

The input Producer Prices Index (input PPI) grew by 4.6% in the 12 months to October 2017, down from 8.1% in the 12 months to September 2017. The output Producer Prices Index (output PPI) grew by 2.8% in the 12 months to October 2017, down from 3.3% in the 12 months to September 2017.

So there is good news there for us although awkward again for Andy Haldane. On the other side of the coin there has been around an US $5 rise in the price of Brent Crude Oil since October so that will impact the November data if it stays there. Also more political crises could weaken the Pound like they did only on Monday.

Comment

We find ourselves in the peak zone for UK inflation as we may get a nudge higher but the bulk effect of the fall in the UK Pound £ has pretty much completed now. Back in late summer 2016 I suggested that its impact would be over 1% and if we look at the numbers for Germany and Sweden today that looks to be confirmed. Last year saw monthly CPI rise by 0.2% in November and 0.5% in December as inflation rose so the threshold is higher.

However we remain in a mess as to how we calculate inflation as the Retail Price Index measure has it at 4% as opposed to 3% and of course the newer effort CPIH is at 2.8%. So a few more goes and they may record it at 0% and we could have an “unflation rate”!

I have argued against CPIH for five years now for the reasons explained today and warned the National Statistician John Pullinger of the dangers of using it earlier this year. Meanwhile former supporters such as the economics editor of the Financial Times Chris Giles ( who was on the committee which proposed CPIH) now longer seem to be keeping the faith as this indicates.

CPIH is (probably) better since it has a big proxy for housing services of owner occupiers, but with hindsight I worry occasionally that it doesn’t proxy security of tenure well. And security of tenure is a big service you acquire when buying not renting.

 

 

 

 

 

UK housing policy continues to promote ever more unaffordable prices

This week has opened with a barrage of news on the UK housing market. Whilst this is of course the equivalent of a hardy perennial there are two factors bringing it into focus. The first is that it is the UK Budget next week and the second is a weekend where a strong end to the last week for the UK Pound £ has been replaced by this.

Barclays trade of the week (short EURGBP) stopped out at Monday 0857am… ( @RANSquawk )

Is that some sort of record? As Prince would say it is a Sign O’ The Times.

One issue at play is building evidence of changes in the housing market. From Estate Agency Today.

Sellers have launched “their own sale” in response to the stagnating market by slashing asking prices according to Rightmove – but some sellers have not cut enough.

So what has happened?

The portal says sellers of homes that are new to the market have trimmed asking prices over the past month by a modest 0.8 per cent; more dramatically, 37 per cent of properties already on the market have reduced their asking prices since first being listed.

The 37 per cent figure represents the highest proportion at this time of year for five years, the portal says in its latest monthly market snapshot.

It is not the fact that there are price offers at this time of year that is unusual it is the amount of them. Also the five-year timing will be noted by the Bank of England as that takes us back to developments which influenced its decision to boost house prices with its Funding for Lending Scheme.

At the moment the situation as regarding price drops is recorded thus.

Analysis of those properties that actually sold last month after having reduced their prices shows that their average reduction between initial and last advertised asking price was also 6.3 per cent.

However the state of play in London seems rather different especially as we note this in the Guardian is from an estate agent.

Lucy Pendleton, of the London estate agent James Pendleton, said sellers in the capital are facing some particularly tough decisions. She argues that one large price cut can work better than several small ones.

As to the gap between asking prices and actual selling ones Henry Pryor helps us out.

Average asking prices measured by across the country have fallen slightly. They’re now just 27% (£84k) higher than average sale prices recorded by

LSL Acadata

This body covers all transactions including those for cash and tells us this.

The slowdown in prices continued into October, with values flat over the month and up 0.8% on an annual basis. This is the slowest growth since March 2012, and at £298,438 prices are now roughly level with November 2016.

The driver of the slow down is very familiar.

London continues to weigh on the market, with the decline in prices there (now 2.4% annually) dampening growth substantially though. Prices fell more slowly in September than the previous month, down 0.3%. The average house in the capital remains at £583,598, despite a fall of £14,250 over the year.

Government Policy

We have had various suggestions and hints from ministers over the past couple of months but this morning has brought this in the Financial Times.

UK chancellor Philip Hammond is drawing up plans to help first-time buyers in his Budget later this month, in an attempt to show the government is getting to grips with the housing crisis.

Having opened this piece with a mention of hardy perennials we have one which blooms very regularly in the UK which is what the UK government will badge as help for first time buyers. I would imagine that many of you will be able to guess what form this will take before reading the details below.

The chancellor is preparing a stamp duty cut for first-time buyers as a signal that the Conservative party understands the widespread resentment felt by those locked out of the housing market because of high prices, according to government aides………The Treasury regards a stamp duty cut for first-time buyers, which might be introduced for a temporary period, as one way to address a growing feeling of inter-generational unfairness in Britain.

There are more than a few begged questions in that but let us for the moment move on whilst noting the changes at play.

This problem is exemplified by how younger people are struggling to follow in the footsteps of their parents by buying their own homes. The number of homeowners under the age of 45 in England has dropped by 904,000 since the Conservatives entered government in 2010: down from 4.46m in that year to 3.56m in 2015-2016, according to data from the Department for Communities and Local Government.

Also this is an intriguing way of looking at the likely impact which also points out the wide variation in average house prices around the UK.

Lucian Cook, head of residential research at Savills, an estate agency, said any cut in stamp duty for first-time buyers would primarily benefit those purchasing homes in London and south-east England. Stamp duty is not payable on properties worth less than £125,000, and Mr Cook highlighted how the average price for a first-time buyer in Yorkshire was just over £125,000.

So a response to house price falls in London? We have been wondering on here how long that might take….

Bring me a higher love

The hardy perennial theme continues as I note this from City-AM.

Writing to the chancellor, an influential group of housing associations urged Hammond to allow developers to extend the height of properties without having to secure planning permission.

Under the “build up not out” plan, championed by Tory MP John Penrose, developers would be able to increase a building’s height so it matched the tallest building in its neighbourhood, or the height of surrounding trees.

The supply of homes is of course an issue in the UK although of course developers have quite a vested interest in being able to build higher as I recall the Yes Prime Minister episode that referred to this. Those who live next door may not be quite so keen so care is needed.

Comment

There is a clear problem with two possible government policies which is the proposed expansion of Help To Buy we looked at back on the 2nd of October and today’s Stamp Duty cut. This is that moves which are badged as help are tactically true but strategic disasters. What I mean by this is that the person helped gains at that moment but that fades away as we note that these moves are not only associated with but cause ever higher house prices. Sometimes they are priced  straight in and people may be being helped to buy at the top of the market signified by the ever higher multiple of income required. This of course then requires even more help to stop house prices falling as the cycle repeats so far endlessly.

An irony is that a Stamp Duty cut would also damage one of the better revenue areas for the government in recent times. From the FT.

The Treasury’s receipts from stamp duty surged to a record high of £11.77bn in 2016-17, up 10 per cent per cent compared with the previous year.

There are regular debates about taxation and the apparent impossibility in more than a few areas of increasing it. Well Stamp Duty has not been one of them and has seen increasing flows to the UK Exchequer.

The issue of raising housing supply seems much better founded than raising demand. But it is problematic for the current Chancellor of the Exchequer as whilst it is welcome I think to see someone who is not just a career politician owning businesses which are in property development and construction raises a moral hazard question. Approving changes which benefit you personally is not a good look especially when the developers have benefited from the whole Help To Buy era.

Also if we look back to October 23rd there was this.

The government should borrow money to fund the building of hundreds of thousands of new homes, a cabinet minister says.

Communities Secretary Sajid Javid said taking advantage of record-low interest rates “can be the right thing if done sensibly”.

If Mr.Javid was a Chelsea footballer it would appear that he has been sent to Vitesse Arnhem on loan maybe permanently.

Meanwhile there is news from the Bank of England that house buyers have had the advantage even before it existed.

 

 

 

What about QE for manufacturing and construction rather than stock and bond markets?

Let us begin today by looking at something to cheer the cockles of a central bankers heart. Firstly from Alliance News on Tuesday.

The FTSE 100 index closed up 1.93 points at 7,562.28 on Monday, building on its fresh all-time closing high set on Friday.

It has dipped away from that level a little since but never mind as the Bank of England is usually behind the times and no-one will notice it especially if a chart from 2008 showing it around 3800 then is used. What a triumph for the period of lower interest-rates and QE ( Quantitative Easing). Tuesday brought us this from the Halifax..

House prices rose by 0.3% between September and October, following a 0.8% increase in September. The average price of £225,826 is the highest on record and 2.8% higher than in January (£219,741).

So as you can see the ” wealth effects” should be pouring into the economy right now. Sadly unlike the Bank of Japan there are no equity and property holdings to claim a profit on but never mind. If you are a young researcher in Threadneedle Street the way to career advancement is to write about wealth effects boosting the economy especially if you avoid writing about how the major wealth effects are for the few rather than the many.

Wages

There has been some potential good news on this front as well. Yesterday the agents of the Bank of England reported this.

Recruitment difficulties had intensified and were above normal in a range of activities, alongside continued
modest employment growth. As a result, pay growth had edged up and was expected to be somewhat higher in
2018 than this year.

This of course brings them into line with the official Bank of England view from the past 5 years or so that wage growth is rising. Of course the possible catch is that the Bank is not only the witness but the judge and jury here as we mull what somewhat higher means? One group who have managed a solid wage rise are these. From the Evening Standard about Southern Rail.

Members of Aslef, the train drivers’ union backed the deal, which includes a 28.5 per cent pay rise over the next five years, by 731 votes to 193, a majority of 79 per cent.

Industrial action by train drivers leading to pay rises feels like something from the 70s and maybe 80s but long-suffering commuters from the south will be grateful if this puts an end to the problems. As to the pattern of wages growth going forwards we can only wait and see if what used to be called “relativity’s” re-emerge and it leads to wage claims and rises elsewhere. That sort of thing has been missing for some time and is a hint that the UK employment situation may not be as strong as the headline figures imply. Although Governor Carney thinks the opposite.

with unemployment at a 42 year low, more people in work than ever before. This isn’t a false read on
the unemployment rate,

Savers

Here we find that Governor Carney was very bullish for their immediate prospects after his Bank Rate rise.

It will have an impact on borrowers over time, it will have a more immediate positive impact on savers, in terms of deposit rates.

So that is the state of play in his Ivory Tower, meanwhile if we look at the real world the BBC reported this yesterday.

Seven days after the rise in base rates, just 17 out of 150 providers have passed on improved returns to their savers.

The Bank of England raised rates by 0.25% to 0.5% last Thursday, the first rise in a decade.

Many banks are still considering whether to pass on the benefits.

But even if their provider does choose to increase rates in full, some savers will still find themselves worse off than when rates were last at 0.5%.

As to the slower impact on borrowers.

By contrast, lenders have been quick to raise the cost of mortgages.

Most customers with tracker mortgages have seen an immediate rise of 0.25%.

So far 20 banks have announced increases to their Standard Variable Rate (SVR) mortgages, including Barclays, Halifax, Lloyds, Nationwide, Santander and TSB.

Poor old Mark perhaps he might like to play some PM Dawn to help relax.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine

Production

This morning’s numbers brought some good news for the UK economy but mixed news for the Bank of England.

In September 2017, total production was estimated to have increased by 0.7% compared with August 2017……Total production output for September 2017 compared with September 2016 increased by 2.5%.

It might only be 14% of the economy these days but it has improved recently and this improvement has been driven by this.

Manufacturing provided the largest upward contribution, increasing by 0.7%, with 10 of the 13 sub-sectors rising. This is the fifth consecutive monthly rise in this sector and follows growth of 0.4% in August 2017. Machinery and equipment not elsewhere classified provided the largest upward contribution to the growth in manufacturing, rising by 3.2%, following 0.0% in August 2017.

Also North Sea Oil and Gas ended its maintenance period and of course as we go forwards ( these numbers are up to September) will be seeing higher oil prices. Also those who joke we might need to trade with space in future well…..

Within this sub-sector, air and spacecraft and related machinery rose by 10.2%.

Trade

Whilst there was better news from the monthly data for September alone the background picture continued on its usual not very merry way.

Between the three months to June 2017 and the three months to September 2017 (Quarter 2 (Apr to June) 2017 to Quarter 3 (July to Sept) 2017), total trade (goods and services) exports decreased by 0.2% (£0.3 billion), while total trade imports increased by 1.6% (£2.6 billion). This resulted in a widening of the total trade (goods and services) deficit by £3.0 billion to £9.5 billion.

There are some ways in which this fits with the other data we have for example weaker oil exports go with the summer maintenance period and higher exports of vehicles with the manufacturing data. But it is odd that exports are falling with rising production and particularly manufacturing figures. Perhaps we will find over time that exports of services were higher than we thought at the time.

Trade in services exports have been revised up by £0.3 billion for both July and August 2017. This is due to survey data replacing earlier estimates.

Construction

I have been worried about the accuracy of these numbers for some time ( regular readers may recall when a large business was switched from services to construction a couple of years ago which did not inspire confidence). However such as they are the sector has plunged into a recession.

However, construction dropped for the second quarter running, driven by falls in commercial work and housing repairs……Activity in the construction sector continued to weaken in Quarter 3 2017, with total output falling by 0.9%……..consecutive quarterly declines in current estimates of total construction output have not been seen since Quarter 3 2012.

I asked online for thoughts as to why this might be and one group of replies suggested a combination of a lack of demand and uncertainty.Another suggested that the credit crunch wiped out some smaller house builders which have never really been replaced.

Comment

There is a lot to consider here. Let us start with some good news which is that the production sector has improved and it has been driven by manufacturing. That is not showing up yet in the trade figures on any grand scale but there is hope we will see that feed in as 2017 ends and moves into 2018. As to construction it is in a decline and recession and I wonder if Governor Carney will be awake at night thinking that the £10 billion he splashed around in the corporate bond market or the £60 billion giving Gilt holders an early Christmas present might have been better spent helping the real economy?. Should it be the case it is suffering from uncertainty and a lack of demand there may be a case for government spending here. The main flaw in that is of course we might get more expensive projects like HS2 and Hinkley Point.

However perspective is also needed because if we look at the credit crunch era construction has recovered well. If we use 2010 as our benchmark then in August it at 118.5 was even above services at 117.2 and way ahead of manufacturing at 106 and production at 101.7.

If I return to the title of this piece if only the Bank of England put the same effort into supporting UK manufacturing as it has into propping up the housing market. Of the £90.1 billion of the Term Funding Scheme the only way I see it helping manufacturing is via the car leasing/finance sector and of course that mostly helps overseas manufacturers.

 

 

 

 

 

 

 

Why are we told some inflation is good for us?

A major topic in the world of economics is the subject of inflation which has been brought into focus by the events of the past 2/3 years or so. First we had the phase where a fall in the price of crude oil filtered through the system such that official consumer inflation across many countries fell to zero per cent on an annual basis and in some cases below that. If you recall that led to the deflation scare or it you will excuse the capitals what much of the media presented as a DEFLATION scare. We were presented with a four horsemen of the apocalypse style scenario where lower and especially negative inflation would take us to a downwards spiral where wages and economic activity fell as well along the line of this from R.E.M.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

I coined the phrase “deflation nutter” to cover this because as I pointed out, Greece the subject of yesterday suffered from quite a few policy errors pushing it into depression and that on the other side of the coin for all its problems Japan had survived years and indeed decades of 0% inflation. Indeed on the 29th of January 2015 I wrote an article on here explaining how lower consumer inflation was boosting consumption across a range of countries via the positive effect it was having on real wages.

 if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

 

Relative prices

The comfortable cosy world of central bankers and theoretical economists told us and indeed continues to tell us that we need positive inflation so that relative prices can change. That leads us to the era of inflation targets which are mostly set at 2% per annum although of course there is a regular cry for inflation targets to be raised. However 2015/16 torpedoed their ship as if we just look at the basic change we saw a large relative price adjustment for crude oil leading to adjustments directly to other energy costs and a lot of other changes. Ooops! Even worse for the theory we saw two large sectors of the economy respond in opposite fashion. A clear example of this was provided by my own country the UK where services inflation barely changed and ironically for a period of deflation paranoia was quite often above the inflation target. But the goods sector saw substantial disinflation as it was it that pulled the overall measure down to around 0%.

We can bring this up to date by looking at the latest data from the Statistics Bureau in Japan.

  The consumer price index for Ku-area of Tokyo in October 2017 (preliminary) was 100.1 (2015=100), down 0.2% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

So not only is there no inflation here there has not been any for some time. Yet the latest monthly update tells us that food prices fell by 2.4% on an annual basis and the sector including energy fuel and lighting rose by 7.1%. Please remember that the next time the Ivory Towers start to chant their “we need inflation so relative prices can adjust” mantra.

Reality

This is that central banks are in the main failing to reach their inflation targets. For example if we look at the US economy the Federal Reserve targets the PCE ( Personal Consumption Expenditure) inflation measure which was running at an annual rate of 1.6% in September and even that level required an 11.1% increase in energy prices.

So we see central banks and establishments responding to this of which the extreme is often to be found in Japan. From @lemasabachthani yesterday.

JAPAN PM AIDE HONDA: INAPPROPRIATE TO REAPPOINT BOJ GOV KURODA, BOJ NEEDS NEW LEADERSHIP TO ACHIEVE 2 PCT INFLATION TARGET

Poor old Governor Kuroda whose turning of the Bank of Japan into the Tokyo Whale was proving in his terms at least to be quite a success. From the Financial Times.

Trading was at its most eye-catching in Japan. Tokyo’s Topix index touched its highest level since November 1991, only to end down on the day after a volatile session. At its peak, the index reached the fresh high of 1,844.05 with gains across almost all major segments, taking it more than 20 per cent higher for the year to date. But it faded back in late trade to close at 1,817.75.

It makes me wonder what any proposed new Governor would be expected to do?! QE for what else?

Whereas in this morning’s monthly bulletin the ECB ( European Central Bank) has told us this.

Following the decision made on 26 October 2017 the monthly pace will be further reduced to €30 billion from January 2018 and net purchases will be carried out until September 2018. The recalibration of the APP reflects growing confidence in the gradual convergence of inflation rates towards the ECB’s inflation aim, on account of
the increasingly robust and broad-based economic expansion, an uptick in measures of underlying inflation and the continued effective pass-through of the Governing
Council’s policy measures to the financing conditions of the real economy.

So we see proposals for central banking policy lost in  a land of confusion as the US tightens, the Euro area eases a little less and yet again the establishment in Japan cries for more, more, more.

Comment

There is a lot to consider here as we mull a world of easy and in some cases extraordinarily easy monetary policy with what is in general below target inflation. Of course there are exceptions like Venezuela which as far as you can measure it seems to have an inflation rate of the order of 2000% + . But in general such places are importing inflation via a lower currency exchange rate which means that someone else’s is reduced. Also we need to note that 2017 is looking like a good year for economic growth as this morning’s forecasts from the European Commission indicate.

The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%)……..at 2.1% in 2018 and at 1.9% in 2019.

So then of course you need an excuse for easy monetary policy which is below target inflation! Of course this ignores two technical problems. The first is that at the moment if we get inflation it is mostly from a higher oil price as we mull the likely effects of Brent Crude Oil which has moved into the US $60s. The second is that there is inflation to be found if you look at asset prices as whilst some of the equity market highs we keep seeing is genuine some of it is simply where all the QE has gone. Also there is the issue of house prices where even in the Euro area they are growing at an annual rate of 3.8% so if they were in an inflation index even more questions would be asked about monetary policy.

In a world where wages growth is not only subdued but has clearly shifted onto a lower plane the obsession with raising inflation will simply make the ordinary person worse off via its effect on real wages. Sadly this impact is usually hardest on the poorest.

Me on Core Finance TV

http://www.corelondon.tv/uk-housing-market-house-party-keeps-going/