Is UK inflation rising or falling?

Today brings UK inflation data in to focus but before we get there we have received almost a message from the past from Nigeria. What I mean by that is that the inflation rate of 15.37% it has just reported for December is a reminder of past problems in the UK. Whilst it is a reduction on November consumers in Nigeria will be focusing on food price inflation of 19.4% no doubt whilst their central bank tells them it is non-core. We even have a hint of a consequence of hyper inflation as I note three different unofficial estimates for its inflation appearing and they are 600%, 3000% and 5067%. Aren’t you glad that’s clear?!

The trend

This year has started with inflation concerns as a theme and they have come from two sources. One seems to be something of a rehash of the tired old “output gap” theory. This has perhaps been given a little more credence this year as the world economy has been doing well and finally as unemployment falls in so many places we will then supposedly see some inflation as the Phillips Curve leaps from its grave like Dracula. Or something like that. Putting it another way there are overheating fears based on similar lines. William Dudley of the New York Federal Reserve was expressing such fears last week in remarks and in the Wall Street Journal. The problem for such thinking is that “output gap” style theories have been consistently wrong in the credit crunch era.

What we actually have as I looked at on the of this month is rises in commodity prices. Another example of this was seen overnight as the price of a barrel of Brent Crude Oil nudged over US $70. It has dipped back below that today but the underlying message is of an oil price around US $14 higher than a year ago and US $25 higher than the  recent nadir of late June 2017. There are various ways of looking at the impact of this but below is one version.

The New York Fed has a go at measuring inflationary pressure as shown below.

The UIG derived from the “full data set” increased slightly from a currently estimated 2.96% in November to 2.98% in December. The “prices-only” measure decreased slightly from 2.22% in November to 2.18% in December.

This is a better method than the attempt to look at core measures ( which for newer readers mostly means excluding the most important things like food and energy). What it shows us is some upwards pull on inflation right now albeit that some of that is from financial markets and maybe self-fulfilling.

Shrinkflation

My theme that the UK is particularly prone to inflation gets another tick. From the BBC.

Coca-Cola has announced it will cut the size of a 1.75l bottle to 1.5l and put up the price by 20p in March, because of the introduction of a sugar tax on soft drinks from April this year.

Today’s UK data

Let us open with a welcome piece of news.

The all items CPI annual rate is 3.0%, down from 3.1% in November.

The only person who may be shifting in his seat is Bank of England Governor Mark Carney who has yet to write his explanatory letter to the Chancellor about it being over 3% and now of course it isn’t! Embarrassing.

The reasons for the dip are based on air fares and something parents will have welcomed.

The largest effects came from prices for games and toys, which fell between November and December 2017 by more than they did a year ago.

The air fares move is intriguing as it is a technical move based on them having a lower weighting or the implied view they are relatively less important. So they rose by a similar amount but had less impact, curious.

What happens next?

If we look a producer prices we get a glimpse of what is coming over the hill in inflation terms.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to December 2017, up from 3.1% in November 2017.Prices for materials and fuels (input prices) rose 4.9% on the year to December 2017, down from 7.3% in November 2017.

As you can see the immediate impact is a small pull higher but behind that there is less pressure than before. On the latter point we see yet again the impact of the oil price.

The largest upward contribution to the annual rate in December 2017 came from crude oil, which contributed 1.69 percentage points (Figure 2) on the back of annual price growth of 10.6% (Table 3), down from 26.9% last month.

If we look at what has happened since the numbers were collected the oil price is up around US $4/5 but in a welcome development the UK Pound £ is up around 4 cents against the US Dollar. So we can conclude two things. Firstly the impact of the lower Pound £ is quickly washing out of the system and in fact as we look forwards it will be a reducing factor on inflation if it remains at these levels because as I type this it is around 13 cents higher than a year ago. Meanwhile the higher oil price I looked at earlier is moving things in the opposite direction. So if you prefer we are moving from an individual phase to more of a world-wide one.

There is a long section in the report on the trade-weighted £ which has many uses but in this area I am afraid that Men At Work were correct due to so many commodity prices being in US Dollars.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake

A  much bigger mistake

The UK inflation establishment has pushed forwards a new inflation measure and when it was mooted back in 2012 it got a wide range of support. For example the committee which recommended and pushed it called CPAC included representatives from the BBC ( Stephanie Flanders) and the Financial Times ( economics editor Chris Giles). But their main change has failed utterly unless you actually believe costs for those who own their own homes have done this over the past year.

The OOH component annual rate is 1.3%, down from 1.5% last month.

Does anyone actually believe that housing costs in the UK are a downwards drag on inflation? Even someone looking at us from as far away as Pluto could spot that one is very wrong. After all this morning also saw this released.

Average house prices in the UK have increased by 5.1% in the year to November 2017 (down from 5.4% in October 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Not exactly the same month but if we look at the trend we see that what buyers regard as 5% has somehow morphed into 1.3%! They might reasonably become rather angry when they learn it is because something which does not exist and is never paid called Imputed Rent that is used to lower the number. This also leads me to have to point out that this from the Office of National Statistics deserves the banner of Fake News

mainly from owner occupiers’ housing costs (OOH),
with prices increasing by less between November and December 2017 than they did a year
ago. OOH costs have changed little since September 2017,

This implies they have measured the costs when the major influence is imputed instead.

Comment

It is a sad thing to report but UK inflation measurement has been heading in the wrong direction since at least 2012 and maybe 2003 since CPI was introduced. Much of the problem comes from our housing market which CPI mostly ignores ( the owner occupied housing sector is given a Star Trek style cloaking device and disappears). It leads to this problem.

The all items CPI annual rate is 3.0%, down from 3.1% in November…….The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
4.2%, up from 4.0% last month.

Over time a gap like this is significant in many respects and has consequences. After all the inflation target was only moved by 0.5% so does the 1.2% gap highlight another possible cause of the credit crunch? Next whilst the gap is 1,1% to the headline RPI that means students pay more and reported GDP is higher. Of course GDP would be higher still if CPIH was used.

The all items CPIH annual rate is 2.7%, down from 2.8% in November

No wonder more and more people are losing faith. Let me end on a positive note which was my subject of the 19th of December which highlighted a better way.

 

 

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Carillion shows a black heart linking PFI and private/state interrelations

The weekend just passed has seen the midnight oil burnt in Westminster as increasingly desperate attempts were made to rescue the company Carillion. You may wonder why as of course it is not a bank?! But the story emerging is one that is sadly familiar in many ways but with a few credit crunch era twists. For those unaware of what it does here is how it describes itself.

Carillion is a leading integrated support services business.

Not the best of starts as we wonder what that means? Later we do get some more precise detail.

Support services –  Facilities management, facilities services, energy services, rail services, road maintenance and utility services.

Public Private Partnership (PPP) projects – Our investing activities in PPP projects range from  defence, health, education, transport, secure, energy services and other Government accommodation.

Middle East construction services – Our building and civil engineering activities in the Middle East.

Construction services (excluding the Middle East) – Our market leading consultancy, building, civil engineering and developments activities in the UK.

I recall rumblings of trouble not so long ago with the Middle East projects but the most notable issue here is what it calls PPP but what we have discussed on here as the Private Finance Initiative or PFI.

We work in partnership with the public sector to deliver important services which offer value for money and make a positive difference to the lives of people in the communities where we work.

The company embedded itself in two areas in particular that are both considered vital but also have been ridden with PFI scandals.

 Some of the country’s largest and most prestigious NHS Trusts rely on us to deliver services critical to the safe care of over three million patients each year.

In the education sector,we have designed and built 150 schools, many as Public Private Partnership projects. We provide to 875 schools, clean more than 468,000m2 of school accommodation across 245 schools and provide mechanical, electrical and fabric maintenance services in 683 schools.

 

What has happened?

They say that in war the first casualty is the truth well it is true in company collapses as well. Only on the 3rd of May the Chief Executive Richard Howson announced this.

We have made an encouraging start to the year

Yet after only a short journey to the 11th of July Reuters were reporting this.

Shares of UK construction services firm Carillion (L:CLLN) slumped again on Tuesday with a profit warning, suspension of dividends and a CEO departure now wiping out half the company’s value in two sessions.

Danger! Will Robinson Danger!

A few words at the end of the Reuters article leapt off the page at me.

one of the UK’s most heavily shorted stocks

We move in those few short words from the “Why?” of Carly Simon to the “Who Knew?” of Pink. This is because shorting a stock on such a scale indicates that more than a few people knew something was wrong here. Yet we get a sniff of possible corruption as we note that even so new contracts were awarded for example these on the 6th of November.

Carillion is today announcing two contract awards, both in respect of Network Rail’s Midland Mainline improvement programme.

Were these part of an attempt to bail the company out at the expense of the taxpayer? Even worse was this from Construction News after the July problems.

 

Carillion / Kier / Eiffage clinched the central packages, picking up the £742m C2 North Portal Chiltern Tunnels to Brackley and the £616m C3 Brackley to Long Itchington Wood Green south portal.

Yes just when you thought it could not get any worse we see that Carillion is embedded in HS2 and we got an official denial of trouble!

Transport secretary Chris Grayling has defended the choice of troubled contractor Carillion as one of the firms to build phase one of HS2.

I guess we will find out what a “secure undertaking” is.

Private Finance Initiative

This was a large strand of business and as I reported on the 1st of September last year the main sound for the companies involved was ker-ching as they counted the cash.

The capital value of the assets which have been built is £12.4bn. However, over the course of the life of the contracts, the NHS will pay in the region of £80.8bn to PFI companies for the use of these assets.

However on this road the clouds darken again as we mull how a company with contracts which gave guaranteed profits baked by the taxpayer mostly in the UK but also abroad could go broke? Either much of its other business was appalling or it spent the money profligately.

Number Crunching

There are/were some real issues here so let us start with the dividend paid last June 9th. Shareholders received some 12.65 pence each which has to be questioned as only a month later came the announcement of financial distress. Of course those who held their shares have been wiped out by the compulsory liquidation but the real issue is with the board. On what grounds did they feel able to make the payment as allowing the business to carry on as normal mostly benefited them? There is a large moral hazard here especially after they told us this.

The Board and its Committees continue to benefit from a strong balance of expertise, experience, independence and knowledge of Carillion and our business sectors.

Next comes the issue of goodwill.

I queried as to how on earth Carillion could claim this? This has led to quite a debate where the real issue is why were the numbers not downgraded as the situation worsened. We of course return to denial of the state of play and the dividend payment but it is hard to move on without mulling this from @dsquareddigest.

Force of habit means that whenever I see the word “goodwill” I read “overpayment”

Or this from @SieurdePonthieu

What evidence did the supply to their auditors to substantiate the £500m? How did the auditors test the valuation? Post auditors were supposed to be very hot on that.

Pension problems

The next piece of number crunching comes from the pension scheme. From the Financial Times.

As a result of the liquidation, the Pension Protection Fund will take over payment of pensions for the company’s 28,000 retirement scheme members, and ensure scheme members who are not yet drawing a pension receive a capped level of benefits, with their retirement income cut by around 10 per cent.

Will they end up funding the goodwill via reduced pensions? Then of course there is the Pension Protection Fund can we find the goodwill here too? From the pensions expert John Ralfe

My take on pensions. Buy out deficit = c £1.4bn. PPF deficit = c £800m.

Comment

There is a lot to consider here as we look at the collapse and liquidation of Carillion. Let us open with two pieces of good news which is firstly that the road to privatisation of profits and socialisation of losses was not open this morning as there has been no bailout. Next whilst some benefits will be reduced pensioners will get a lot of protection albeit at the cost of the PPF or other pension schemes.

But there is damage across a wide range of areas. Contractors and sub-contractors must have been dreading the news today as not only will future payments stop at least for now but due to the 120 days payment policy past payments will not be made. There should be an investigation into this as we note that there was money to pay both dividends and directors. Next we come to PFI schemes and whether such companies become mini-monopolies and how if so they can manage to fail?

Yet again we find the issue of accountancy and auditing as in spite of all the supposed checks another large public company turns out to be an emperor with no clothes. Then we find that PWC get work on the liquidation after being one of the architects of PFI as we again find ourselves mulling another monopoly of sorts. They seem to benefit whatever the outcome.

Lastly I suggest that if you find someone called Phillip Green at the top of a pension scheme you immediately get very nervous albeit it is a different one this time around.

What is going on at the Bank of Japan?

It is time to take another step on our journey that Graham Parker and the Rumour would have described as discovering Japan as quite a bit is currently going on. On Tuesday eyes turned to the Bank of Japan as it did this according to Marketwatch.

The central bank cut its purchases of Japanese government bonds, known as JGBs, expiring within 10-25 years and those maturing in 25-40 years by ¥10 billion ($88.8 million) each.

It created something of a stir and rippled around financial markets. There were two pretty clear impacts and the first as you might expect was a stronger Yen which has become one of the themes of this week. An opening level of above 113 to the US Dollar has been replaced by just above 111 and any dip in the 110s will give a sour taste to the Friday night glass of sake for Governor Kuroda.

If we look back to this time last year we see that the Yen is stronger on that measure as back then it was above 114 versus the US Dollar. This may seem pretty poor value in return for this.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

Even in these inflated times for assets that is a lot of money and the Bank of Japan is not getting a lot of bang for its buck anymore as we have discussed. It would be particularly awkward if after not getting much progress for the extra (Q)QE any reduction or tapering took it back to where it began. The impact of Quantitative Easing on currencies is something we regularly look at as the impact has become patchy at best and this week has seen us start to wonder about what happens should central banks look to move away from centre stage. That would be a big deal in Japan as a weaker currency is one of the main arrows in the Abenomics quiver. As ever we cannot look at anything in isolation as the US Dollar is in a weaker phase as let me pick this from the Donald as a possible factor partly due to its proximity to me.

Reason I canceled my trip to London is that I am not a big fan of the Obama Administration having sold perhaps the best located and finest embassy in London for “peanuts,” only to build a new one in an off location for 1.2 billion dollars. Bad deal. Wanted me to cut ribbon-NO!

Mind you that is a lot better than what he called certain countries! If nothing else this was to my recollection also planned before the Obama administration.

Bond Markets

You will not be surprised to learn that the price of Japanese Government Bonds fell and yields rose, after all the biggest buyer had slightly emptier pockets. However in spite of some media reports the change here was not large as 0.06% for the ten-year went initially to 0.09% and has now settled at 0.07%. Up to the 7 year maturity remains at negative yields and even the 40 year does not quite yield 1%. If we look at that picture we see how much of a gift that the “independent” Bank of Japan has given the government of Shinzo Abe. It runs a loose fiscal policy where it is borrowing around 20 trillion year a year and has a debt of 1276 trillion Yen as of last September which is around 232% of GDP or Gross Domestic Product. So each year QQE saves the Japanese government a lot of money and allows it to keep its fiscal stimulus. We do not get much analysis of this in the media probably because the Japanese media is well Japanese as we mull the consequences of the owning the Financial Times.

A stronger effect was found in international bond markets which were spooked much more than the domestic one. US government bond prices fell and the 10-year yield went above 2.5% and got some questioning if we were now in a bond bear market? After around three decades of a bull market including of course these days trillions of negative yielding bonds around the globe care and an especially strong signal is needed for that. Maybe we will learn a little more if the US 2-year yield goes above 2% as it is currently threatening to do. But in a world where Italian 10-year bonds yield only 2% there is quite a way to go for a proper bond bear market.

The real economy

If we look at the lost decade(s) era then Japan is experiencing a relatively good phase right now. From The Japan Times.

The economy grew an annualized real 2.5 percent in the July-September period, revised up from preliminary data and marking seven straight quarters of growth — the longest stretch on record —.

Someone got a bit excited with history there I think as there was a time before what we now call the lost decade. However for those who call this success for Abenomics there are some things to consider such as these.

Exports grew 1.5 percent from the previous quarter amid solid overseas demand as the global economy gains traction.

Japan is benefiting from a better world economic situation but like so often in the era of the lost decades it is not generating much from within.

But private consumption, a key factor accounting for nearly 60 percent of GDP, continued to be sluggish with a 0.5 percent decline from the previous quarter as spending on automobiles and mobile phones fell.

Let us mark the fact that we are seeing another country where car demand is falling and move to what is the key economic metric for Japan.

Workers will see a 1 percent increase in their total earnings next year, the most since 1997, as rising profits and the tightest labor market in decades add upward pressure on pay, a Bloomberg survey shows.

Actually what we are not told is that compared to so many Bloomberg reports this is a downgrade as in its world wages have been on the edge of a surge for 3-4 years now. But reality according to the Japan Times is very different as we note the size of the increase it is apparently lauding.

In a sign that worker could receive better pay, a separate survey on the average winter bonus at major companies this year showed a slight increase — 0.01 percent — from a year earlier to ¥880,793, up for the fifth consecutive year.

Comment

There are quite a few things to laud Japan for as we note its ultra low unemployment rate at 2.7% and the way it takes care of its elderly in particular. At the moment the economic wheels are being oiled by a positive world economic situation which of course helps an exporting nation. That poses a question for those crediting Abenomics for the improvement as we note the more recent surveys are not as positive and the rises in commodity and oil prices and the likely effect on a nation with limited natural resources.

But more deeply this weeks market moves are tactically perhaps just a response to the way that “Yield Curve Control” works in practice which currently requires fewer bond purchases. But strategically the Bank of Japan is left with this.

 

That tweet misses out the QQE for Japan and QE for the latter two but we return yet again to monetary policy being pro cyclical and in the case of Japan fiscal policy as well. What could go wrong in a country where demographics are a ticking economic time bomb?

 

Why have house prices in Italy continued to fall?

One of the features of these times is that economic policy is pretty much invariably house price friendly. Not only have central banks around the world slashed official interest-rates thereby reducing variable mortgage rates but many followed this up with Quantitative Easing bond buying which pushed fixed-rate mortgages (even) lower as well. If that was not enough some of the liquidity created by the QE era was invested in capital cities around the globe by investors looking to spread their risks. In addition we saw various credit easing programmes which were designed to refloat even zombie banks and get them back lending again. In my country this type of credit easing was called the Funding for Lending Scheme which did so by claiming to boost business lending but in reality boosted the mortgage market. Looked at like that we see policies which could not have been much more house price friendly.

If we switch to the Euro area we see that this went as far as the ECB declaring a negative deposit rate ( -0.4%) which it still has in spite of these better economic times and a balance sheet totaling 4.5 trillion Euros. This has led to house price recoveries and in particular in two of the countries which had symbolised a troubled housing market which were of course Ireland and Spain. But intriguingly one country has missed out as we were reminded of only yesterday.

The Italian Difference

Yesterday morning the official statistics body Istat told us this.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

The breakdown shows a small nudge higher for new properties that in aggregate is weaker than the fall in price for exisiting properties.

prices of new dwellings increased by 0.3% compared to the previous quarter and by 0.6% with respect to
the third quarter of 2016 (up from +0.3% observed in the second quarter); prices of existing dwellings
decreased by 0.7% compared to the previous quarter and by 1.3% with respect to the same quarter of the
previous year.

Property owners in Italy may be a little jealous of those in Amsterdam who have just seen a 13.5% rise in house prices in the past year.

A ( space) oddity

The situation gets more curious if we note that as discussed earlier the mortgage market has got more favourable. In terms of credit then there should be more around as at the aggregate level the ECB has expanded its balance sheet and we know that Italian banks took part in this at times on a large scale. Whilst the overall process has been an Italian style shambles there have (finally) been some bank bailouts or rather hybrid bailin/outs.

If we move from credit supply to price we see that mortgage rates have been falling in Italy. The website Statista tells us that the 3.68% of the opening of 2013 was replaced by 2.1% at the half-way point of 2017. The fall was not in a straight line but is a clear fall. Another way of putting this is to use the composite mortgage rate of the Bnak of Italy. When ECB President gave his “Whatever it takes ( to save the Euro speech)” in July 2012 it might also have been save Italian house prices as the mortgage rate fell from 3.95% then to 1.98% as of last November so in essence halved.

So if we apply the play book house prices should been rallying in Italy and maybe strongly.

House Price Slump

Reality is however very different as the data in fact shows annual falls. For example 4.4% in 2014 and 2.6% in 2015 and 0.8% in 2016. Indeed if we look for some perspective in the credit crunch era we see the Financial Times reporting this.

In real terms, Italy’s real house prices have been falling consistently since 2007 and are now 23 per cent lower — a drop that has brought the construction and property sectors to their knees.

If we look back to the credit crunch impact and then the Euro area crisis which then gave Italy a double-whammy hit then we see that lower house prices are covered by Radiohead.

No alarms and no surprises

Although existing property owners may be singing along to the next part of the lyric.

let me out of here

What is more surprising is the fact that the economic improvement has had such a different impact on house prices in Italy compared to its Euro area peers.

Italy was the only country in the EU where house prices contracted in the second quarter of last year, according to the latest figures from Eurostat, the EU statistics agency. In contrast, almost two-thirds of EU countries are reporting house price growth of more than 5 per cent. ( FT )

If we look at the house price index we see that as of the third quarter of last year it was at 98.6 compared to the 100 of 2015. So just as Mario Draghi and the ECB were “pumping up” monetary policy house prices in Italy were doing not much and if anything drifting lower. Looking further back we see that the index was 116.3 in 2010 so it has not been a good period of time for property owners in Italy and that does matter because of this.

and in a country where more than 72 per cent of households own their own home

I have to confess I was not previously aware of what a property owning nation Italy is.

The banks

We have looked many times at the troubled banking sector in Italy and we have seen from the numbers above that the property market and the banking sector have been clutching each other tightly in the credit crunch era. Maybe this is at least part of the reason why the Italian establishment has dithered so much over the banking bailouts required as it waited for a bottom which so far has not arrived. This has left the Italian banking sector with 173.1 billion Euros of bad loans sitting on their balance sheets.

Property now accounts for more corporate bad loans than any other sector: 42 per cent compared with 29 per cent in 2011………And for property-related lending the proportion of loans turning bad has been twice as high as in the manufacturing sector, weighing on banks’ €173bn of bad debts. ( FT)

So something of a death spiral as one zombie sector feeds off another as this reply to me indicates.

The trend is getting better for Italian house market but it is a vicious circle: banks’ sales of repossessed property is also contributing to the prolonged house price contraction. The number of real estate units sold via auction increased 25 % in the last 2 years ( @Raff_Perf )

As The Cranberries would say “Zombie, zombie,zombie”

Disposing of bad property loans has also been slower than for other sectors……… In contrast, banks continue to harbour hopes of greater recovery of secured loans to construction and real estate companies. As a result, this lending has remained in limbo for longer.

Another forward guidance fail?

Comment

One way of looking at Italy right now is of a property owning democracy which has had a sustained fall in house prices. This of course adds to the fact that on an individual basis economic output or GDP has fallen in the Euro area as output stagnated but the population rose meaning the net fall must now be around 5%. It is hard not to wonder if the “Whatever it takes” speech of Mario Draghi was not at least partly driven by rising mortgage rates in Italy ( pre his speech they went over 4%) and falling house prices in his home country. Along the way it is not only the banking sector which is affected.

Construction has almost halved from its pre-crisis level. ( FT)

That puts the UK’s construction problem I looked ta yesterday into perspective doesn’t it?

Looking ahead we see a better economic situation for Italy as it has returned to economic growth. What this has done if we look at annual house price numbers is slowed the decline but not yet caused any rises. In some ways this is welcome as first time buyers will no doubt be grateful that they have not seen the rises for example seen in much of my home country but if with all the monetary policy effort the results are what they are what happens when the next recession turns up?

Still if you want the bill pill Matrix style there is this from AURA who call themselves real estate experts.

“I would say it’s a mathematical fact: house prices cannot drop more than 30%. I believe that this drop of values is over and it’s now time to buy”. Stefano Rossini, Ceo for MutuiSuperket.it,

Perhaps he has never been to Ireland or more curiously Spain.

Me on Core Finance

http://www.corelondon.tv/manufacturing-gives-boost-uk-economy/

 

 

 

The UK manufacturing boom is boosting both GDP and productivity

Today will bring us up to speed or at least up to the end of November on a range of areas of the UK economy. Some of it may well be contrasting as we mull the hoped for manufacturing boom but also not that the construction sector has fallen into a recession. As we do so there are plenty of more up to date influences at play as we note that the UK Pound £ has improved to around US $1.35 versus the US Dollar which means that on annual inflation comparisons it no longer boosts inflation as it is up around 13 cents over that period. So instead it will come to be a brake on our above target inflationary episode although as ever life is not simple as we note that the rise in the oil price I looked at on the has continued with the price of a barrel of Brent Crude Oil pushing above US $69 this morning making a three-year high.

Wages

We so rarely see good news in this area so let me bring you this from today’s Sainsburys results.

The 4% pay rise for staff was paid for out of cost savings says Mike Coupe, CEO ….so no impact on pricing or margins…. ( h/t Karen Tso of CNBC)

We see so little sign of wage growth above 2% these days so anything like this is welcome and indeed if we look a little further it is not the only such sign in the retail sector.

 Aldi is increasing pay for store staff after it enjoyed a bumper Christmas with sales up 15% in December…..

Aldi said it was increasing the minimum hourly rate of pay for store assistants to £8.85 nationally, a 3.75% rise, and to £10.20 in London, a 4.6% boost, from 1 February.

The company, which also pays employees for breaks unlike some chains, claimed it was reaffirming its position as the UK’s highest-paying supermarket.

The rates match the independently verified living wage recommended by the Living Wage Foundation, although Aldi is not formally accredited to the scheme as not all its workers are guaranteed the rate as a minimum.

As you were probably already aware the retail sector is not a high payer so the increases are good news in an era of concern over poverty whilst being at work and higher food bank usage.  Or to put it another way an era where we have a need for a Living Wage Foundation.

Mind you not all wage boosts are well received. From yesterday’s Guardian.

The chief executive of housebuilder Persimmon has insisted he deserves his £110m bonus because he has “worked very hard” to reinvigorate the housing market.

Jeff Fairburn collected the first £50m worth of shares on New Year’s Eve from the record-breaking bonus scheme that has been described as “obscene” and “corporate looting”. He will qualify for another £60m of profits from the scheme this year.

That will no doubt be much more than the total effect of the Sainsburys wages rise and in fact we can go further.

The scheme – believed to be Britain’s most generous-ever bonus payout – will hand more than £500m to those 140 senior staff.

The real problem is that this has mostly been fed to them by the UK taxpayer via this.

More than half the homes sold by York-based Persimmon last year went to help-to-buy recipients, meaning government money helped finance the sales.

Noble Francis has kindly helped us out on the subject.

Apropos of nothing, Persimmon‘s share price from the day before Help to Buy (19 March 2013) was announced till 8 January 2018. A 183% rise.

Whilst equity markets have been having a good run the general move is of course nothing like that.

What about consumer credit?

According to the Bank of England worries from people like me are overblown, From the Bank Underground blog.

Credit growth not being disproportionately driven by subprime borrowers is reassuring. As is the lack of evidence that mortgage lending restrictions are pushing mortgagors towards taking on consumer credit.

So that’s alright then. But now that a reassuring line has been taking ( both for unsecured credit and the author’s careers) there is of course the fear that my analysis may be right so we get.

But vulnerabilities remain. Consumers remain indebted for longer than previously thought. And renters with squeezed finances may be an increasingly important (and vulnerable) driver of growth in consumer credit.

In the end it is a bit like the Japanese word Hai which we translate as yes but in my time there I learnt that it also covers maybe and can slide therefore into no!

Today’s Data

Manufacturing

There is a continuation of what is rapidly becoming a good news area for the UK economy.

Manufacturing output increased ( 0.4%) for the seventh consecutive month, for the first time on record;

If we look for more detail we see this.

Manufacturing has shown similar signs of strength with output rising by 1.4% in the three months to November 2017…….Manufacturing output was 3.9% higher in the three months to November 2017 compared with the same three months in 2016, which is the strongest rate of growth since March 2011; on this basis, growth has now been above 3% for four consecutive three-months-on-a-year periods, which is the first time since June 2011.

We know from the various business surveys ( CBI and Markit PMI) that this is expected to continue. The growth is broad-based although regular readers will not be surprised that one area failed to take part.

 The downward contribution came from a decrease of 7.1% in motor vehicles, trailers and semi-trailers; the largest fall since August 2014 when it fell by 7.7%.

This of course provides food for thought for the unsecured credit analysis above via car loans.

Production

This too was upbeat mostly as a function of manufacturing which provided 2.77% of the growth recorded below.

Total production increased by 3.3% in the three months to November 2017, compared with the same three months to November 2016.

There was good news from the past tucked away in this as October’s numbers were revised higher.

Trade

For once we had some better news here.

The total UK trade (goods and services) deficit narrowed by £2.1 billion to £6.2 billion in the three months to November 2017; excluding erratic commodities, the total deficit narrowed by £1.2 billion to £6.1 billion.

As ever we have a deficit but maybe we are beginning to see the impact of better manufacturing data and more of this would help/

a £0.9 billion widening of the trade in services surplus due to increases in exports.

Actually the general export position is looking the best it has been for some time.

The UK total trade deficit (goods and services) narrowed by £4.3 billion between the three months to November 2016 and the three months to November 2017; this was due primarily to a 10.6% (£8.4 billion) increase in goods exports, which was higher than the increase in goods imports.

Is that the lower overall level of the UK Pound £ in play? Or to be more specific the reverse J curve ending and the more formal J Curve beginning.

Construction

There was a glimmer of good news here.

Construction output rose by 0.4% in November 2017 as growth in private new housing increased by 4.1%,

However that is not yet enough to end the recessionary winds blowing across this sector.

Construction output fell by 2.0% in the three months to November 2017, which is the largest three-month fall since August 2012

Comment

The news is good for manufacturing and must be received rather wryly by the former Governor of the Bank of England Baron King of Lothbury. He of course talked often about a rebalancing towards manufacturing but the fall in the Pound £ on his watch (2007/08) did not help much, whereas the post June 2016 fall is doing better. The difference in my opinion is that the world economic situation is much better. Also we may see more of this which hopefully will help wage growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.9% from Quarter 2 (Apr to June) 2017 to Quarter 3 (July to Sept) 2017; this is the largest increase in productivity since Quarter 2 2011.

The manufacturing boom has lifted production and finally seems to be impacting on trade which might have Baron King putting a splash of cognac in his morning coffee! Mind you the current incumbent of that role may have some food for thought also from the trade improvement as Rebecca Harding points out.

Has anyone told the how closely correlated with financial fraud trade in works of art is?

Isn’t Mark Carney a keen art buyer? Anyway I am sure there is nothing to see there and we should move on.

The cloud in the silver lining is construction which is beginning to benefit from some extra house building but has yet to break the recessionary winds blowing. On a personal level it is hard to believe with all the building at Nine Elms so near which must be that elsewhere there must be quite a desert.

 

 

The link between “currency wars” and central banks morphing into hedge funds

The credit crunch era has brought us all sort of themes but a lasting one was given to us by Brazil’s Finance Minister back in September of 2010. From the Financial Times.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.

The issue of fears that countries were undertaking competitive devaluations was something which raised a spectre of the 1920s being repeated. I note that Wikipedia calls it the Currency War of 2009-11 which is in my opinion around 7 years too short as of the countries mentioned back in the FT article some are still singing the same song and of course Japan redoubled its efforts and some with the advent of Abenomics.

The Euro

It was only last week that we looked at the way Germany has undertaken a stealth devaluation ironically in full media view via its membership of the Euro. But also of course if QE is a way of weakening your currency then the ECB ( European Central Bank) has had the pedal to the metal as it has expanded its balance sheet to around 4.5 billion Euros. On this road it has become something of an extremely large hedge fund of which more later but currently hedge funds seem to be fans of this.

If we combine this with the positive trade balance of the Euro area which has been reinforced this morning by Germany declaring a 25.4 billion current account surplus in November we see why the Euro was strong in the latter part of 2017. We also see perhaps why it has dipped back below 1.20 versus the US Dollar and the UK Pound £ has pushed above 1.13 to the Euro as currency traders wonder who is left to buy the Euro in the short-term?

But let us move on noting that a deposit rate of -0.4% and QE of 30 billion Euros a month would certainly have been seen as a devaluation effort back in September 2010.

Turning Japanese

Has anyone tried harder than the Japanese under Abenomics to reduce the value of their currency? We have seen purchases of pretty much every financial asset ( including for newer readers commercial property and equities) as the Bank of Japan balance sheet soared soared to nearly ( 96%) a years economic output or GDP. This did send the Yen lower but in more recent times it has not done much at all to the disappointment of the authorities in Tokyo. Is that behind this morning’s news that the Bank of Japan eased its bond buying efforts? Rather than us turning Japanese are they now aping us gaijin? It is too early to say but it is intriguing to note that December was a month in which the Bank of Japan’s balance sheet actually shrank. Care is needed here as for example the US Federal Reserve is in the process of shrinking its balance sheet but some data has seen it rise.

Perhaps the Bank of Japan should play some George Michael from its loudspeakers.

Yes I’ve gotta have faith…
Mmm, I gotta have faith
‘Cause I gotta have faith, faith, faith
I gotta have faith-a-faith-a-faith

South Korea and the Won

Last week we got a warning that a new currency wars outbreak was on the cards as this was reported. From CNBC.

South Korea’s central bank chief said that the bank will leave its currency to market forces, but would respond if moves in the won get too big. Lee Ju-yeol said the Bank of Korea will take active steps when herd behavior is seen.

Not quite a full denial but yesterday forexlive reported something you are likely to have already guessed.

Bank of Korea is suspected to have bought around $1.5 billion in USD/KRW during currency trading today.

As we wonder what herd was seen in the Won as of course the “Thundering Herd” or Merrill Lynch is no longer with us? Also as this letter from the Bank of Korea to the FT last year confirms Korea does not play what Janet Kay called “Silly Games”.

First, Korea does not manage exchange rates to prevent currency appreciation. The Korean government does not set a specific target level or direction of the exchange rate. The Korean won exchange rate is basically determined by the market, and intervention is limited to addressing disorderly market movements.

Next time lads it would be best to leave this out.

Second, Korea’s current account surplus should not be understood as evidence of its currency undervaluation.

Of course not. Anyway the Won has been strong.

The South Korean currency surged almost 13 percent last year, as an expanding trade surplus and the nation’s first interest-rate increase in six years boosted its allure. (Bloomberg).

Another way of looking at that is to look back over the credit crunch era. We do see that the Won dropped like a stone against the US Dollar to around 1600 but with ebbs and flows has returned to not far from where it began to the 1060s. Of course we can get some more insight comparing more locally and if we look at the real trade-weighted exchange rates of the BIS ( Bank for International Settlements) then there was a case against the Yen in fact a strong one. Compared to 2010= 100 the Japanese Yen was at 73.7 ( see above) but the Won was at 113. However the claim of a strong currency might get the Chinese knocking at the South Korean’s door as the Yuan was at 121.4.

China

Perhaps the Chinese are now on the case as Bloomberg reports.

The yuan, which headed for its biggest drop in two months on the news, is allowed to move a maximum of 2 percent either side of the fixing. Analysts said the change shows China is confident in the yuan’s current trajectory, which has been one of steady appreciation.

Hedge Fund Alert

There are two pieces of good news for the modern theory of central banks morphing into hedge funds around this morning so let us first go to Switzerland.

According to provisional calculations, the Swiss National Bank (SNB) will report a profit in
the order of CHF 54 billion for the 2017 financial year. The profit on foreign currency
positions amounted to CHF 49 billion. A valuation gain of CHF 3 billion was recorded on
gold holdings. The net result on Swiss franc positions amounted to CHF 2 billion

With all that profit the ordinary Suisse may wonder why they are not getting more?

Confederation and cantons to receive distribution of at least
CHF 2 billion

Whilst the SNB behaves like a late Father Christmas those in charge of the ever growing equity holdings at the Bank of Japan may be partying like it is 1999 and having a celebratory glass of sake on this news.

Japan’s Nikkei 225 reaches fresh 26-year high; ( FT)

Meanwhile a not so polite message may be going from the ECB to the Bank of Finland.

The European Central Bank has sold its bonds of scandal-hit retailer Steinhoff , data showed on Monday, potentially suffering a loss of up to 55% on that investment. (Reuters)

Comment

So there you have it as we see that the label “currency wars” can still be applied albeit that the geography of the main outbreak has moved across the Pacific. Actually Japan was always in the game and it is no surprise that its currency twin the Swiss Franc is the other central bank which has become a subsidiary of a hedge fund. That poses a lot of questions should the currency weaken as the Swissy has albeit so far only on a relatively minor scale. There have been discussions so far this year about how bond markets will survive less QE but I do not see anyone wondering what might happen if the Swiss and Japanese central banks stopped buying equities and even decided to sell some?

For all the fire and fury ( sorry) there remains a simple underlying point which is that if one currency declines falls or devalues then others have to rise. That is especially awkward for central banks as they attempt to explain how trying to manipulate a zero-sum game brings overall benefits.

 

What can we expect next from UK house prices?

This morning has brought us an update on what the UK establishment treat as a not only a bell weather but also a cornerstone of economic policy which is of course house prices. The Halifax which of course represents Lloyds Banking Group which is a big player in the mortgage market so what is happening?

On a monthly basis, prices also fell by 0.6% from November following a 0.3% increase in both October and November; this is the first fall since June 2017.

So the headline catcher is that house prices fell in December however these numbers are a pretty erratic series so let us look for some perspective.

House prices in the final quarter (October-December) were 1.3% higher than in the previous quarter (July-September), down from 2.3% recorded in October and November,

So we move from a recorded fall to an apparent slowing which is backed up by a comparison of the annual data.

Prices in the last three months of 2017 were 2.7% higher than in the same three months a year earlier although the annual change in December was lower than in November (3.9%).

Another way of putting the apparent slowing is that at this time last year the annual rate of growth was 6.5% so there has been a decline which we expected. As it happens the annual decline is very similar to the 2.6% reported last week by the Nationwide Building Society so there is some confirmation there. However the pattern has been unpredictable as for example there was something of a rally in the autumn of 2017 in the Halifax data which was against the trend. For those who want to know an actual price or at least an average one here it is.

The average price of £225,021 at the end of the year is 2.4% higher than in January 2017 (£219,741).

The problem comes when we look at a comparison of such a number with what someone is likely to be earning. Such reports come with estimates themselves which in both cases ( Nationwide & Halifax)  have pretty much returned to the pre credit crunch highs or something of the order of a ratio of 5.5. However if we look at the official average weekly earnings figures and (perhaps generously) multiply by 52 we see that the answer of £26,520 requires multiplying by around 8.5 times to get the average house price.

Activity

For all the discussion of change this has been quite stable as this suggests.

Monthly UK home sales exceed 100,000 for the eleventh month in succession. Sales have remained above 100,000 in all months of 2017. In November they reached 104,200, the highest monthly level since March 2016……… For the past
twelve months mortgage approvals have been in the narrow range of 64,900 to 69,500.

The main change is that fewer seem to want to sell.

Turning to supply, new instructions to sell continued to deteriorate at the headline level and has now
fallen for 22 consecutive months – the worst sequence for close to eight years

Ominous perhaps.

What does the Halifax think about 2018?

Overall, we expect annual house price growth nationally to stay low and in the range of 0-3% by the end of 2018. The main driver of this forecast is the continuing effects of the squeeze on spending power as inflation has outstripped wage growth and the uncertainty regarding the prospects for the UK economy next year.

The first issue is that even they do not expect much if any which is revealing although their reasoning seems odd. For example unless the commodity price rises I looked at on Friday continue UK inflation seems set to fade especially if the UK Pound £ remains around US $1.35. Also whilst economists continue to write about uncertainty the main population sees an economy growing consistently if not that fast. Some of course will have fears and part of that will be Brexit related but currently economists are projecting their own “monsters of the id” on everyone else.

London Calling

This continues to provide what may turn out to be a clarion call. From The Times over the weekend.

Almost half of the homes on sale for between £1 million and £2 million in London have had their prices cut, with average reductions of £142,000, rising to nearly £900,000 in extreme cases.

Presumably not the £1 million homes seeing price cuts of nearly £900,000! It is not just a London thing as I note I may not be the only person who likes a slice or two of Christmas cake.

Across Britain one in three sellers reduced their asking price last year, the highest proportion since the double-dip recession of 2012. However, sellers with homes in the “marzipan layer” — those worth less than the super-prime stock of central London (the icing) but more than most of the rest of the country (the cake) — are making the biggest price cuts.

Some of the effect here has been the rise in Stamp Duty on higher-priced properties but I note that Henry Pryor is reporting a change in psychology.

But almost all the buyers are discretionary and feel there is no harm in waiting. With an uncertain Brexit around the corner, buyers feel they can sit tight or rent and still be no worse off because prices will be even lower next year.

A change in psychology may be enough in itself although real falls also usually have surveyors reducing valuations. Of course however there needs to be some perspective as some of the comments suggest.

Heck even my parents house is now only worth 98 times what they paid for it !

(Down from 100 times before the referendum) ( Anthony Morris)

Or.

So overpriced homes in London are now marginally less overpriced. I think we’ll survive this somehow. ( John B )

Blackfriars

For those unaware this is on the edge of what is regarded as the City of London as well as being a big train and tube station. It also had a development described in the advertising like this.

The ad portrays a rich couple embarking on helicopter rides, being serviced by an astute butler and sight-seeing the capital in a Bentley. The couple also admire a sculpture of the building they have just acquired a penthouse suite in. ( h/t @econhedge and The Drum)

How is that going? From Bloomberg.

An investor who agreed to purchase an apartment at the ritzy One Blackfriars project on the banks of the River Thames is offering the two-bedroom home on the 20th floor for 1.8 million pounds ($2.44 million), more than 22 percent less than they agreed to pay for it in 2013.

Also Bloomberg has missed the currency angle as if the investor is from Asia there is likely to be a currency related loss to add to this.

Comment

Actually the main trend in the UK housing market has been something of a realignment of house price growth with both wage growth and economic growth. That is good although things not getting worse is different from things getting better. As any sustained surge in wage growth has escaped us in the credit crunch era as we mull it rumbling on at circa 2% per annum it means that more affordable homes requires lower house prices which of course is the opposite of official policy.

As for London it is being affected by international trends where capital cities are now seeing house price falls rather than rises. There will still be overseas buyers but fewer of them and thus some air seems certain to come out of the bubble. There is still an extraordinary dislocation between current prices and the finances of the vast majority of Londoners.

Philippe Coutinho

Football fans like me were subject to another burst of transfer fever over the weekend. But there is an economic effect and if we look at the initial payment of around £106 million then there are clear effects. Firstly a boost to UK exports and thereby to economic output or GDP ( Gross Domestic Product) accompanied by a boost to the exchange rate against the Euro. Over time there will be a smaller flow in those directions as the amount heads up to a maximum £142 million. In addition to this there is presumably also a boost to GDP by the purchase of Virgil Van Dijk for around £70 million by Liverpool as they spent some of the expected proceeds.

Such numbers are always estimates in the football world  but I am intrigued how the national accounts will account ( sorry) for this, as for example do they deduct the price paid by Liverpool for Coutinho? I cannot move on without pointing out that there are clear signs of inflation here as whilst Countinho has improved as a player at Liverpool not by anything like the price change.

Also whilst I am on sporting matters congratulations to Australia on their Ashes victory.