Interest-Rates are on the rise again

In the middle of the various crises in which we presently find ourselves there has been something else going on. As the leader of the pack in this area is the United States we can start there.

U.S. Treasury yields bounced higher on Monday, continuing their upward momentum from last week as the Federal Reserve moves closer to easing off its pandemic-era policies.

The yield on the benchmark 10-year Treasury note climbed above the key 1.5% level in early trading, at one point rising above 1.51% ( CNBC)

There is quite a value judgement about the US Federal Reserve there but let us stay for the moment with the concept of a higher benchmark bond yield. There is a bit of a yo-yo here because it was only a week ago that it was 1.3% as there was a rush to bonds from those panicking about Evergrande. Also and in some ways more significant due to its role in the mortgage market there is this.

And another down leg for bonds overnight as 30s now comfortably above key 2% level ( @fullcarry)

The Impact

The first port of call is likely to be the mortgage market as the move in the long bond pushes borrowing rates higher. That will also impact on all longer-term businesses and of course the US government just as it plans this.

Senate Majority Leader Chuck Schumer and House of Representatives Speaker Nancy Pelosi provided no details on how they would pay for Biden’s proposed $3.5 trillion social spending plan. ( Reuters)

The whole issue here is dragging on but the plan will end up with more borrowing which means the US government will not appreciate higher financing costs.

The other impact is that these higher yields are followed around the world in a type of ripple effect.

The Causes

I am not as convinced as the media are that the so far mythical Taper is the driving force here. After all what has really changed over the past week on that front? Yes we have more vague promises from the US Federal Reserve but we have had those before and with more signs of a world economic slow down appearing it does not seem to be getting more likely.

Local governments in Zhejiang, Jiangsu, Yunnan and Guangdong provinces have asked factories to limit power usage or curb output.

Some power providers have sent notices to heavy users to either halt production during peak power periods that can run from 7 a.m. and 11 p.m., or shut operations entirely for two to three days a week. ( Reuters)

Power cuts in China just add to the economic output problems there. The New York Fed suspended its GDP Nowcast at the beginning of this month which is not especially auspicious and on Friday slashed its future growth expectations.

The mean forecast for real GDP growth (Q4/Q4) is 5.3, 1.7, 0.8, and 0.7 percent in 2021, 2022, 2023, and 2024, respectively, compared to 5.4, 2.6, 1.7, and 1.0 percent in June.

The debt ceiling is not entirely convincing either. There are obvious risks if the US is unable to raise the present US $28.4 trillion dollar ceiling. But we have been down this road more than a few times now and opposition is in general about the opponents getting approval for some of their favourite plans, rather than any willingness to shut down US government and eventual default. So we might get a partial shut down for a few days but then once the pork barrel deals are struck, on we go.

Convexity and Foreign Buyers

By contrast I think these are in play and convexity is a curious one in a way. Let us go back to February when Reuters looked at this.

The rise in Treasury yields has created the need for investors who hold mortgage-backed securities (MBS) to reduce the risks on the loans they manage to counter the negative effects of slower loan prepayments when interest rates climb, a move known as “convexity hedging”.

This is similar in a way to being short gamma in an options position because you end up doing what you do not want to do which is responding to a fall in prices by selling.

MBS investors such as insurance companies and real estate investment trusts who need to maintain a certain duration target would have to reduce that duration by either selling Treasury futures or by buying interest rate swaps where they would exchange a fixed coupon with another investor for a floating rate, a move that effectively reduces the duration of an asset.

In a piece of timing so bad it is almost admirable the Financial Times told us this a weel ago.

Foreign investors cannot get enough US government debt, which analysts say could help soften the blow when the Federal Reserve starts to cut back its own bond-buying programme this year. Overseas buyers snapped up more than a quarter of the $41bn of 10-year notes on offer in August, the highest percentage in three years. At the equivalent auction in July, foreign investors took 16 per cent. At the two-year auction in August, investors bought 22 per cent, the highest since December 2019.

Poor old Tom is probably lying low right now.

“It is still very attractive for global investors to buy Treasuries,” said Tom Graff, head of fixed income at asset manager Brown Advisory. “We expect foreign demand will remain quite strong for the foreseeable future.”

In my career Japanese overseas buying is a consistent reverse indicator.

Demand has been particularly strong in recent months from China and Japan, the two biggest foreign holders of Treasuries, said Tiffany Wilding, North American economist at Pimco.

Still they are even more attractive now.


The situation here looks to be something of a perfect storm where various factors have been in play in a minor way and have been enough via convexity selling to push the market. Regular readers may have noted to have not mentioned inflation and that is simply because bond markets seem to have decoupled from that.

Moving outside of the US there are many who are directly affected by their use of US dollar borrowing. Places such as Argentina, Turkey and Ukraine come to mind but there are plenty of others. Then there are those indirectly affected by the reality that their bond markets follow the US one. So that is the UK where the ten-year yield has nudged 1% today as opposed to the 0.5% of early August. Also Germany although a ten-year yield of -0.2% shows it is being paid less to borrow  rather than paying more.

These moves will ripple through mortgage markets and business lending thus tending to add to the economic slow down. Also we will see more expensive government borrowing and this is where I get off this particular wagon as I do not see them letting this happen on any scale. The central banks will be told to stop this at some point and they will “independently” decide to do so meaning their talk of interest-rate hikes is just that, talk.

Quite how we get off this particular train I am not sure but for now with government’s becoming even more control freaks they will soon step in I think. Just to be clear I do not think it is a good idea merely that they will do it.

The ECB faces the inflation consequences if its own climate change policy

Today the Euro area is back in focus and let me take a moment to look back to Friday to note an interview with ECB President Christine Lagarde by CNBC. As ever there were some curious statements.

At the moment, we have been revising our projection upward rather than downward and the numbers that we are seeing at the moment lead us to believe that we are still in line with our projections.

This was in response to a question about signs of slowing in the German economy which we have been noting for a while. But as you can see in spite of claiming to look at the numbers President Lagarde has missed it.

We will have new projections in December so we’ll see at that time, but for the moment we are in synch and in line with our projection.

Then there was the curious story in the Financial Times about a forecast interest-rate rise in 2023.

What I know for a fact, because I know my Chief Economist and my colleague and friend, Philip Lane, is that he never would have said something like what was alleged to have been said.

So translating the political language that is an official denial so a yes. For out purposes the ECB is floating along projecting food news for the Euro area economy just as it is turning down which is quite a fail.

There was also the usual cherry-picking of the inflation numbers.

many of the causes of higher prices are temporary. When you look at what’s causing it, a lot of it has to do with energy prices. You look back a year ago, prices were rock bottom. They have of course moved up and the difference is explaining a lot of the inflation that unfortunately people are experiencing at the moment.

The problem here is that the usual central banking dismissal of non-core inflation is colliding with quite a surge that the ordinary person is having to pay.

Italy’s electricity prices jumped over 17% LAST WEEK. Wow – inflation anyone? This massive increase is clearly unsustainable and could lead to problems this winter in Italy ( @LorenBoston)

They have been rising since June and will collide soon with this from President Lagarde’s predecessor.

Future generations will ask themselves a simple question: ‘Why didn’t our parents act sooner to stop climate change?’ We must take action. We owe it to the citizens of today and, above all, to the citizens of tomorrow.” (Mario Draghi)

Continuing the theme there is this from Spain earlier today.

The annual rate of the general Industrial Price Index (IPRI) in August is of 18.0%, almost two and a half points above that registered in July and the highest since May 1980.

The Lagarde attempt to day that this is a result of last year has the problem of the monthly rise.

In August, the monthly variation rate of the general IPRI is 1.9%.

The energy price crisis of 2021 is reinforced by the fact that electricity prices rose by 7.5% on the month and gas prices by 8.3%.

So we can move on with the ECB facing quite a crisis as there is clear inflationary pressure just as the economy is turning down.

The Money Supply Problem

The monthly update is really rather awkward for Lagarde.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 11.1% in August, compared with 11.0% in July.

So with inflation high and rising she is pumping it up even more. Also this comes on top of all the previous growth now in a reversal of here previous attempt to focus on “base effects”. By August last year the ECB had already pumped a lot of money into the system. The total amount of narrow money is just under 11 trillion Euros and at the present rate of growth will exceed that this month. The last 3 months have seen 121 billion, 64 billion and now 93 billion added.

If you take her line that growth is going well then there is another issue which is why is this needed? There is a more subtle point which relates to the detail.

It’s inevitable that in those circumstances there are bottlenecks. There is a shortage of supply relative to much higher demand.

So how will raising demand when supply is limited help? That is a recipe for higher prices and even more inflation.Even the Markit PMI business survey is picking this up.

Shortages once again fed through to a steep rise in
firms’ input costs. Across manufacturing and
services, input costs rose at the sharpest rate since
September 2000. Service sector input cost inflation
hit the highest since July 2008 while input price
inflation in manufacturing remained close to all-time

Also that it is being passed on.

Higher costs were commonly passed on to
customers. Measured overall, selling price inflation
accelerated in September, rising to the third-highest
rate seen over the past two decades, exceeded
only by the increases seen in June and July.

So the narrow money push will be in play over the next 3/6 months when we can expect more inflation. With the supply bottlenecks I wonder where the growth expected by Lagarde will come from and of course the past is not what it was.

Spanish GDP registered a variation of 1.1% in the second quarter of 2021 with respect to the previous quarter in volume terms. This rate is  1.7 lower than that advanced in 30th July.

So 1.1% is the new 2.8%.

Looking Ahead

The theory is that broad money growth predicts nominal growth around 18/24 months ahead.

The annual growth rate of the broad monetary aggregate M3 increased to 7.9% in August 2021 from 7.6% in July, averaging 7.9% in the three months up to August.

Again as a generic this looks inflationary. We all hope the supply shortages will fade and then end but the problem is that even in the Euro Boom growth was not much over 2%. So the rest will be inflation.

By the standards of this measure growth has been remarkably even at 87,82 and now 75 billion Euros with a slight fading trend.


The ECB is facing not one but two nexus points right now and it does so at exactly the wrong time. Let me explain with reference to the Lagarde interview.

It has been very different from what I had expected in the first place. I wasn’t expecting a walk in the park, but I was expecting something more quiet than what we had.

I wrote about her appointment that Mario Draghi had set monetary policy for the next year or so for her. After all wouldn’t you when your replacement has not only a conviction for negligence but has been a factor in two major crises ( Greece and Argentina)? This first collided with the Covid pandemic and at first it was not too hard as all central banks eased policy. But now there is a choice between rising inflation and a slowing economy. What will she do? Personally I expect her to ignore the inflation but not everyone thinks that.

Next is the energy issue which is the next crisis at hand.

Energy is going to be a matter that will probably stay with us longer because we are transitioning as well from fossil-industry-driven sources of energy to what we aspire to be much less fossil sources. So that’s a transition that is in play.

You may have noticed that it is suddenly not temporary! But the issue here is a deeper one as readers will have different views on climate change but Lagarde is straight out of the political class who are determined to make it the driver of everything. Indeed they are driving prices higher.

The energy crisis in Europe presages trouble for the rest of the planet as the continent’s gas shortage has governments warning of blackouts and factories being forced to shut ( Bloomberg )


Will it be a case of “it’s the economy stupid” for Germany?

Over the past couple of months we have been monitoring and noting the increasing signs of a slow down in the economy of Germany. This has also come with rising inflation hence the stagflation theme. This morning has brought another feature of my work into play in that I have argued for many years that house prices are kept out of inflation measures so that they can pump them up and claim them as growth in the next crisis.

WIESBADEN – The prices for residential real estate (house price index) in Germany rose by an average of 10.9% in the 2nd quarter of 2021 compared to the same quarter of the previous year. This is the largest price increase in residential property transactions since the start of the time series in 2000. As the Federal Statistical Office (Destatis) also reports, apartments and one- and two-family houses are on average 3.7% more expensive than in the previous quarter.

As you can see the issues just pour out of that release. If an annual rate of 10.9% is not enough and it is the fastest this century then a quarterly rate of 3.7% represents an acceleration and quite a one at that. Perhaps the present government is trying to give homeowners a UK style bribe. I suppose you could argue that just worked to some extent in Canada.

The catch with that argument which is the central banking “wealth effects” in another set of clothes is the impact on first-time buyers and those trading up which face inflation. Over the past year they have faced quite a lot of it. This is on top of previous rises which the Bundesbank analysed last year.

As of roughly 2015, steep upward pressure on residential property prices became broadly based
across regions. According to Bundesbank calculations based on data from bulwiengesa AG,
residential property prices in Germany as a
whole have since risen by an average of 7¾%
per year, whereas they rose by just 4¼% per
year in the first half of the boom period.

This is on top of what it warned about back in 2014.

Urban properties are now overpriced by 10-20 percent, the bank said, adding that “in major cities the prices for residential property deviate by about 25 percent.” It added that apartment prices have gone up by 9 percent in Germany’s seven largest cities. ( CNBC)

We get an idea of what it has done since from the index which was 95.5 in 2014 and 151.1 in the latest reading. So if they were overvalued then? Well I think you get the idea.

As to the pattern it seems pretty broad based.

Prices rose significantly in both cities and rural areas. A particularly strong increase was again observed in the top 7 metropolises (Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf): The prices for single and two-family houses in the seven metropolises rose by 14.7% compared to the same quarter of the previous year , Condominiums rose by 12.9%. In the other urban districts, the prices for single and two-family houses rose by 11.9%, condominiums cost 10.5% more than in the 2nd quarter of 2020.

The Causes

The economy has done nothing like that. Gross Domestic Product ended 2014 at 99.5 and is now 103.9. I will let that sink in for newer readers because it is includes the period that has been presented and broadcast as the “Euro Boom”. In fact there were later downwards revisions to the German data starting with the opening of 2018. So there was growth of about 8% to the end of 2019 or pre pandemic. So house prices were already surging way beyond economic growth and were of course being driven by the negative interest-rates ( 6 years of them now) and the QE bond buying of the ECB. The latter has meant that Germany has been paid to borrow and even after the rises in bond yields this week the ten-year yield is -0.25%.

This has consequences for the mortgage market which Fitch Ratings looked at in June.

German mortgage loans generally carry a fixed rate, which is reset at a predefined date. This was traditionally five to 10 years after origination, but the proportion of borrowers with fixed interest periods of 10 or more years has risen in recent years. About half of new borrowers now have a fixed rate for over 10 years, up around 15pp since 2010.

Leading to this.

German 10-year fixed mortgage rates have increased to about 0.75%, from about 0.45% at the start of 2021, as bund yields have risen on increased inflation expectations

It is hard not to laugh at 0.3% being considered to be inflation expectations. But anyway even at 0.75% that is very cheap.

The Economic Outlook

This has been deteriorating as the summer has moved to autumn. The official data series started the month badly.

WIESBADEN – According to provisional results from the Federal Statistical Office (Destatis), retailers in Germany had calendar and seasonally adjusted sales in real (price-adjusted) 5.1% less in July 2021 than in June 2021……..Compared to July 2020, sales in July 2021 fell by 0.3% in real terms and rose by 1.7% in nominal terms.

There was also this.

COLOGNE / WIESBADEN – As reported by the Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis), the mileage of toll trucks with at least four axles on federal motorways, calendar and seasonally adjusted, decreased by 2.2% in August 2021 compared to July 2021.

Of course with the driver shortages this “faster indicator” is telling us more than it intended to.

There was also this.

BERLIN, Sept 16 (Reuters) – The German economy will grow slower than expected this year as supply chain problems and shortages of raw materials keep a lid on the industrial recovery, but it should rebound strongly next year, the DIW economic institute said on Thursday.

The DIW trimmed its growth forecast for this year to 2.1% from a previous 3.2%, but predicted a jump of 4.9% in 2022 assuming production constraints lift towards the end of the year. It sees growth normalising at 1.5% in 2023.

So quite a reduction for this year and such forecasts are usually behind the times. For newer readers I would not worry too much about next year’s suggested rise as forecasters love to take out an each way bet in such circumstances. But also note the 1.5% for 2023 which is hardly stellar. Indeed we people suggested on here that due to the way the numbers are calculated anything below 2% per annum is in fact going backwards.

I am no great fan of the Markit PMI business surveys so please only take them as a general hint but they seem to be picking it up as well.

“September’s flash PMI survey showed a notable
slowdown in the rate of growth of the German
economy, in a sign that activity is beginning to level
off after rebounding sharply over the summer.”


There are two factors in play at the moment. Firstly the economy is slowing noticeably and secondly there is a cost of living crisis. The inflation rate is 3.4% on the Euro measure and if we put in house prices is 4.2%. So it is likely that real wages are falling in spite of the official measures claiming otherwise. Let me give you an example of the German collective wages series.

Changes in actually paid working hours are not included in the tariff index.

Some of you might think that actual wages are quite important. Anyway that is a generic issue true in so many places.

The trade wars morphed into the pandemic and now the recovery has the supply shortages. We seem to be in permanent crisis which raises two issues. The first is the slow down right now and the second is what will economic growth be once it is over? That assumes that we will not be kept/told we are in permanent crisis as there is also this ongoing issue.

As reported by the Federal Statistical Office (Destatis), electricity generation from conventional energy increased by 20.9% compared to the first half of 2020 and accounted for 56.0% of total electricity generation. Due to the lack of wind in spring, the most important energy source was coal,


With an increase of 35.5%, electricity from coal-fired power plants recorded the highest increase compared to the same period in the previous year. Coal thus made up 27.1% of the total amount of electricity fed into the grid.


The Bank of England is lost at sea

Today the Bank of England makes its policy announcement. I would say that some of you may be reading this after the event but in a way I am too as it voted last night. It prefers bureaucratic ease to the risk of the decision leaking. Speaking of last night we saw a feature of the times which was not a little bizarre. As I expected the US Federal Reserve did nothing except pull markets along following the same piece of cheese which keeps disappearing.

Powell: Taper Announcement Could Come as Soon as the Next FOMC Meeting ( @DeltaOne )

Actually it was supposed to be this one and then previously at Jackson Hole in August. This does not seem anything like convincing to me.

“While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” ( Chair Powell)

The biazarre came as discussions began about the Tapering which has not started as as you can see no decision has been made will be over by the middle of next year so interest-rates can rise. Apparently that is “hawkish”

On that scale I wonder what they make of this from Brazil.

Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to increase the Selic rate by 1.00 p.p. to 6.25% p.a.

Even worse is the rationale.

The Committee judges that this decision reflects its baseline scenario for prospective inflation

So they are worried about inflation and are responding whilst Chair Powell is “hawkish” by doing nothing but will definitely maybe do something one day.

More pain for Chair Powell and his merry share and bond trading crew has come from Norway this morning.

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate from zero percent to 0.25 percent.

“A normalising economy now suggests that it is appropriate to begin a gradual normalisation of the policy rate,” says Governor Øystein Olsen.

The Bank of England

This will be struggling with the same issues with a UK twist. That is that with inflation above 3% on the official CPI measure an explanatory letter to the Chancellor Rishi Sunak is due today. Except how to write it without saying we did it? That issue is reinforced by the present gas price crisis where there will already be an impact from the price rises announced for October 1st but it now looks increasingly likely there will be another one by the spring.

Gas and electricity bills accounted for 7.5% and 7.3% of all spending by households in the two lowest income deciles, compared with 3.1% and 2.7% for households in the two highest deciles. ( Reuters)

In terms of the CPI inflation measure domestic fuel has a weight of 2.6% so it poses a challenge to the “temporary” inflation theme as next year’s expected rise nudges the number then higher. The price of a barrel of Brent Crude being above US $76 per barrel is not helping much either.


Earlier this month Governor Andrew Bailey started his public relations effort on interest-rates.

LONDON, Sept 8 (Reuters) – Bank of England policymakers were split evenly last month between those who felt the minimum conditions for considering an interest rate hike had been met and those who thought the recovery was not strong enough, Governor Andrew Bailey said.

An odd statement so let us look further.

“Let me condition this by the fact that it was an unusual meeting because there were only eight members of the committee – so it actually was four-all,” Bailey told the Treasury Committee in the lower house of parliament.

At a time when telling lies in Parliament is an issue let us take a moment to remind ourselves of the actual vote.

The Chair invited the Committee to vote on the propositions that:

Bank Rate should be maintained at 0.1%;


The Committee voted unanimously in favour

So his 4-4 was in fact 8-0 as they were a person short due to forgetting to appoint a new Chief Economist in time. Thus he has misled Parliament and the unwary with the get-out being his use of “basic minimum” which is in fact meaningless. He is doing this in response to this.

Perhaps, Andrew, I could start with you. In May, the
Bank forecast inflation at 2.5% by the end of this year. As you know, now the forecast is 4%, which is a very significant uplift of 1.5%; I think it is the largest CPI uplift to a forecast that there has been, and almost half as
large again as the second largest uplift.

It seems that Parliament may be finally realising that the Bank of England cannot forecast its way out of a paper bag. I have a little sympathy for them as of course they also have to listen to the even worse forecasting of the Office for Budget Responsibility. But that fades as we recall who appoints these people to these roles!


The evidence to Parliament took a curious turn as the absent-minded professor lived up to his name.

I am often puzzled by the claim about asset prices and QE.

In the case of Dr.Broadbent we could have stopped after the first 4 words. But there was more to come.

I am happy to write to the Committee and make these points in more detail. In real terms, UK equity prices are still a long, long way below their peaks of the 1990s; they have not been strong. House prices have gone up a lot over
the last year, for reasons related to Covid, but before that had risen for 15 years basically in line with wages. The really rapid growth in house prices was before that; it was in the years around the millennium.

There is so much that is wrong here. For example we look at equity prices in real terms but house prices in nominal ones. Also even by his standards this really is a shocking lack of awareness of his own actions.

House prices have gone up a lot over
the last year, for reasons related to Covid

So the economic collapse pushed house prices higher on its own Ben? He has forgotten this from Bank Underground from the 6th September 2019.

We find that the rise in real house prices since 2000 can be explained almost entirely by lower interest rates.

So via the interest-rate cuts and QE bond buying that Ben has voted for.

The equity market point is more intriguing although care is needed as the FTSE 100 is international and represents mining and other stocks which have not done as well as others. But even if you switch to domestic stocks there is some truth to this. Although in a familiar swerve he has forgotten one of his favourite words “counterfactual” as they may have fallen otherwise. Also as equities pat dividends they should be included.


As you can see the Bank of England is currently becalmed with only “open mouth operations” available to it. The interest-rate weapon has been weakened by several developments. One is the move the fixed-rate mortgages and the other is the fact that the Bank of England QE book is effectively financed at Bank Rate so they are not keen to raise it. Also any rise in bond yields will be expensive for the government which is already facing more debt costs due to the rise in inflation it and the Bank of England have worked together to create.

Oh, what a tangled web we weave, when first we practice to deceive! ( Sir Walter Scott )

Added to all of this there is the trend towards economic slowing that we have been observing. Whilst I have no great faith in the Markit PMI the Bank of England does ( Ben Broadbent being especially enthusiastic) and that told us this earlier.

“While there are clear signs that demand is cooling since
peaking in the second quarter, the survey also points to
business activity being increasingly constrained by shortages
of materials and labour, most notably in the manufacturing
sector but also in some services firms.”

Then there is the large tax rise on its way ( which looks a bigger mistake by the day) and the energy price rises and the end of the top-up to Universal Credit. Much more of that and they will be thinking of easing again…..

The central banks are caught in a trap of their own making

The last eighteen months or so have seen central banks deploy monetary policy on a grander scale than ever before. There was a rush to cut interest-rates an enormous surge in bond buying and credit easing. But now they are facing quite a few credibility problems. Let me start with the Federal Reserve in the US.

The taper announcement cometh, but just not this week, according to the CNBC Fed Survey.

The survey of 32 market participants shows they expect the Federal Reserve to announce a reduction in its $120 billion in monthly asset purchases in November and begin to taper in December. The Fed is expected to cut purchases each month by $15 billion.

The first rate hike does not come until the end of next year.

That was from CNBC yesterday and continues the theme of any reduction in QE bond buying always being just around the corner on a straight road. After all it was supposed to be at Jackson Hole in August and then in September. As you can see the idea of an interest-rate hike seems to terrify them so much it has been kicked into the long grass. Also if we look into the detail the idea that a US $15 billion per month reduction is significant pales when we look at this.

If the Fed doesn’t slow the pace of its monthly bond purchases in the next few months, its balance sheet will be close to $9 trillion by year end. In the past three months alone, its holdings have expanded by $384 billion, to $8.45 trillion. ( Lisa Abramowicz ).

As you can see they have become addicted to bond buying and QE.

Might as well face it, you’re addicted to love
Might as well face it, you’re addicted to love
Might as well face it, you’re addicted to love ( Robert Palmer )

Why should they act?

In the second quarter the US passed its previous peak in terms of economic output or GDP as 19.36 trillion dollars replaced the previous peak of 19.22 ( 2012 prices). So the emergency is over and we are back to debating what growth rate it can achieve. Also there is this.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in August on a seasonally adjusted basis after rising 0.5 percent in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.3 percent before seasonal adjustment.

The Fed does not target CPI as it follows the central banking rule of targeting the lowest inflation measure it can find. But there is plainly a lot of pressure here and inflation is running hot. Last night I tweeted a paper by Christophe Barraud which suggested this.

For a few months, one of the key developments in the US housing market has been the rebound of the rental market. According to the latest figures, US rents increased by more than 10% YoY in August.

Many are expecting an uptick in rents and as they are 31.1% of the US CPI ( mostly Imputed Rents) it would have quite an impact as officially they are between 2.1% and 2.6%. The issue of measuring rental inflation is complex in terms of “new” and “old” rents but for out purposes today we see that inflation is not only higher but a significant sector looks set to go higher.

So all roads point towards not only a withdrawal of the stimulus but a rise in interest-rates away from 0.1%.

Euro area

Here is Estonia central bank Governor Muller from earlier.

“I realize that it would be a problem if there is a very sharp cliff effect at the end of the pandemic emergency purchase program.”

“One option would be to expand the pre-crisis plan above the current 20 billion euros per month.”

A potential increase in the older quantitative easing program is “part of the discussion we will have on how to phase out PEPP and what it would mean for asset purchases going forward.”

Regular readers will be aware that this has been the plan all along. Assuming that the PEPP does end next March – any economic decline will see it extended – then the existing programme will be expanded. The ECB has spent the pandemic trying to play a two-card trick as if they are any different in reality. It was simply a way of relaxing boundaries yet again. This is what I am tempted to say is a special case but also becoming more common.

What I mean by the more common is that the ECB has been for some time turning Japanese as QE looks permanent. But it is also a special case in that it has plunged further into the icy cold world of negative interest-rates than anyone else with its -1% for the banks via the various TLTROs. Is  there a hint of this ending? No and yet.

The euro area annual inflation rate was 3.0% in August 2021, up from 2.2% in July ( Eurostat)

With inflationary pressure around ( producer prices rose by 2.3% in July alone) the ECB is feeling the heat here. But growth has not been as good as in the US and this keeps happening.

Ifo institute cuts Germany 2021 GDP growth forecast to 2.5% from 3.3% previously ( ForexLive)

Germany with its large export sector is being particularly hit by the slow downs in China and elsewhere. Also the supply shortages remain in play.

Volkswagen’s truck division Traton is the latest manufacturer to warn the global shortage of semiconductors chips has jeopardized its deliveries ( Bloomberg)


There was a Bank of Japan meeting earlier and here is something that is really quite significant via LiveSquawk.

BoJ’s Kuroda: Pent-Up Demand Will Help Consumption Recover –

Rise In Wages Has Been Relatively Moderate –

Do Not Think Weak Wage Growth Is Cause Of Consumption

Regular readers will be aware that wage growth in Japan is another thing that is just about to rise ( which gets copied and pasted by the media) but does not happen. The whole period of Abenomics has been that on rinse and repeat.

Things are in fact so bad that the only real news is their metamorphosis into a band of climate change fighting ninjas.

These terms and conditions prescribe the principles for the Bank of Japan’s
funds-supplying operations to support financing of the private sector for
their efforts on climate change (i.e., open market operations through which
the Bank provides loans against eligible collateral within the amount
outstanding of investment or loans by eligible counterparties to contribute
to Japan’s actions to address climate change).

Basically it is free money ( 0%)


The contrast between now and the start of the pandemic could not be more striking. Then central banks rushed into action to deal with an emergency.

You say it’s urgent
So urgent, so oh oh urgent
Just wait and see
How urgent my love can be
It’s urgent ( Foreigner )

But now on the other side of the coin it is a possible US $15 billion dollar reduction in monthly bond purchases and that is definitely maybe. Interest-rate rises are for the long grass and now we see economies slowing again, so any real change is disappearing into the distance. How long do they think they can get away with this?


The UK government was keen to spend spend spend in August

This mornings official release on the UK public finances has an interesting turn of events in it. So let us start with the headline number.

Public sector net borrowing (excluding public sector banks, PSNB ex) was estimated to have been £20.5 billion in August 2021; this was the second-highest August borrowing since monthly records began in 1993, but £5.5 billion less than in August 2020.

If we look at the recent trend this is disappointing. If we take out July due to it being a self-assessment month for income tax we see that May and June had also been of the order of £20 billion so the borrowing on an initial inspection looks a little stuck.


For those of you worried about the implications of that for the underlying economy there was a fair bit of relief in the tax numbers.

Central government receipts in August 2021 were estimated to have been £61.2 billion, a £5.3 billion increase compared with August 2020. Of these receipts, tax revenue increased by £4.1 billion to £45.0 billion.

For example VAT was up by 5% on last year and PAYE income tax receipts were up by 12.8%. There was some extra self-assessment money too.

In August (and February), accrued receipts are usually boosted by late payments of self-assessed taxes due in July (and January) each year. This month, self-assessed Income Tax receipts were £2.2 billion, £0.3 billion more than in August 2020.

We need to look at the overall season and last month told us this.

This month self-assessed Income Tax receipts were £8.5 billion, £3.7 billion more than in July 2020 but £0.9 billion less than that of July 2019.

So we edged closer to the 2019 level which suggests we are nearer to it than the GDP numbers have done. Switching to Corporation Tax the numbers are not so clear but one of our themes is most definitely in play.

Corporation Tax receipts in recent months have been higher than those published in the Office for Budget Responsibility’s (OBR) Economic and fiscal outlook (EFO) – March 2021.

My first rule of OBR club that the OBR is always wrong strikes again! It is like a football team that loses 5-0 every week but comes back with the same manager and team the next season and guess what? It is long past the time to scrap it as frankly its forecasts are so consistently wrong they are misleading.


If it was not receipts then there is only one candidate for the source of the relatively high borrowing and here it is.

Central government bodies spent £79.6 billion in August 2021, £1.0 billion less than in August 2020.

In fact there is one area where it seems to be trying to apply a fiscal stimulus.

Central government departments spent £29.5 billion on goods and services in August 2021, an increase of £1.5 billion from August 2020.

Of course with inflation on the march some of it may be simply higher prices as we peer into the detail.

Spending in this area includes £16.5 billion on procurement and £12.7 billion in pay.

Maybe it is this.

This cost includes the expenditure by the Department of Health and Social Care (DHSC), devolved administrations and other departments in response to the coronavirus pandemic including the NHS Test and Trace programme and the cost of vaccines.

Local government expenditure is on the rise too.

Central government current transfers to local government were £9.0 billion in August 2021, an increase of £0.8 billion compared with August 2020. In part, these payments enable local authorities to fund coronavirus policies.

This is interesting because we did not get that sort of breakdown last year but we do know that in a broad sweep money was pushed to local government to help deal with the pandemic and now we seem to be spending even more.

Debt Costs

These were always going to follow the rise in the Retail Prices Index or RPI via our index-linked bonds or Gilts.

Interest payments on central government debt were £6.3 billion in August 2021, £2.9 billion more than in August 2020 but £2.3 billion less than the monthly record of £8.6 billion in June 2021.

In fact due to the lagged nature of the accounting there is worse to come.

The recent high levels in debt interest payments are largely a result of movements in the Retail Prices Index (RPI) to which index-linked gilts are pegged. To estimate the RPI uplift for 3-month lagged index linked gilts in August 2021, we reference the RPI movement between May and June 2021, with the most recent RPI not yet feeding into the estimate.

So we have monthly RPI increases of 0.7%,0.5% and 0.6% yet to feed into these numbers so the situation here comes from AC/DC.

No stop signs
Speed limit
Nobody’s gonna slow me down
Like a wheel
Gonna spin it
Nobody’s gonna mess me around

Also there is a smaller issue from conventional bonds where the ten-year yield is now around 0.8% whereas it spent nearly all of August being below 0.6%. So a drip drip from this if these yields persist.

Last Year was worse than we thought

In itself this seems fair enough.

Of these, the most notable revision to public sector net borrowing was a result of the recording of the expected loss under the government loan guarantee schemes.

The amount is pretty large and let us hope it is accurate.

We have provisionally estimated that this expenditure at inception has contributed to an increase in public sector net borrowing of £20.9 billion in financial year ending (FYE) 2021 and £0.5 billion in FYE 2022.

Debt redefined

Here are the headlines.

Public sector net debt (excluding public sector banks, PSND ex) stood at £2,202.9 billion at the end of August 2021, an increase of £184.2 billion compared with the same point last year…….Debt is now a ratio of GDP currently standing at 97.6% at the end of August 2021.

So as you can see it is even more important that bond yields are low because whilst we just noted a nudge higher it is still very cheap on three levels. Firstly in absolute terms, next relative to inflation and thirdly relative to the scale of borrowing.

The Bank of England has intervened on a large scale in this area but the effect so far has been to reduce costs but we account for it in a rather odd fashion as debt is effectively lower rather than higher.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of August 2021 would reduce by £236.3 billion (or 10.5 percentage points of GDP) to £1,966.6 billion (or 87.1% of GDP).

There are issues with this such as replacing a fixed interest-rate with a variable Bank Rate but for now with it at 0.1% that is not high. Also should it become material I expect a change in the rules.


The monthly numbers tell us that the economy looked to be doing okay in August via the tax receipts. Also that there was some fiscal stimulus via the expenditure numbers. So after the GDP growth disappointment in July we can hope for a better number in August.

Switching to the year so far we have made some solid progress on the borrowing front.

The public sector borrowed £93.8 billion in the financial year-to-August 2021, £88.9 billion less than in the same period a year earlier.

Today marked a change for our debt as we issue the first so-called green bond.

Since I wrote this, final order book for UK’s first green gilt now over £100 billion / $137 billion ( David Milliken )

It is the fashion of the times of course so investors will be keen and no doubt the Bank of England is counting down the 169 hours before it too can join the party,

The catch is where it going as there has been so much waste such as the shambles and indeed lies around Smart Meters for example.

Proceeds from the sale will be ring-fenced for projects such as clean energy, and will also help the government burnish its green credentials before it hosts the United Nations COP26 climate conference in Glasgow in November.

Let us hope that we will not in this instance be referring to Arcade Fire.

If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back
You know I would love to waste it again
Waste it again and again and again


The UK government is facing the consequence of its own failed energy policies

In a way it is a surprise that the UK finds itself in an energy crisis right now. This is because the weather has been mild and mostly pleasant leading to this being the position around 9 am today.

GB Grid: #Wind is generating 1.92GW (6.53%) out of 29.45GW

UK electricity demand is as you can see reflecting this by being below 30 GW so in an alternative universe we should be exporting power from out wind farms via the interconnectors. That after all was the promised land for the “Saudi Arabia of wind”.

That was reflected as recently as last Tuesday by UK energy secretary Kwasi Kwarteng who seemed to echo comical Ali with this.

1. Our Energy White Paper sets out specific steps we will take to overwhelmingly decarbonise power generation in the 2030s A plan to support up to 220,000 jobs, and keep bills affordable as we transition to net zero by 2050

There were already signs of a coming storm for now as he focused on 30 years ahead. Whereas I had warned about exactly this on the 10th of August.

Governments have raised prices via green policies and hoped to get away with the consequences ( ie parking them on the next government). But reality is dawning as to what the real consequences are.

But wait there was more pie in the sky thinking from Kwasi.

2. Our Transport Plan sets out the specific steps we will take to decarbonise the entire transport system in the UK A plan to support tens of thousands of jobs worth up to £9.7 billion GVA in 2050.

Unfortunately for Kwasi the crisis meant that he ended up in an example of what a difference not even a week makes. Here he is from Saturday.

Today, I’ll be speaking to chief executives of the UK’s largest energy suppliers + operators to discuss the global gas situation Britain has a diverse range of gas supply sources, with sufficient capacity to more than meet demand We do not expect supply emergencies this winter.

Indeed the UK government found itself having to issue an explainer on the subject with one bit especially embarrassing and the emphasis is mine.

High gas wholesale prices have subsequently driven an increase in wholesale power prices this year.

In recent weeks, this trend has been exacerbated by the weatherand planned maintenance at some power stations.

The maintenance was supposed to be no issue because according to the rhetoric we are becoming the Saudi Arabia of wind except there has been plunges to even below 1GW from that source. So we have had to import lots of power.

So Kwasi had gone from expounding fantasies about the future to a rather painful present in very short order and on such a scale he was forced to deny “supply emergencies this winter” So serious was this that he was to be found at his desk on a Sunday as another problem emerged.

Today I have also met Tony Will in person, the global CEO of @CFIndustries

– our largest domestic supplier of CO2. We discussed the pressures the business is facing and explored possible ways forward to secure vital supplies, including to our food and energy industries.

Even Bloomberg are finding the mess here the subject of a little fun.

Who’d have thought @BorisJohnson  would be trying to secure bigger cuts to CO2 on one side of the Atlantic, while back home, a shortage of CO2 is causing problems to food supplies… ( Alex Morales)

The European Crisis

The situation as ever was described by Javier Blas.

EUROPEAN ENERGY CRUNCH: Natural gas prices opening sharply up this morning (again). UK NBP up nearly 7%, approaching last week’s record. Dutch TTF up 8%. UK Prime Minister Boris Johnson said en route to New York that the problem was “temporary” | #CommodityInflation

Ah “temporary”! We know what that means. Perhaps the Prime Minister has been listening to the Bank of England or had early sight of its explanatory letter about above 3% CPI inflation.

The impact is being felt across Europe according to

Surging energy prices in Europe are hurting more than just consumers. The price spikes have started to hit industrial activities, threatening to deal a blow to the post-COVID recovery in European economies with a triple whammy of reduced consumer purchasing power, lower industrial production, and higher operating costs.

Some businesses are closing already.

It’s not only consumers that struggle with the record energy prices. Industries are starting to feel the heat, too.

CF Industries, a manufacturer of hydrogen and nitrogen products, said this week it was halting operations at both its Billingham and Ince manufacturing complexes in the UK due to high natural gas prices.

“The Company does not have an estimate for when production will resume at the facilities,” CF Industries said.

Norway-based Yara, one of the world’s top ammonia producers, is curtailing production due to the record-high gas prices.

There is a sort of echo of 1984 here as we have the Vampire Squid itself getting ready for winter.

“Under such an outcome, the only balancing mechanism would be a significant further rally in European gas and power prices reflective of the need to destroy demand, with curtailed power demand in the industrial sector through blackouts,” Goldman’s analysts said in a note carried by Bloomberg.

So “destroy demand” is the new euphemism for power cuts is it?

Tucked away in all of this is another fail for economics 101.

Moreover, competition from Asia on the LNG market could mean that Europe may not get too much additional LNG supply. Spot prices in Asia are at record highs for this time of the year, but buyers are paying regardless, concerned that the natural gas shortage globally could worsen as the winter season approaches.

The higher prices do not seem set to produce much extra supply.

So we are left with “It’s a gas gas gas” of the Rolling Stones.


If you are in an industry where the establishment had made mistakes and faux-pas you have a good chance of this.

The government is considering offering emergency state-backed loans to energy companies as firms battle to stay afloat amid surging gas prices.

Business Secretary Kwasi Kwarteng will hold crisis talks with industry bosses including Centrica and E.On on Monday.

High demand for gas and reduced supply are behind a surge in wholesale prices. ( BBC)

Is it rude to point out that the BBC has been cheerleading for wind farms for years and now cannot get off that particular issue fast enough and if you blink you might miss what “reduced supply” actually means.


Crises like this usually involve a list of mistakes rather than a single one and official claims that it is simply bad luck when it is bad decisions and bad planning. After all if we look at luck then with a type of Indian summer in September the UK is being lucky with the weather or things would be even worse. In themselves wind farms and solar power are not at fault. It is those who have not only promoted them but financed them on a scale way beyond their abilities and usefulness. When the wind does not blow it does not matter how many wind farms that you have. But we have ploughed ahead ignoring that. Also the truth is that there have been lies about the cost.

With a capital cost of £3.8 billion, and a prospective load factor in its first year of perhaps 47% (i.e. the same as Beatrice, the windfarm next door), we might optimistically expect Moray East to have a levelised cost of £130, which is pretty much typical of recent offshore units.

Which leaves us still with the mystery of why Moray East submitted a bid for a CfD at £57. It has been indexed up to £68 already, but even so, it’s hard to see how they make money in the short term. ( Andrew Montford )

Then there are the Smart Meter adverts which remind us that rather than saving money as claimed they have cost billions and have added to bills. If anybody but the establishment was behind this those adverts would have been banned long ago by the Advertising Standards Authority.

Much smaller sums of money than these may have made the coal power stations we have rushed to scrap less polluting. After all should people fire up diesel generators this winter they would have been cleaner than them anyway.

Also where has the regulator been as UK energy companies took a one-way punt on energy prices? Yes Ofgem I am looking at you.

Fortunately not everything is a disaster as a new interconnector ( 1.4GW ) with Norway will be in full operation soon and we can benefit at times like this from its hydropower resources. Later this week some wind is forecast although care is needed as relying on the weather forecast got me wet yesterday. But future power decisions need to be based on reality and not this.

Every man has a place, in his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky, on our ship, Fantasii
All your dreams will come true, right away ( Earth Wind & Fire)


My theory that higher inflation leads to lower UK Retail Sales works again

There is a lot going on in economies right now but it is always nice when one of your theories works again. Back on the 29th of January 2015 I pointed out this.

However 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.

So lower inflation was accompanied by strong retail sales which is rather ominous right now as earlier this we inflation was reported at 4.8% via the RPI or if you prefer to ignore owner-occupied housing 3.2% via the CPI. So what about retail sales?

Retail sales volumes fell by 0.9% in August 2021, following a 2.8% fall in July

So they have stumbled as inflation gas picked up and we look at a specific number for that too.

reflecting an annual retail sales implied price deflator of 3.3%.

The push has come recently as we see monthly rises of 1% in May,0.7% in June -0.4% in July and 0.9% in August. So even with a curious July number that is quite a push and look what has happened.

The Breakdown

Here there was some solace because there is something of a switch between categories going on.

Food store sales volumes fell by 1.2% in August 2021, following a fall of 2.0% in the previous month after an increase of 4.0% in June thanks to the start of the Euro 2020 football championship. This monthly fall in food sales volume may be associated with an increase in social spending (such as eating out) linked to the further lifting of hospitality restrictions since July. This is supported by data from Open Table, which showed a pickup in online restaurant reservations in August.

As you can see there was a distortion from the Euros football but there is a bigger one as people return to eating out. Or as @forexflow put it earlier when asking me about this.

Not being able to get a table at my local curry hut unless I book a week in advance supports my theory too mate.

This is reinforced by another part of the official release.

This pattern is also in line with data on UK spending on debit and credit cards, based on CHAPS payments made by credit and debit card payment processors, which reported a fall in spending on staples (such as food) in August alongside an increase in social spending (such as eating out and takeaways).

So business was pushed into retail sales via the lockdowns and is now being taken away. Although not entirely as perhaps they found treats they liked and still have them.

Despite the monthly fall, food store sales volumes are still 3.4% above pre-coronavirus (COVID-19) pandemic levels in February 2020.

Department Stores

These have been in trouble for some years as we have observed via the decline of the high street. The pandemic seems to have made this even worse.

Department stores reported a fall of 3.7% in monthly sales volumes in August 2021, following falls each month since April 2021. Department store sales volumes were 5.2% below their pre-coronavirus pandemic February 2020 levels.

There is a supply chain story here and the emphasis is mine.

Across businesses in the retail industry, 6.5% reported they were not able to get the materials, goods or services needed from within the UK in the last two weeks. This compares with 7.1% across all industries. Department stores reported the largest percentage at 18.2%, followed by clothing stores at 11.1%.

This was backed up by the inflation data earlier this week where the furniture category rose by 1.3% in August. So the shortages are raising prices as well as reducing volumes. Other businesses had troubles but were able to duck and dive around them.

Another 8.9% of businesses in the retail industry reported they were able to get the materials, goods or services they needed from within the UK in the last two weeks, but had to change suppliers or find alternative solutions. Over 22% of food stores reported this, followed by 18.8% of fuel stores and 11.1% of clothing stores.

Other stores saw a dip but a smaller one and are still higher than pre pandemic.

Other non-food stores (such as chemists, toy stores and sports equipment stores) reported a monthly fall in sales volumes of 1.2% in August 2021. Despite this, sales volumes were 3.0% higher than this time last year and 4.5% above their pre-coronavirus pandemic levels.

If you are looking for growth then maybe we were a bit better dressed.

sales volumes for clothing stores were the only sector to show an increase over the month, at 0.7%.


This maybe gives us a hint of the broader economy.

Automotive fuel sales volumes rose by 1.5% in August 2021 as people continued to increase their amount of travel; however, they remained 1.2% below their pre-pandemic February 2020 levels.

So an improvement but the overall picture may be worse than shown because some seem to have switched away from public transport. There is an irony here as it will receive a boost in Battersea on Monday when the 2 new Tube stations open ( yes we will have a Battersea Power Station station), something people have been asking to happen for decades. Just in time for public transport to decline.

In total, there were 3.59m entries and exits compared to the pre-pandemic baseline of 7.12m. It was the first time that the Tube has seen 50 per cent of ridership on a Monday since March 2020. ( City-AM ).


This seems to be on the march again. It may be related to the supply shortages as people do their own searches for goods not in the local shops.

The proportion of retail sales online rose to 27.7% in August 2021 from 27.1% in July, substantially higher than the 19.7% in February 2020 before the pandemic.


The numbers have been depressed by the inflation surge in the UK and in fact have fallen for the last four months in an almost perfect demonstration of that. However we live in complex times where a lot is happening at once and the numbers have been depressed both by a category switch ( restaurants etc reopening) as well as the supply shortages. The latter seems set to continue as I note it has spread to truck production in the US so not only are drivers in short supply it may spread to the trucks as well. Car sales too will be a depressing factor although offset somewhat by used car sales. So overall here we are.

 however, volumes were up by 0.3% in the three months to August compared with the previous three months, and in August 2021 were 4.6% higher than their pre-coronavirus (COVID-19) pandemic February 2020 levels.

The recent declines link though to my view on the Bank of England.

The Bank of England is now expected to raise rates in May 2022, according to Goldman Sachs. Expects the BOE will hike bank rates to 1% by the fourth quarter of 2023. ( @PriapusIQ)

I think Goldman Sachs have a position they want to get out of……



Australia takes centre stage

Today all roads seem to lead to a place “down under” as President Biden put it last night. Although in that particular instance it looked to be driven by the fact he had forgotten the name of the Australian Prime Minister Scott Morrison. But there was something of a geopolitical shift going on with the new alliance AUKUS as a place we have christened the South China Territories increasingly faces up to its rather exposed position. Switching to the economics a nuclear powered submarine programme is a big deal.

Australia will build at least eight nuclear-powered submarines under a historic new military alliance with the United States and Britain, dumping the troubled $90 billion future submarine deal with France. ( Sydney Morning Herald )

Defence projects invariably take longer and are more expensive than badged as the price of the French deal had risen by $40 billion. A plus in this instance is that the UK ( Astutes) and US ( Virginias) are being built so the technology exists. So whilst much work will be in Australia and Adelaide in particular there will be work and exports for the UK and US. So we have in economic terms a tangled web if we add in that Australia is building these to defend itself from its biggest customer.

Reserve Bank of Australia

Regular readers will not be surprised to learn that the first article in its September review is not only about the banks but also a subsidy to them.

The facility has provided low cost threeyear funding to banks operating in Australia. As for all central bank funding, funds are lent against high quality collateral.

There is an echo of the geopolitical move as this was a copy of the Bank of England scheme. Central bankers are pack animals and imitation is the norm as well as being the sincerest form of flattery.

The funding was cheap with another UK copy in the interest-rate.

In November 2020, the cost of new funding
under the TFF was lowered to 0.1 per cent in
line with reductions in the target cash rate and
the three-year government bond yield target.

There was also lots of it.

The TFF has provided $188 billion in funding to
banks since its inception. This funding is equivalent
to 4 per cent of banks’ non-equity funding
, or 6 per cent of credit.

According to the RBA research the banks were saved around 0.5% on average and with our experience from the UK let us skip the small business lending hype and cut to the real event.

Rates on outstanding variable-rate housing loans
have declined by around 55 basis points since
February 2020, while interest rates on outstanding
fixed-rate housing loans have declined by around
140 basis points.

As an aside we see another incentive for more fixed-rate mortgages as we look at the scale of the moves.

House Price Rises

This was of course the endgame. How is that going?

Weighted average of the eight capital cities

  • rose 6.7% this quarter.
  • rose 16.8% over the last twelve months. ( Australia Statistics )

Even by UK standards that is quite a surge and no doubt the RBA will be able to feel that it can stand tall in central banking circles. Indeed it will be beaming with pride at this part of the announcement.

The preliminary estimate of the total value of residential dwellings in Australia in the June quarter 2021 was $8,924.6 billion, up $596.4 billion from $8,328.1 billion in the March quarter 2021. This is the largest rise on record for the series.

Of the total value of residential dwellings, $8,527.6 billion was owned by households.

the mean price of residential dwellings rose $52,600 to $835,700.

There will be a race amongst the Phd researchers to be the first to claim large wealth effects on economic output and hence GDP from this. Missing will be several relevant facts.

  1. You cannot sell the market in one go or if you prefer these are marginal and not average prices
  2. Some will sell and make the gain but not many and other ways of gaining ( equity release and remortgaging) are relatively small fry.
  3. This ignores the inflationary impact on both first-time buyers and those trading up

Considering the size of Australia the rises seem pretty consistent.

rose in Sydney (+19.3%), Canberra (+19.1%), Hobart (+17.7%), Melbourne (+15.0%), Perth (+15.0%), Brisbane (+14.6%), Adelaide (+14.2%), and Darwin (+12.8%), over the last twelve months.

Let me just remind you the extraordinary nature of this as the numbers are that in isolation but when you add an economic plunge it adds to the extraordinary nature.


The numbers this morning showed a bit of a change.

Population growth over the past 12 months was entirely due to natural increase (adding 131,000 people), while net overseas migration was negative (-95,300) over the period, the first time since 1946. This continues the recent shift from the long run trend of net overseas migration driving the majority of Australia’s population growth.

So the opposite of our Turning Japanese theme as there is natural population growth and Australia has both space and resources for them. But switching back to housing it seems to not really be a factor when we note there are more houses.

the number of residential dwellings rose by 44,400 to 10,679,500. (Quarterly)

Labour Market

Hours Worked

Let us go straight to the best signal from this morning’s release.

Hours worked decreased by 3.7% (in seasonally adjusted terms) between July and August 2021, while employment decreased by 1.1% or 146,300 people. The fall in hours worked followed falls of 1.8% in June and 0.2% in July, reflecting the increase in lockdowns and other restrictions during this period.

This is a bit of a grim move as things turn down in a land under. If we look back hours worked had exceeded the March 2020 by 2.9% in May but the overall impact of the declines since have reduced it to a 2.9% decline in August. So contrasting with this week’s numbers from the UK in two respects. The decline is smaller compared to our one of circa 5% but the direction of travel is of decline and not gain. Actually let me add a third issue which is in their favour in that they are heading for summer and us winter which via Covid-19 may also be in play.

As we see so often the unemployment rate was a poor guide to what was really happening.

The unemployment rate decreased by 0.1 pts to 4.5%

The unemployment rate was 0.7 pts lower than March 2020

Although the underemployment rate did much better.

The underemployment rate increased by 1.0 pts to 9.3%

The underemployment rate was 0.5 pts higher than March 2020

Also their measure of wage changes looks to be working a lot better than ours.

The full-time adult average weekly earnings increased by 1.5 per cent between November 2020 and May 2021, reflecting the further shift towards a more typical earnings distribution and more usual six-monthly change in average earnings.


There are quite a few strands to this saga. The Aussie economy has been pulled into reverse by the lockdowns which in the very short-term seem to be going nowhere. But the move into summer should help. As long as they can keep people working then the European energy crisis will be a boon for the resources sector.

MELBOURNE, Sept 16 (Reuters) – Australia’s Environment Minister Sussan Ley on Thursday approved an expansion of a Whitehaven Coal (WHC.AX) mine ………..Australia, the world’s biggest coal exporter,

Oh and we are back to China again.

 Coal accounted for around 60 per cent of China’s energy use in 2018,…… By value, Australia’s fossil fuel exports mainly comprise thermal coal (4 per cent of total exports), coking coal (7 per cent) and LNG (10 per cent). ( RBA)

But the answer according to the RBA is to flood the banks with cheap money so they can offer cheaper mortgages and pump up house prices. I often wonder at what point the young rebel against this especially as they now face higher energy bills?

The Consumer Price Index (CPI) rose 0.8% this quarter.

Oh and housing costs were recorded as falling 0.2% over the past year. I would say that you could not make it up but of course they have,




UK CPI inflation surges by a record amount just as a fire has been lit under energy costs

This morning has been one for team inflation. As ever the situation was one where the expectations were caught out although not if you had listened to this week’s podcast. So let us get straight to it.

The Consumer Prices Index (CPI) rose by 3.2% in the 12 months to August 2021, up from 2.0% in July: the increase of 1.2 percentage points is the largest ever recorded increase in the CPI National Statistic 12-month inflation rate series, which began in January 1997; this is likely to be a temporary change.

The first point of note is that this is quite a surge which is a record for the time that the Bank of England has been in charge of targeting inflation which began in 1997. This is far from a record if we look further back in time with the Retail Prices Index having been above 20% and seeing some real surges. But for now we have an issue and staying with the Bank of England we are now in the zone where it will have to write a letter to the Chancellor Rishi Sunak.

If inflation moves away from the target by more than 1 percentage point in either direction, I shall expect you to send an open letter to me…….I shall expect a letter within seven days of the publication of the data.

Framing the letter will not be easy because I doubt a “it was us that did it” would be entirely welcome. But the fiscal stimulus combined with a 0.1% Bank Rate and the other monetary easing such as QE bond purchases have contributed. This is important because they may be tempted to forget that this consequent inflation makes workers and consumers poorer when they tell us we are better off. Also this afternoon the Bank of England will buy another £1.15 billion of UK bonds to raise inflation which is awkward to say the least when it is well above target.

Also it looks like someone from the Bank of England is on temporary secondment at the ONS.

 this is likely to be a temporary change.

The Movers and Shakers

They are described thus.

Restaurants and hotels, recreation and culture, and food and non-alcoholic beverages made the largest upward contributions

On a monthly basis food prices rose by 1% in August and drinks rose by 2% so we see a suggestion that the supply issues have raised prices. The recreation category rose by 1.2% driven by a move of 2,2% in the category that includes gardens and pets. This may be something of a shambles as those who recall how the lock down surge in puppy prices was ignored ( too difficult to measure apparently although everyone else seemed to notice it) in favour of hamster and gerbils. Are they now rising in price?

The Restaurants and Hotels category rose by 1.3% meaning that if we put in the end of the impact of Eat Out to Help Out this happened.

The contribution from restaurants and hotels increased to 0.65 percentage points in August 2021. This is the largest contribution that this division has ever made to the CPIH annual rate.

Actually the furniture section rose by 1.3% on the month as well but for some reason they do not mention this.

Housing Costs

These continue to be quite a challenge to the credibility of the UK inflation structure. Most people will be aware via the news and media that house prices have been rising across the world as well as in the UK. The problem is that CPI inflation ignores owner-occupied housing costs and gets to 3.2%. So let us now use the measure which in theory includes them.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.0% in the 12 months to August 2021,

Yes the surging housing costs have in fact REDUCED inflation according to the official measure. This is because they use this.

Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to August 2021, unchanged since July 2021.

This is a problem on two fronts. The simplest is that Zoopla recently reported rental inflation of 2.1% so the official numbers look  understated and remember they have all been recalculated once before ( the official term was discontinuity). Also they think growth is picking up.

Average rents in Manchester Local Authority have risen by 1.4% in the last three months alone. Over the same time period rents in Birmingham LA are up 2.5%, Leeds up 1.9% and Edinburgh up 2.2%.

Next comes the fact that rents are also used for those who are owners and thus do not pay rent. So they use 1.2% as a proxy for this.

UK average house prices increased by 8.0% over the year to July 2021, down from 13.1% in June 2021….The average UK house price was £256,000 in July 2021, which is £19,000 higher than this time last year, following the record high of £265,000 in June 2021.

The house price series is being affected by swings driven by the Stamp Duty changes but as you can see they have been surging which has been completely missed by the official series.

Retail Prices Index or RPI

I have been making the case for it for at least a decade now facing down the official propaganda. It is not perfect ( no inflation measure is) but right now via its depreciation component it is covering the house price boom.

The all items RPI annual rate is 4.8%, up from 3.8% last month.

So as a measure it is better than the CPI one which replaced it and it is also better than the “housing costs” version called CPIH. Right now there is an extraordinary gap between the two and let me remind you that one has actual costs and the other has fantasy ones.

The difference between the CPIH and RPI unrounded annual rates in August 2021 was -1.80 percentage points, widening from -1.74 percentage points in July.

The Trend

The producer price series gives us a guide in terms of industrial costs.

The headline rate of output prices showed positive growth of 5.9% on the year to August 2021, up from 5.1% in July 2021.

The headline rate of input prices showed positive growth of 11.0% on the year to August 2021, up from 10.4% in July 2021.

So the annual rate continues to rise and the output monthly push was similar.

On the month, the rate of output inflation was 0.7% in August 2021, down from 0.8% in July 2021……

Although we finally got a bit of relief on the input side which slowed.

On the month, the rate of input inflation was 0.4% in August 2021, down from 1.3% in July 2021


The issue of inflation is back on the table and let break down what I think it really is and what happens next. We can put house prices into CPI and if you do so at the weights used in CPIH you would get a number over 4% but in reality they would change them so we would get roughly 3.7%. The dispute over the RPI has been over the formula effect but in fact it uses the Carli formula less than many think these days but let me give some ground and say 4.5% there. But if we start taking an average we end up with a number over 4% as opposed to the official 3%. That is a big deal compared to the official 3% and you compound that over time.

For example let me bring in another factor as with 4% inflation real wages with a few exceptions are probably still falling as opposed to the official number below.

In real terms (adjusted for inflation), total and regular pay are now growing at a faster rate than inflation, at 6.0% for total pay and 4.5% for regular pay.

That is an embarrassing level of error.

Next comes the trend which according to the ONS is down due to temporary factors.  Let me give you a factor I hope is temporary going the other way.

UK, France power cable to be halted until Oct 13th. ( @MichaelHewson_CMC )

Regular readers will be aware of the UK energy crisis of this summer which has by contrast to a cable fire look rather permanent. How is that going?

UK natural gas wholesale prices are ***jumping ~20% today*** to fresh record high as trades brace for more UK gas-fired power station demand after the loss of a key electricity interconnector between UK and France (among other issues) ( @JavierBlas )

There is already a rise in domestic energy costs baked in for the beginning of next month and another looks to be on its way……..

Oh and we were told that that domestic energy costs fell by 0.1% in August.

Finally the cost of UK inflation linked bonds ( Gilts) is about to surge with the RPI at 4.8% so UK debt costs will be on the rise.