The Bank of England intervenes in support of Tottenham Hotspur

We have been provided with some more insights into the thinking of the Bank of England via a speech from Executive Director Andrew Hauser. We open with a curious accident of timing.

I have always had a funny feeling about Friday the 13th – and 13 March 2020, Mark Carney’s last day in the
office as Governor of the Bank of England, was no exception.

Actually he had various leaving dates as one might expect from an unreliable boyfriend. Then the speech shows it is being given by a central banker because we are told this.

But this is no time for self-congratulation.

But then it apparently is.

Hailed globally as a shining example of how monetary, fiscal and regulatory policies
could work together to reinforce one another, the combination of interest rate cuts, government spending,
cheap funding and capital easing measures seemed sure to stabilise markets and restore some muchneeded confidence to households and businesses.

Can you applaud yourself whilst also slapping yourself on the back, but avoid self-congratulation?

Policies

We get a confirmation of one of my points.

The dollar swap lines may be the most important part of the international financial stability safety net that few
have ever heard of.

In essence the US Federal Reserve was effectively operating as the world’s central bank.

QE

The events are described thus.

This was by far the largest and fastest single programme ever launched: equivalent to around a tenth of UK GDP, or 50% of the MPC’s existing holdings, and more than twice as rapid as the opening salvo of purchases in 2009.

The impact is described in glowing terms.

The impact was immediate, and decisive. Gilt yields fell back sharply as confidence returned, and market
functioning measures began to normalise . Purchase operations have since taken place
smoothly, with good participation and tight pricing.

There are issues with this though as we find ourselves noting that “as confidence returned” actually means that the Bank of England buys vast numbers of Gilts ( bonds). In fact the present rate of purchases at £13.5 billion per week means that few others need “confidence” as the UK has sold around £13.3 billion of new Gilts this week. So this week nobody else needed any confidence at all! Next is the yield issue where the Bank of England buying has driven short-dated Gilts into negative territory. I looked at the detail of the purchases on Tuesday and Wednesday and over 90% of the short-dated auction so around £2.9 billion was driving prices into negative yields which is apparently “tight pricing”. Also if I was being offered profits and in some cases enormous profits like this I think you might see “good participation” from me too.

Covid Corporate Credit Facility (CCFF)

Let me thank Andrew Hauser for reminding me of this issue and it led me down an unusual road. So in the style of children’s TV let me say to Arsenal fans are you sitting comfortably? First the details of the scheme and it is another bad day for those claiming the Bank of England is independent.

Given the credit risks involved, financial exposures and
eligibility decisions would be owned by the Treasury, but the scheme – to be known as the Covid Corporate
Credit Facility (CCFF) – would be designed and run by the Bank, and funded through the issuance of
reserves, with the MPC’s agreement.

What has it amounted to?

So far, over 140 firms have signed up for the scheme, and have borrowed over £20bn in total,
some of which has already matured. Firms’ borrowing capacity in the scheme is more than three times that
level , helping to underpin confidence – and complementing the Government-run schemes, including the Coronavirus Business Interruption and Bounce Back Loan (BBL) Schemes, which together have lent a further £31bn.

This is a tidy sum indeed and the independence crew take another punch to the solar plexus as we note that he is linking Bank of England work with HM Treasury.

Whilst the help is no doubt welcome yet again we see a central banker unable to see the wood for the trees.

First, CP issuance under the scheme has been at least three times
larger than the size of the pre-Covid-19 sterling CP market – and nearly three quarters of CCFF firms have
set up a CP programme since applying. So the CCFF has helped to deepen the CP market, with potentially
lasting benefits.

The Threadneedle Street Whale is in the market buying it all up! Who would not want to offer debt cheaply? Small and medium-sized businesses must be looking on with envy. It also gives us an addition to my financial lexicon for these times.

“the normalisation of conditions in core markets, ” means the Bank of England is buying.

Meanwhile

 

 

Term Funding Scheme

This is reviewed in dare I say it? Self-congratulatory terms.

In addition to the CCFF, the Bank also opened the borrowing window for the new Term Funding Scheme
with additional incentives for Small and Medium Sized Enterprises (TFSME) on 15 April………There has already been £12bn of lending from the scheme – a far more rapid pace than the previous TFS.

Actually I would have expected more but of course the mortgage market is not yet properly open.

It does this by providing banks with cheap funding over
a four-year term (rising to six years for loans guaranteed under the BBL scheme).

So another one in 4 years as we note there is still £107 billion under the previous scheme?

Ways and Means

I looked at this on April 9th and concluded it was a minor factor which you might recall was very different to the mainstream media view.

The Ways and Means account has not been used since the financial crisis, and is normally worth £400m. But outside experts say that this will increase by billions, perhaps tens of billions to help the government manage a sharp increase in immediate spending,

I would suggest that Faisal Islam of the BBC needs some new “outside experts” as it has remained at £370 million and has therefore not been used.

Comment

We get some perspective from the scale of the interventions by the Bank of England which is described thus.

a balance sheet that has expanded by almost a third in three months, and will reach nearly 40% of annual UK GDP by
mid-year. To deliver that, we are doing more than ten times the number of weekly operations than in the
pre-Covid19 period.

He calculates it as £769 billion and as the pace continues I think it is more like £789 billion now.

Next is something that he rues but I am more hopeful about as the lack of groups may reduce the group-think.

Face-to face meetings – the lifeblood of central banking, sadly – have been seamlessly replaced with audio and
video calls.

Andrew Hauser clearly thinks about the situation but there is an elephant missing in his room which is how do we reverse all the central banking intervention and also deal with the side-effects? Have you noticed hoe the issue of the impact on longer-term saving ( pensions and insurance companies) has seen a type of radio blackout? Here are his suggestions.

First, do we understand why intermediaries struggled to make effective markets in core government
bond, money and foreign exchange instruments at crucial moments during the crisis?

Second, are we comfortable with the central role played by highly-leveraged but thinly-capitalised
non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify
instability so starkly?

Third, how do we deal with the risks posed to financial stability by the structural tendency for Money
Market and some other open-ended funds to be prone to runs, without having to commit scarce
public money to costly support facilities?

And, fourth, how can we ensure timely transition away from LIBOR, whose weaknesses were
highlighted so starkly by the crisis?

Still according to the Halifax Building Society house prices are (somehow) 2.6% higher than last May.

 

 

 

Christine Lagarde and the ECB have switched from monetary to fiscal policy

The Corona Virus pandemic has really rather caught the European Central Bank (ECB) on the hop. You see it was not supposed to be like this on several counts. Firstly the “Euro Boom” was supposed to continue but we now know via various revisions that things had turned down in Germany in early 2018 and then the Trumpian trade war hit as well. So the claims of former ECB President Mario Draghi that a combination of negative interest-rates and QE bond buying had boosted both Gross Domestic Product ( GDP) and inflation by around 1.5% morphed into this.

First, as regards the key ECB interest rates, we decided to lower the interest rate on the deposit facility by 10 basis points to -0.50%……..Second, the Governing Council decided to restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. We expect them to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.

As you can see the situation was quite problematic. For all the rhetoric who really believed that a cut in interest-rates of 0.1% would make a difference when much larger ones had not? Next comes the issue of having to restart sovereign bond purchases and QE only 9 months or so after stopping it. As a collective then there is the issue of what all the monetary easing has achieved? That leads to my critique that it is always a case of “More! More! More” or if you prefer QE to Infinity.

Next comes the issue of personnel. For all the talk about the ECB being independent the reclaiming of it by the political class was in process via the appointment of the former French Finance Minister Christine Lagarde as President. This of course added to the fact that the Vice President Luis de Guindos had been the Spanish Finance Minister. Combined with this comes the issue of competence as I recall Mario Draghi pointing out he would give Luis de Guindos a specific job when he found one he could do, thereby clearly implying he lacked the required knowledge and skill set. It is hard to know where to start with Christine Lagarde on this subject after her failures involving Greece and Argentina ( which sadly is in the mire again) and her conviction for negligence. Of course she has added to that more recently with her statement about “bond spreads” which saw the ten-year yield in Italy impersonate a Space-X rocket until somebody persuaded her to issue a correction. Although as the last press conference highlighted you never really escape a faux pas like that.

Do you now believe that it is the ECB’s role to control the spreads on government debt?

The Present Situation

This was supposed to be one where monetary policy had been set for the next year or so and President Lagarde could get her Hermes slippers under the table before having to do anything. Life sometimes comes at you quite fast though as this morning has already highlighted. From Eurostat.

In April 2020, the COVID-19 containment measures widely introduced by Member States again had a significant
impact on retail trade, as the seasonally adjusted volume of retail trade decreased by 11.7% in the euro area and
by 11.1% in the EU, compared with March 2020, according to estimates from Eurostat, the statistical office of
the European Union. In March 2020, the retail trade volume decreased by 11.1% in the euro area and by 10.1%
in the EU.
In April 2020 compared with April 2019, the calendar adjusted retail sales index decreased by 19.6% in the euro
area and by 18.0% in the EU.

As you can see Retail Sales have fallen by a fifth as far as we can tell ( normal measuring will be impossible right now and the numbers are erratic in normal times). Also there were large structural shifts with clothing and footwear down 63.5% on a year ago and online up 20.9%. Much of this is due to shops being closed and will be reversed but there is a loss for taxes and GDP which is an issue for ECB policy. Other news points out that May has its troubles as well.

Germany May New Car Registrations Total 168,148 -49.5% Y/Y – KBA ( @LiveSquawk)

Policy Response

For all the claims and rhetoric is that the ECB has prioritised the banks and government’s. So let us start with The Precious! The Precious!

Accordingly, the Governing Council decided today to further ease the conditions on our targeted longer-term refinancing operations (TLTRO III)……. Moreover, for counterparties whose eligible net lending reaches the lending performance threshold, the interest rate over the period from June 2020 to June 2021 will now be 50 basis points below the average deposit facility rate prevailing over the same period.

For newer readers this means that the banks will be facing what is both the lowest interest-rate seen so far anywhere at -1% and also a fix for the problems they have dealing with a -0.5% interest-rate more generally. It also means that whilst the bit below is not an outright lie it is also not true.

In addition, we decided to keep the key ECB interest rates unchanged.

In fact for those who regard the interest-rate for banks as key it is an untruth. Estimates for the gains to the banking sector from this are of the order of 3 billion Euros. Yet another subsidy or if you prefer we are getting the Vapors.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

Fiscal Policy

This is what monetary policy has now morphed into. There is an irony here because one of the reasons the ECB has pursued such expansionary policy is the nature of fiscal policy in the Euro area. That has been highlighted in three main ways. the surpluses of Germany, the Stability and Growth Pact and the depressive policy applied to Greece. But that was then and this is now.

Chancellor Angela Merkel said Wednesday that Germany was set to plow 130 billion euros ($146 billion) into rebooting an economy severely hit by the coronavirus pandemic.

The measures include temporarily cutting value-added tax form 19% to 16%, providing families with an additional €300 per child and doubling a government-supported rebate on electric car purchases.

The package also establishes a €50 billion fund for addressing climate change, innovation and digitization within the German economy. ( dw.com )

Even Italy is being allowed to spend.

Fiat To Use State-Backed Loan To Pay Italy Staff, Suppliers ( @LiveSquawk)

This is the real reason for the QE and is highlighted below.

FRANKFURT (Reuters) – The European Central Bank scooped up all of Italy’s new debt in April and May but merely managed to keep borrowing costs for the indebted, virus-stricken country from rising, data showed on Tuesday.

The ECB bought 51.1 billion euros worth of Italian government bonds in the last two months compared with a net supply, as calculated by analysts at UniCredit, of 49 billion euros.

Comment

Thus President Lagarde will be mulling the words of Boz Scaggs.

(What can I do?)
Ooh, show me that I care
(What can I say?)
Hmmm, got to have your number baby
(What can I do?)

Plainly the ECB needs the flexibility of being able to expand its QE bond buying so that Euro area governments can borrow cheaply as highlighted by Italy or be paid to borrow like Germany. We could see the PEPP plan which is the latest emergency one expanded as it will run out in late September on present trends, also the German Constitutional Court has conveniently given it a bye. But she could do that next time. So finally we have a decision appropriate for a politician!

As to interest-rates we see that the banks have as usual been taken care of. That only leaves the rest of us so it is unlikely. We will only see another cut if they decide that like a First World War general that a futile gesture is needed.

The problems posed by mass unemployment

A sad consequence of the lock downs and the effective closure of some parts of the economy is lower employment and higher unemployment. That type of theme was in evidence very early today as we learnt that even the land “down under” looks like it is in recession after recording a 0.3% decline in the opening quarter of 2020. The first for nearly 30 years as even the commodities boom seen has been unable to resist the effects of the pandemic. This brings me to what Australia Statistics told us last month.

Employment decreased by 594,300 people (-4.6%) between March and April 2020, with full-time employment decreasing by 220,500 people and part-time employment decreasing by 373,800 people.Compared to a year ago, there were 123,000 less people employed full-time and 272,000 less people employed part-time. Thischange led to a decrease in the part-time share of employment over the past 12 months, from 31.5% to 30.3%.

I have opened with the employment data as we get a better guide from it in such times although to be fair it seems to be making a fist of the unemployment position.

The unemployment rate increased 1.0 points to 6.2%and was 1.0 points higher than in April 2019. The number of unemployed people increased by 104,500 in April 2020 to 823,300 people, and increased by 117,700 people from April 2019.

The underemployment rate increased by 4.9 pts to 13.7%, the highest on record, and was 5.2 pts higher than in April 2019.The number of underemployed people increased by 603,300 in April 2020 to 1,816,100 people, an increase of almost 50% (49.7%), and increased by 666,100 people since April 2019.

As you can see they have picked up a fair bit of the changes and it is nice to see an underemployment measure albeit not nice to see it rise so much. The signal for the Australian economy in the quarter just gone is rather grim though especially if we note this.

Monthly hours worked in all jobs decreased by 163.9 million hours (-9.2%) to 1,625.8 million hours in April 2020, larger than the decrease in employed people.

Italy

In line with our “Girlfriend in a coma” theme one fears the worst for Italy now especially as we note how hard it was hit by the virus pandemic. Even worse a mere headline perusal is actively misleading as I note this from Istat, and the emphasis is mine.

In April 2020, in comparison with the previous month, employment significantly decreased and unemployment sharply fell together with a relevant increase of inactivity.

The full detail is below.

In the last month, also the remarkable fall of the unemployed people (-23.9%, -484 thousand) was recorded for both men (-17.4%, -179 thousand) and women (-30.6%, -305 thousand). The unemployment rate dropped to 6.3% (-1.7 percentage points) and the youth rate fell to 20.3% (-6.2 p.p.).

Yes a number which ordinarily would be perceived as a triumph after all the struggles Italy has had with its economy and elevated unemployment is at best a mirage and at worst a complete fail for the methodology below.

Unemployed persons: comprise persons aged 15-74 who:
were actively seeking work, i.e. had carried out activities in the four week period ending with the reference week
to seek paid employment or self-employment and were available to start working before the end of the two
weeks following the reference week;

Some would not have bothered to look for work thinking it was hopeless and many of course would simply have been unable to. We do find them elsewhere in the data set.

In April the considerable growth of inactive people aged 15-64 (+5.4%, +746 thousand) was registered for
both men (+6.0%, +307 thousand) and women (+5.0%, +438 thousand), leading the inactivity rate to
38.1% (+2.0 percentage points).

If we look back we see that there was a similar issue with the March numbers so a published unemployment rate of 6.3% looks like one of over 11% if we make some sort of correction for the April and March issues.

We get a better guide to the state of play from the employment position which as we observe from time to time has become something of a leafing indicator.

On a monthly basis, the decline of employment (-1.2%, -274 thousand) concerned both men (-1.0%, -131 thousand) and women (-1.5%, -143 thousand), and brought the employment rate to 57.9% (-0.7 p. p.)…….With respect to the previous quarter, in the period February – April 2020, employment considerably decreased (-1.0%, -226 thousand) for both genders…….Compared to March 2019, employment showed a decrease in terms of figures (-2.1%, -497 thousand) and rate (-1.1 percentage points).

Oh and in the last sentence they mean April rather than March. But looking ahead we see a 1.2% fall for employment in April alone which has implications for GDP and of course it is before the furlough scheme.

 Italy has furloughed 7.2 million workers, equivalent to 31% of employment at end-2019; ( FitchRatings )

Germany

This morning has also brought news about the state of play in Germany.

WIESBADEN – Roughly 44.8 million persons resident in Germany (national concept) were in employment in April 2020 according to provisional calculations of the Federal Statistical Office (Destatis). Compared with April 2019, the number of persons in employment decreased by 0.5% (-210,000). This means that for the first time since March 2010 the number of persons in employment decreased year on year (-92,000; -0.2%). In March 2020, the year-on-year change rate had been +0.2%.

For our purposes we get a signal from this.

According to provisional results of the employment accounts, the number of persons in employment fell by 161,000 in April 2020 on the previous month. Normally, employment rises strongly in April as a result of the usual spring upturn, that is, by 143,000 in April on an average of the last five years.

Perhaps the headline read a lot better in German.

No spring upturn

Switching to unemployment the system seems less flawed than in Italy.

Results of the labour force survey show that 1.89 million people were unemployed in April 2020. That was an increase of 220,000, or 13.2%, on March 2020. Compared with April 2019, the number of unemployed persons increased by 515,000 or +38.0%. The unemployment rate was 4.3% in April 2020.

There is a clear conceptual issue here if we return to Fitch Ratings.

Germany has enrolled more than 10 million workers on its scheme, representing 22% of employment at the end-2019. This number ultimately may be lower because some firms that have registered employees as a precaution may decide not to participate.

Germany employed the Kurzarbeit to great effect during the global financial crisis when its implementation prevented the mass lay-offs that were seen elsewhere in Europe. While unemployment in Germany remained broadly unchanged in 2008-2009, other countries reported significant increases.

Comment

There are deep sociological and psychological impacts from these numbers and let me give my sympathies to those affected. Hopefully we can avoid what happened in the 1930s. Returning to the statistics there are a litany of issues some of which we have already looked at. Let me point out another via the German employment data.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment decreased by 271,000 (-0.6%) in April 2020 compared with March 2020.

The usual pattern for seasonal fluctuations will be no guide this year and may even be worse than useless but it will still be used in the headline data. But there is more if we switch to Eurostat.

In April 2020, the second month after COVID-19 containment measures were implemented by most Member
States, the euro area seasonally-adjusted unemployment rate was 7.3%, up from 7.1% in March 2020. The EU
unemployment rate was 6.6% in April 2020, up from 6.4% in March 2020.

We have the issue of Italy recording a large rise as a fall but even in Germany there is an issue as I note an unemployment rate of 4.3%. Well after applying the usual rules Eurostat has published it at 3.5%. There is no great conspiracy here as the statisticians apply rules which are supposed to make things clearer but some extra thought is requited as we note they are in fact making the numbers pretty meaningless right now, or the opposite of their role.

The Investing Channel

 

 

 

 

UK consumer credit collapses as the money supply soars

As we peruse the data for the impact of all the Bank of England actions in this pandemic we have also been updated on its main priority. From the Nationwide Building Society.

“UK house prices fell by 1.7% over the month in May, after
taking account of seasonal effects – this is the largest
monthly fall since February 2009. As a result, the annual rate of house price growth slowed to 1.8%, from 3.7% in April.”

According to them things had been going really rather well before the May reverse.

“In the opening months of 2020, before the pandemic struck
the UK, the housing market had been steadily gathering
momentum. Activity levels and price growth were edging up thanks to continued robust labour market conditions, low borrowing costs and a more stable political backdrop
following the general election.”

Personally I am rather dubious about the April number but we do have a large fall for May and also something of a critique for the suspended official index from the Office for National Statistics.

Mortgage activity has also declined sharply. Nevertheless,
our ability to generate the house price index has not been
impacted to date, as sample sizes have remained sufficiently large (and representative) to generate robust results.

Rents

Perhaps such news is all too much for the boomers as I note the BBC reporting this today.

Lockdown break-ups, job losses and urgent relocations are thought to have led to a surge in the rental sector.

Demand for lettings in Great Britain is up by 22% compared to last year, according to property giant Rightmove.

Experts say the lifting of lockdown restrictions has released “two months of pent-up tension” in the market.

The supply of new rents is not keeping up with demand, however, prompting fears the surge will push up costs and leave some struggling to find homes.

The article tries to give the impression that rents are rising but provides no evidence for this at all, as the data set only has demand. It seems to lack a mention of the numbers in the data set which showed larger demand declines in the pandemic. We seem back to the get in now before rents boom message that is so familiar as the media parrots what the industry wants.

“I think we were lucky really because we got in there before demand boomed.”

On a personal level some people were viewing in my block yesterday. Fair play to the viewers who put on masks, but sadly the estate agent who is more likely to spread the virus did not bother with any PPE.

Consumer Credit

Even in the hot summer weather we are seeing the spine of the Monetary Policy Committee will have seen a sudden chill as these numbers came in.

New gross borrowing fell to £11.8 billion in April, roughly half its February level. Repayments on consumer borrowing have also fallen sharply, by 19% since February, reflecting payment holidays. On net, the larger fall in gross borrowing meant people repaid £7.4 billion of consumer credit in April, double the repayment in March, which itself was a record repayment (Chart 3). The extremely weak net flows of consumer credit meant that the annual growth rate fell below zero in April, to -0.4%, the weakest since August 2012.

What is happening here is that each month there is a large amount of new borrowing but also repayments and the usual situation is that we see net borrowing and in recent years lots of it. In April the amount of new borrowing fell and for once the use of the word collapse is appropriate whereas the level of repayments fell by much less. Thus the net amount swung by as much as I can ever recall.

In terms of the detail the main player was credit card borrowing.

The majority (£5.0 billion) of net consumer credit repayments were on credit cards, while £2.4 billion of other loans were also repaid in April. The annual growth rate of credit card lending was negative for the second month running, falling to -7.8%, compared with 3.5% in February before borrowing fell. Growth in other loans and advances remained positive, at 3.1%.

Mortgages

There was a similar pattern to be found here although in this instance it was not enough to turn the net figure negative. Also the bit I have emphasised is a signal of the financial distress I have both feared and expected.

Lending has also fallen sharply. Gross (new) mortgage borrowing fell to £14.4 billion, 38% lower than in February (Chart 5). Repayments on mortgage lending also fell sharply, to £13.9 billion, 26% lower than in February. This reflects a sharp fall in full repayments of loans, as well as the effect of payment holidays. The sharper fall in gross lending than repayments means that net mortgage borrowing fell, and was only £0.3 billion in April compared to an increase of £4.3 billion in February. This was the lowest net increase since December 2011.

One area that I do expect to pick up is this.

Approvals for remortgage (which include remortgaging with a different lender only) have fallen by less, to 34,400, 34% lower than in February.

With my indicator for fixed mortgage interest-rates ( the five-year Gilt yield) so low and effectively around 0% I expect some cheaper mortgage rates and hence more remortgaging, for those that can. As to mortgage rates they did this.

The effective interest rate paid on the stock of floating-rate mortgages fell 46 basis points, to 2.39%, the lowest rate since this series began in 2016; and the rate on new floating-rate loans fell 35 basis points to 1.48%.

They do not often tell us the mortgage rates but I guess they wanted to emphasise their own actions.

The rate paid by individuals on floating-rate mortgage borrowing fell a little further in April, however, as the MPC’s March Bank Rate cuts continued to pass through.

Business Lending

You might like to recall as you read the bit below that all of the credit easing since the summer of 2012 has been to boost small business lending.

Private sector businesses of all sizes borrowed little extra from banks in April. Small and medium sized businesses drew down an extra £0.3billion in loans from banks, on net, a similar amount as in March. The annual growth rate of borrowing by SMEs was 1.2%, in line with the growth rate since mid 2019.

For newer the readers the central banking game is to claim you are boosting lending to SMEs and then express surprise when it is mortgage lending and unsecured credit to consumers that rises and soars respectively.

The numbers below are mostly because many businesses have been desperate for cash.

But strength in borrowing by the public administration and defence industry meant total borrowing by large businesses was £12.9 billion in April. While this total is very strong by historical standards, it is down from £32.4 billion in March. The annual growth rate of borrowing by all large businesses increased to 15.4%, much stronger than the growth rate of around 5% in late 2019.

There will be quite a complicated mixture there as we no note lower and sometime zero sales colliding with many expenses continuing.

This is an ongoing problem where big businesses get help. As you can see they can access bank loans and the various Bank of England schemes are designed for them too.

 In April, firms raised £16.1 billion from financial markets, on net, the highest amount raised since June 2009 and significantly stronger than the previous six month average of £23 million. Within this, firms issued £7.7 billion of bonds, £7.0 billion of commercial paper (including funds raised through the Covid Corporate Financing Facility), and £1.4 billion of equity.

It is not easy as for obvious reasons a central bank can help a large business in ways that it cannot help a corner shop or one (wo)man band but the truth is that they also get a bit lazy and could try much harder.

Comment

I have held back the money supply data for this section and here it is.

These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £37.3 billion in April. The strength was driven by households and PNFCs. The increase was smaller than in March, when money increased by £67.3 billion.

An interesting decline in the monthly number but the main message here is the £104.6 billion in only two months which compares to a total of £2364.4 billion. So a bit short of 5% in only 2 months! The annual rate is now 9%. On terms of economic impact then that is supposed to give us a nominal GDP growth rate also of 9% in a couple of years. Because of where we are there are all sorts or problems with applying that rule but it is grounds for those who have inflation fears. Oh and as to how this is created well some £13.5 billion of QE a week sure helps.

One other factor will be that these aggregate numbers will hide very different individual and group impacts. For example some with mortgages will be in financial distress whereas others will be using lower rates to increase repayments. The same will be true of businesses with sadly as I have explained above smaller ones usually getting the thin end of the wedge. These breakdowns are as important as the aggregate data but often get ignored.

The 2020 Currency War and the role of the US Dollar

As we step into June we have an opportunity to reflect on what has been on the media under card but only because so much has been happening elsewhere. Also we can note yet another fail for economics 101 because the advent of large-scale asset purchases or QE was supposed to cause a currency decline and maybe a large one. A higher supply of money leading to a fall in the price. The Ivory Towers of the central banks were keen on that one as they originally justified QE on the basis of being able to hit their inflation target partly via that route. Of course that has not gone well either as we noted with the ECB that has been on average some 0.7% below its holy grail of just below 2% per annum.

The US Dollar

So on that reading the world’s reserve currency the greenback should be in trouble as we observe this.

The Federal Reserve added $60 billion to its balance sheet last week, now totaling $7.097 trillion. Much of the increase this time (over $41 billion) was in corporate credit and commercial paper facilities. ( @LynAldenContact )

There is a sort of irony in US $60 billion in a week not seeming very much! Anyway the heat has been on.

The Federal Reserve’s balance sheet has expanded a staggering $1.9 trillion since February 26, just days after the S&P 500 peaked. ( @USGlobalETFs )

So plenty of new US Dollar liquidity and as part of that we recall what we might call the external supply which are the liquidity swaps for foreign central banks or US $449 billion.

To that can add an official interest-rate just above 0% ( roughly 0.1%)

Added to those factors the Financial Time has decided to put on its bovver boots and give the Dollar a written kicking.

That begs a question that has been seen as controversial — are we entering a post-dollar world? It might seem a straw-man question, given that more than 60 per cent of the world’s currency reserves are in dollars, which are also used for the vast majority of global commerce. The US Federal Reserve’s recent bolstering of dollar markets outside of the US, as a response to the coronavirus crisis, has given a further boost to global dollar dominance.

The FT writer has rather fumbled the ball there and later again emphasises a US Dollar strength.

Among the many reasons for central banks and global investors to hold US dollars, a key one is that oil is priced in dollars.

Indeed and we have looked at efforts to make ch-ch-changes from the supply side ( Russia) and the demand side ( China) but it remains dominant. There are of course plenty of other commodity markets which have a US Dollar price.

Next is something which intrigues me because if it is true in the US how do you even start with Japan and then of course you get a really rather long list of other countries doing exactly the same.

Finally, there are questions about the way in which the Fed’s unofficial backstopping of US government spending in the wake of the pandemic has politicised the money supply.

Oh and for those of you with inflation concerns ( me too) then this is close to an official denial.

The issue here isn’t really a risk of Weimar Republic-style inflation, at least not any time soon.

Actually the main inflation risk is in asset markets with the S&P 500 above 3k, the Nikkei 225 above 22,000 and the FTSE 100 above 6100 I think we can see clear evidence tight now. But of course the economics editorial line under Chris Giles is that asset prices are not part of inflation and should be ignored as part of his campaign to mislead on this subject.

Emerging Markets

If they were hoping for a US Dollar decline then such hopes have been dashed. One country which has been under the cosh is Brazil where an exchange to the US Dollar of 4 as we began the year has been replaced by one of 5.35 and even that is a fair bit better than the 5.96 at the nadir. Things have been less dramatic for the Argentine Peso but it had a bad 2019 to a move from 60 to the US Dollar to above 68 is further pain and of course an interest-rate of an eye-watering for these times of 38% has been required to restrict it to even that.

India

We have a sub-category all to itself as we note the currency of over a billion people. Let me start with something being debated in so many places, and here is the Economic Times of India from last Tuesday.

The government stimulus package of Rs 20 lakh crore seems to be inadequate to revive the economy, as a large part of it accounts for liquidity-boosting measures by RBI. It is clear that the weak fiscal position forced the government to restrict the stimulus. It is in this scenario, that the need for monetisation of deficit has been widely debated.

In layman’s language, monetisation of deficit means printing more money. In other words, monetisation of deficit happens when RBI buys government securities directly from the primary market to fund government’s expenses.

The Rupee has been a case of slip-sliding away as we note it nearly made 77 and is now 75.3 and that is in spite of the impact of the lower oil price ( and for a while much lower) on India.

Euro

This has not done much at all as I note an annual change of all of -0.38%! We did see some moves as it went to 1.14 at the height of the pandemic panic as the Euro’s “safe haven”  role was stronger than the Dollar’s one. But we then had a dip and now a bounce. So loads of column inches about the world’s main currency pair have led to a net not very much as we stand here today.

Yen

This is really rather similar to the above as we note an annual change of -.0,52% this time after a safe haven spell. Actually 107 or so for the Yen feels strong for it as we remind ourselves that the QE, negative interest-rates and equity purchases of Abenomics were supposed to keep it falling.

UK Pound

The annual picture ( -2%) is a little more misleading here as we have seen swings. The UK Pound £ has been following equity markets so went below US $1.15 at the nadir but has hit US $1.24 as we have bounced. Troubling if you are like me wondering about the equity market bounce. Still we could be the UK media that once again declared this at the bottom.

It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine.

Places like the FT and BBC have proved very useful as when they have a “panic party” about the £ and claim it is looking over a cliff is invariably the time to buy it.

Comment

So we see that the situation is in fact one of where the various QE and interest-rate moves have offset more often than been different. In some ways the central banking “More! More! More!” culture means that differences in pace or size get ignored because they are all rocking a “To Infinity! And Beyond!” vibe as shown by the official denial below.

‘Comfortable’ Now, But On B/Sheet ‘Cannot Go To Infinity ( Jerome Powell via @LiveSquawk )

Let me conclude with another perspective which is the world of precious metals and another form of precious. One way of judging a currency is in this vein and as someone who recalls studying mercantilism which essentially revolved around country’s holdings of silver this provided some food for thought.

Those of us with longer memories have no faith in US paper dollars.  Prior to 1964, US coinage was made of 90% silver.  Today, a roll of 40 quarter dollar coins made of 90% silver, worth $10 in 1964, will cost you about $165.  The real purchasing power of the US dollar has plunged. ( h/t ahimsaka in the FT comments )

Podcast

The blue touch paper has been lit on the Money Supply boom of 2020

Today as I shall explain later is a case of back to the future especially for me. It brings an opportunity to examine one of the economic features of the current Covid-19 pandemic. This is a surge in money supply growth which has been quite something such that I think we will look back and consider it to be unprecedented. I expect that to be true in absolute terms in many places and it is already being true in relative terms in many.

The Euro Area

This morning has brought another signal of this so let us go straight to the ECB data.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March.

Previously we had eight months of growth of ~8% so as you can see going to 10.4% and then 11.9% shows that the accelerator has been pressed hard and maybe the pedal has been pushed to the metal. If we switch to the cause of this which is mostly the rate of QE purchases by the ECB well you can see below. Apologies for the alphabeti spaghetti.

ECB PSPP (EUR): +9.545B To 2.216T (prev +10.936B To 2.207T) –

CSPP: +1.181B To 213.147B (prev +2.324B To 211.966B) – CBPP: +1.028B To 280.778B (prev +1.030B To 279.750B) – ABSPP: -377M To 30.738B (prev +161M To 31.115B) –

PEPP: +30.072B To 211.858B (prev +28.878B To 181.786B) ( @LiveSquawk) ( B= Billion and T=Trillion )

These are the weekly increases and if we stick to the money supply we see that in one week alone some 42 billion Euros of QE took place which means that on the other side of the ledger the narrow money supply has been increased by the same amount. Some of this was previously taking place and the more recent boost is called PEPP and is of the order of 30 billion Euros a week.

What this means is that the total amount of narrow money has gone from just under 9 trillion Euros in January to just over 9.5 trillion in April and will be going past 10 trillion fairly soon ( at the current pace in July).

Tucked away in the detail is that people have been wanting cash as well. The amount in circulation rose by 25.6 billion Euros in March and by 15.1 billion in April. Only a couple of months but that represents a clear shift of gear as we note April was the same as the whole of the third quarter last year and 2020 so far has already exceeded 2019.

Broad Money

This is a case of the same old song.

Annual growth rate of broad >monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March.

The pick-up in annual growth is of the order of 3% and this is the highest growth rate for nearly 12 years, well until next month anyway! Switching to totals it is now 13.6 trillion Euros.

The breakdown is rather revealing I think.

The annual growth rate of the broad monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March, averaging 7.1% in the three months up to April. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to -0.3% in April from 0.0% in March, while the annual growth rate of marketable instruments (M3-M2) decreased to 6.7% in April from 10.1% in March.

This tells us a couple of things. The opener is that the expansion is a narrow money thing and in fact narrow money over explains it. That means that in terms of wider bank intermediation there was a credit contraction here as we shift from M1 to M3 via M2.

Also at first it looks like the rate of deposits from businesses has picked up but then we see it seems to be insurance companies and pension funds. Or if you prefer the ECB has just bought a load of bonds off them and they have deposited the cash for now.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 6.7% in April from 6.0% in March, while the annual growth rate of deposits placed by non-financial corporations increased to 13.7% in April from 9.7% in March. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 12.3% in April from 16.9% in March.

Although that might seem obvious we have seen stages where it has not appeared to be true.

Credit

The credit punch bowl has been out too.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 4.9% in April 2020 from 3.6% in the previous month. The annual growth rate of credit to general government increased to 6.2% in April from 1.6% in March, while the annual growth rate of credit to the private sector increased to 4.4% in April from 4.2% in March.

The main thing of note here is the surge in credit given to governments which links to the increases in public expenditure we have seen. There has been quite a swing here as it was negative ( -2%) as recently as February and had been negative for 9 months. So the Stability and Growth Pact was applied and then abandoned.

Looking at the breakdown the fall in loans to households is presumably a decline in mortgage lending and I think you can all figure out why companies were borrowing more.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) stood at 4.9% in April, compared with 5.0% in March. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.0% in April from 3.4% in March, while the annual growth rate of adjusted loans to non-financial corporations increased to 6.6% in April from 5.5% in March.

@fwred of Bank Pictet has got his microscope out.

Wow, another massive increase in bank loans / credit lines to euro area corporates, up €73bn in April following €121bn in March (both the largest on record by a huge margin)…….Finally, the surge in bank loans in March-April was broad-based across countries. No one left behind.

His Euro area glass is always full so let me point out that there are times when companies are borrowing to invest (good) and times they are borrowing because they are in trouble.

Also he has been kind enough to illustrate one of my main themes so thank you Fred and the emphasis is mine

Euro area corporates are drawing on their credit lines and taking new bank loans like there *is* tomorrow.

Side-effect: most banks will easily qualify for the lowest TLTRO-III rate from June (-1%).

What a coincidence!

Comment

This is an example in a way of the circle of life as back in the day I got a job because as a graduate monetary economist City firms wanted people to look at the money supply. Although there was a difference in that the central banks and governments were trying to bring it down as opposed to pumping it up. Rather ominously it did not work as planned and sometimes did not work at all.

How should it work? In essence the extra money balances (narrow money) should be spent relatively quickly and thereby give the economy a boost. That is why I look at narrow money and as an indicator it has worked pretty well. The catch or “rub” as Shakespeare would put it is velocity or how quickly the money circulates and there we have a problem as it is hard to measure especially right now. We know that for a while it will have been extremely low because in many areas you simply cannot spend money at the moment.

As we look internationally we see many examples of this. I have gone through the Euro area data today but if we switch to the US the numbers are even higher. The annual rate of M1 growth is 27.5% there so the pedal may even have been pushed through the metal. Care is needed as definitions vary but even using a more Euro area one it looks as though it would be over 20%.

As well as some hoped for economic growth there is a clear and present danger which is inflation. We seem likely to be singing along with BB King.

Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent

I got the blues
Got those inflation blues

Is Hong Kong really over as a financial centre?

Today I thought I would take a slightly different tack and look at a potential shift in world financial markets. It concerns a place that for many years has had an economic party based on “location, location, location” as Hong Kong has been a sort of add-on to China. We have previously looked at the economic consequences of the unrest there and now the ante is being upped by China. This poses the question can it survive as one of the world’s major financial centres?

BEIJING (Reuters) – China’s parliament on Thursday overwhelmingly approved directly imposing national security legislation on Hong Kong to tackle secession, subversion, terrorism and foreign interference in a city roiled last year by months of anti-government protests.

Also I do not know about you but the 6 were brave and the 1 was courageous.

The National People’s Congress voted 2,878 to 1 in favour of the decision to empower its standing committee to draft the legislation, with six abstentions. The legislators gathered in the Great Hall of the People burst into sustained applause when the vote tally was projected onto screens.

If we switch to Hong Kong itself there is plainly trouble ahead.

Earlier on Thursday, angry exchanges in the city’s assembly, the Legislative Council, during debate on the anthem bill saw some lawmakers removed in chaotic scenes and the session adjourned.

If we look wider there is of course The Donald to consider.

WASHINGTON (Reuters) – U.S. President Donald Trump said on Tuesday the United States was working on a strong response to China’s planned national security legislation for Hong Kong and it would be announced before the end of the week.

So quite a bit of realpolitik and this adds to the Trade Wars issue. Not exactly what you want when you are a hub for financial trade.

Rich Chinese are expected to park fewer funds in Hong Kong on worries that the security law could allow mainland authorities to seize their wealth, bankers and other industry sources said.

That is quite damning for Hong Kong’s future on its own. So many things have rolled out of this and I remember Rolex watches being bought as collateral and then sold as well as if course the Bitcoin purchases. So there are more questions than answers before we even leave China.

The Equity Market

There is of course a Trump Tweet for this now the market is rallying.

Stock Market up BIG, DOW crosses 25,000. S&P 500 over 3000. States should open up ASAP. The Transition to Greatness has started, ahead of schedule. There will be ups and downs, but next year will be one of the best ever!

They are of course a bit thinner on the ground in declines but there is an issue here if we switch to the Hang Seng Index. This is from rthk on the 22nd of this month.

Hong Kong stocks dropped 5 percent in the noon session after Beijing said it plans to push through a national security law for the city, adding to tensions with the US and fuelling fears of fresh civil unrest.

The Hang Seng Index sank 5 percent, or 1,204 points, to 23,075, midway into the second session.

Although it slipped a little today it has not done much overall since then as it closed at 23,132. That is a relative loss at a time other markets have rallied. If we move on from the cheerleading of The Donald I note that the Nikkei 225 has over the past week gone from below the Hang Seng at circa 20500 to above it at this morning’s 21,916.

Exchange-Rates

Let me briefly hand you over to the Hong Kong Monetary Authority.

The Linked Exchange Rate System (LERS) has been implemented in Hong Kong since 17 October 1983. Through a rigorous, robust and transparent Currency Board system, the LERS ensures that the Hong Kong dollar exchange rate remains stable within a band of HK$7.75-7.85 to one US dollar.

The LERS is the cornerstone of Hong Kong’s monetary and financial stability.  It has weathered many economic cycles and has proved highly resilient in the face of regional and global financial crises over the years.

Oh dear “resilient” looks like being as applicable as it is to the banks! Anyway we have a currency peg in action which seems to be news to some. That means they follow US interest-rates too athough you can pick-up a bit more than 0.5% a year.

The Federal Open Market Committee of the US Fed announced last night to adjust downward the target range for the US federal funds rate by 100 basis points to 0-0.25%. In light of the Fed’s decision, the Hong Kong Monetary Authority (HKMA) also adjusted downward the Base Rate today. The Base Rate is set at 0.86% today according to a pre-set formula ( 16th of March)

Actually it has been edging higher and is now 1.11% so maybe a little heat is on.

In terms of any response to pressure the HKMA would intervene first and at 3.6 trillion Hong Kong Dollars worth it has quite a war chest. Trouble is reserves never seem to be quite enough however large and in a panic interest-rate rises do not achieve much either. Well apart from applying a brake in the economy.

It could use the liquidity swaps system of the US Federal Reserve to get US Dollars and sell them but the lifespan of that would presumably be until The Donald spotted it.

Moving onto the Yuan and its offshore variant there has been a lot of talk about it but it has been remarkably stable considering the times ( that is a translation of the Chinese ave obviously been intervening) and is at 7.15 versus the US Dollar.

The Economy

This was in a bad way and things have got worse.

Hong Kong’s coronavirus-ravaged economy has suffered its worst decline on record, shrinking 8.9 per cent year on year in the first quarter and sparking an appeal from the city’s finance chief for unity to face the grim months ahead…….Hong Kong’s coronavirus-ravaged economy has suffered its worst decline on record, shrinking 8.9 per cent year on year in the first quarter and sparking an appeal from the city’s finance chief for unity to face the grim months ahead. ( South China Morning Post )

In case any central bankers are reading here is their priority.

Hong Kong SAR (China)’s Real Residential Property Price Index was reported at 189.610 2010=100 in Sep 2019. This records a decrease from the previous number of 194.800 2010=100 for Jun 2019 ( CEIC)

It will be lower now as I note this from the HKMA.

The Hong Kong Mortgage Corporation Limited (HKMC) announces that, the pilot scheme for fixed-rate mortgages will start receiving applications from 7 May (Thursday). In response to the change in market interest rates, mortgage interest rates under the pilot scheme are lowered, as compared to the levels previously announced in the 2020-21 Budget (Budget). The interest rates per annum for 10, 15 and 20 years of the Fixed-Rate Mortgage Pilot Scheme are as follows:

2.55%, 2.65% and 2.75% respectively in case you were wondering.

Comment

The situation is a bit like a dam which invariably looks perfectly secure until it bursts. Indeed there are some bouncing bombs in play.

TRUMP ADMN TO EXPEL CHINESE STUDENTS WITH TIES TO MILITARY SCHOOLS: NYT ( @FirstSquawk )

Financial markets are more likely to be troubled by this from Secretary Pompeo.

Today, I reported to Congress that Hong Kong is no longer autonomous from China, given facts on the ground. The United States stands with the people of Hong Kong.

This is the real question will they be able to operate freely? Next comes the issue of where will the business go? This begs lots of question as I have a friend who works there.

Looking at Hong Kong itself the currency peg looks vulnerable in spite of the large foreign exchange reserves. It so often turns out that Newt from the film Aliens was right.

It wont make any difference

The real ray of hope is that the Chinese may adapt their bill which lacks detail.

Harmful elements in the air
Symbols clashing everywhere
Reaps the fields of rice and reeds
While the population feeds
Junk floats on polluted water
An old custom to sell your daughter
Would you like number twenty three?
Leave your yens on the counter please
Ho-oh, ho-oh-oh-oh
Hong Kong Garden
Ho-oh, ho-oh-oh-oh
Hong Kong Garden ( Siouxsie and the Banshees )

As to the housing market is this how Nine Elms ( confession my part of London) finds some new buyers?