The RBA is financing the Australian government as well as pumping the housing market

It is time for another trip to a land down under as even commodity rich Australia has found its economy affected by the Covid-19 pandemic. It raises a wry smile as I used to regularly reply to the World Economic Forum which periodically trumpeted Australia’s lack of a recession that with its enormous resources that was hardly a surprise and thus meant little about economic policy. However we eventually found something which did create a recession. From the Reserve Bank of Australia earlier.

The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia. This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.

I would be careful about saying things are not as bad as expected after the reverse in Victoria if I was the RBA. So let us send our best wishes to those affected there as we note the detailed breakdown of the forecasts.

In the baseline scenario, output falls by 6 per cent over 2020 and then grows by 5 per cent over the following year. In this scenario, the unemployment rate rises to around 10 per cent later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs. Over the following couple of years, the unemployment rate is expected to decline gradually to around 7 per cent.

So they are expecting lower falls than in Europe but there is a familiar rebound next year which frankly feels based on Zebedee from The Magic Roundabout rather than any grounding in reality.

Financing The Government

Like so often this is what it boils down too.

At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points.

So even resources rich Australia found itself unable to resist the supermassive black hole pull of ZIRP and central bankers being pack animals. I suspect as I shall explain in a minute they have stopped slightly short of 0% because of fears for the banking sector. But the crucial point we are noting here is the control agenda for the bond market which mimics in concept if not level that applied by the Bank of Japan.

Why does the government need financing? Well there is this.

Government bond markets are functioning normally alongside a significant increase in issuance.

As to how much the Australian Office of Financial Management reinforced this last week.

On the 3rd of July we announced a weekly issuance rate for Treasury Bonds of $4-5 billion, with a weekly rate of issuance for Treasury Notes of $2-4 billion. We are confident this guidance will be reliable until the October Budget; absent of course a sharp unanticipated change in the fiscal position.

The major shift in fiscal policy is highlighted here.

Although to date we have only announced a weekly issuance rate and new maturities, the current plan for gross Treasury Bond issuance this year is around $240 billion.  This will comprise about $50 billion to fund maturing debt and $190 billion of net new issuance.  This is materially higher than the $128 billion issued last year, although almost $90 billion of that was issued in the last quarter.

So a near doubling as they went from not being that bothered about issuing debt.

Less than six months ago the AOFM was rationing issuance to best manage a market maintenance objective.

To a spell when they could not issue at all.

Temporary loss of access to funding markets is certainly something we had thought possible (and indeed likely at some point), but combined with the scale and timing of the increased pandemic financing task it was a more sobering experience than we could have imagined.

They would have been burning the midnight oil before International Rescue arrived.

We will never know how long the market would have taken to recover had the RBA not intervened.

If we return to the RBA statement let me present you with two outright lies.

Government bond markets are functioning normally alongside a significant increase in issuance.

If they are then why is this needed?

The yield has, however, been a little higher than 25 basis points over recent weeks. Given this, tomorrow the Bank will purchase AGS in the secondary market to ensure that the yield on 3-year bonds remains consistent with the target. Further purchases will be undertaken as necessary.

Then the next lie.

The yield target will remain in place until progress is being made towards the goals for full employment and inflation.

Actually it will remain in place until the government no longer needs financing. This may be open ended as we note that the only place which has this ( Japan) only ever seems to do more and never less. The initial salvo in Australia was this.

To date, the Reserve Bank has bought around $47 billion of government bonds ( April 21st)

The Precious! The Precious!

In another example of pack animal behaviour they have pretty much copied and pasted a Bank of England policy.

The Reserve Bank has established a Term Funding Facility (TFF) to offer three-year funding to authorised deposit-taking institutions (ADIs).

So they are avoiding calling them banks. Oh and whilst they get this.

to reinforce the benefits to the economy of a lower cash rate, by reducing the funding costs of ADIs and in turn helping to reduce interest rates for borrowers.

You may note how bank costs are “reduced” whereas it is “helping to reduce” them for others. We know who it will help and it is not these.

The scheme encourages lending to all businesses, although the incentives are stronger for small and medium-sized enterprises (SMEs).

Well not unless they are in the mortgage or house price market. For those unaware of the UK situation when the policies were applied here small business lending did nothing but in a “completely unexpected development” mortgage rates plunged and lending surged.

So far just over 27 billion Australian Dollars have been supplied via this route.

Comment

Much here is familiar as we see a central bank implicitly financing its government and pumping up the housing market too. The RBA must have thought all its Christmases had come at once when the Aussie bond market had trouble at the shorter maturities and it could intervene at a place likely to impact on mortgage rates. It must feel the banks need help or it would have cut the official rate to 0%.

Thus has led to a money supply surge with narrow money going from 909 billion in June of last year to 1260 billion on June of this. Quite a shift for an aggregate which we had noted in the past was going nowhere and at times had fallen.

Switching to external events the Aussie Dollar or as some call it the little battler has been doing well. The trade weighted index which went as low as 49.9 on a day familiar to regular readers but the 19th of March for newer ones is now 61.4. As for influences I guess the relative hopes for the economy are in play as well as this.

Preliminary estimates for July indicate that the index increased by 0.9 per cent (on a monthly average basis) in SDR terms, after decreasing by 0.2 per cent in June (revised). The non-rural and base metals sub-indices increased in the month, while the rural sub-index decreased. In Australian dollar terms, the index decreased by 0.2 per cent in July.

Over the past year, the index has decreased by 12 per cent in SDR terms, led by lower coal, iron ore, LNG and oil prices. The index has decreased by 12.1 per cent in Australian dollar terms. ( RBA earlier today)

So an improvement for the resources base and looking ahead Gold is 7.5% of the index. Although the compilers of the index have just reduced its weight from 8.7% and will now find themselves in the deepest dark recesses of the RBA bunker where the cake trolley never goes.

Back to the banks and their troubles

Tucked away in the Covid news over the past few business days has been one of our longest running themes. The original credit crunch story was one of the banks and their collapse and supposed renewal or as they are officially described these days a state of being “resilient”. On this road we saw interest-rate cuts on a grand scale and then central bank bond buying ( QE) to reduce longer-term interest-rates and bond yields. This was to boost their balance sheet via the assets that they have ( loans to us) which are improved by house prices being higher. Actually it did not work so then we saw the various credit easing policies to more directly support this area. The UK opened with the Funding for Lending Scheme which cut mortgage rates by up to 2% according to the Bank of England. Since then we have seen ever more negative bond yields including in the UK as well as the Euro area providing a direct subsidy to banks via the latest TLTROs offering -1% to qualifying banks. Oh and you qualify basically by being a bank in these circumstances.

Except that in spite of all of that we never really achieved “escape velocity” for the banks. They muddled on continuing to be a milch cow for directors and the like but a corner was always about to be turned on a Roman road and we have all been singing along to Talking Heads.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride
I’m feeling okay this morning
And you know
We’re on the road to paradise
Here we go, here we go

Perhaps the most extreme example has been the Italian banks which have seen a litany of rights issues, a private-sector bailout ( Atlante) which made the stronger banks weaker. and outright bailouts which ignored Euro area rules. All that can-kicking crunched straight into the Coivid-19 pandemic. But if we return to the UK we have had our own issues.

HSBC

This morning what is our largest bank these days has released its results and we are immediately placed om alert by the use of the word “resilient”.

Our performance in the first half of 2020 was heavily impacted by the COVID-19 outbreak. In Asia, our business was resilient, demonstrating the strength of our operations.

So resilient in fact that profits fell by 65%.

Reported profit before tax fell 65% to $4.3bn, amid higher expected credit losses and other credit impairment charges (ECL) and lower revenue. Reported ECL of $6.9bn were $5.7bn higher than in 1H19

As you can see we have had “bad loans” “sour loans” “non performing loans” and now “ECLs”. Indeed the use of an acronym is an especially worrying portent.

Here is the view of Group Chief Executive Noel Quinn

“We are helping our customers navigate their own path through uncertainty and acting with pace and decisiveness to adapt HSBC to an environment in which no business can afford to stand still.”

I wonder if he had any idea what that means?

Tucked away in his section we do get a snapshot of the economy as we note this.

Lending decreased by $18bn in the first half.
Customers initially drew on new and existing
credit lines in the first quarter in response to
the Covid-19 outbreak, but began to pay these
down in the second quarter as circumstances
changed.

So for all the rhetoric about recovery and banks helping we see that HSBC has in fact retrenched in loan terms. Also we get another insight to the rise in saving we have noted before.

Deposits rose by $93bn in the first
half, as customers increased their cash
reserves and reduced their spending
during lockdown.

This bit is also revealing.

Geopolitical uncertainty could
also weigh heavily on our clients, particularly
those impacted by heightened US-China and
UK-China tensions, and the future of UK-EU
trade relations.

Firstly Brexit is no longer at the top of the list which is both good and bad. But for HSBC we are reminded of its Far Eastern presence and footprint which is also good and bad. The Hong Kong bit is plainly bad right now and as for China well the jury remains out.

Royal Bank of Scotland

Things were so grim here that the only solution was provided by the way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield. So let me welcome the Nat West Group which of course is a type of back to the future.

However, NatWest Group has a robust capital position, underpinned by a resilient, capital generative and well diversified business.

( Chief Executive Officer Alison Rose)

This means that they are worried about their capital position and exposure to some areas. There are five key messages about this bank of which one caught my eye.

Focused on generating shareholder value. Committed to resuming capital distributions when appropriate

As a UK taxpayer I note that I was invested in this bank at around £5 and the share price as I type this is £1.06 so I think we as taxpayers should ask them to focus on something else!

The numbers are pretty poor.

H1 2020 operating loss before tax of £770 million and operating profit before impairment losses of £2,088 million.
● Net impairment losses of £2,858 million in H1 2020, or 159 basis points of gross customer loans, resulted in an expected
credit loss (ECL) coverage ratio of 1.72% across the Personal and Wholesale portfolios.

In essence banking is losing money whilst punting the markets or perhaps front running the central banks is doing well.

In comparison to H1 2019, across the retail and commercial businesses income decreased by 9.0% whilst NatWest Markets income excluding asset disposals/strategic risk reduction, own credit adjustments (OCA) and notable items increased by 44.4%.

Lloyds

When it reported last Thursday things looked not so bad for a while.

Trading surplus of £3.5 billion, a reduction of 26 per cent compared to the first six months of 2019, providing still significant
capacity to absorb impairment impacts of the coronavirus crisis

But if you looked further down.

Statutory loss before tax of £602 million and statutory profit after tax of £19 million, both impacted by income
developments and the increased impairment charge. Tangible net asset value per share of 51.6 pence.

Mr and Mrs Market do not seem convinced by that asset value as the share price is 26 pence. Surely this is an enormous opportunity for the directors to invest their own money based on their own published view? In the case of CEO Antonio Horta-Osario his £6.3 million a year would provide a solid boost.

Bank in the real world the hype.

Loan to deposit ratio now 100 per cent, providing significant potential to lend into recovery, with a strong liquidity position

becomes this.

Loans and advances at £440 billion were stable compared to the year end but reduced by £3 billion in the second quarter

Barclays

Rather than go through the figures we can focus on the gap between tangible net assets per share of £2.84 and a share price of £1.01 as I type this.

 

Comment

When all this began the incoming Governor of the Bank of England assured us it would be different this time.

Well, I would just add that, as many of you know, we are still dealing with some of the more painful elements of the consequences of the last crises for small firms, and we don’t want that again, thank you, and there’s a very clear message to the banks-, and, by the way, which I think has
been reflected in things that a number of the banks have already said. So, it’s important to take that into
consideration, that, you know, you have all the resources and all the wherewithal to see through this
issue, the shock, and to support the economy and to support businesses, and that’s a very strong
message.

Many of you may also recall when he said that they could lend 13 times as much to support businesses. Meanwhile the releases above show falls in bank lending.

Yet the blundering goes on.

Nationwide re-joined stalwart lenders such as HSBC to offer 90 per cent deals last month, exclusively for first-time buyers, with an additional condition.

Buyers will need to prove that at least 75 per cent of their deposit has come from their own savings, ruling out deposits that have been gifted entirely from parents.

For a bank the issue is repayments not deposits.

With all this success and resilience we should be……oh hang on.

Podcast

Oh France! Oh Spain! Oh Italy!

After yesterday’s update from Germany we move onto the second, third and fourth largest economies in the Euro area, who rather curiously have produced their figures in that order this morning. So as we mull the fact that Germany accelerated the release of its GDP ( Gross Domestic Product) numbers at exactly the wrong time we also need to be ready for bad news.

In Q2 2020, GDP in volume terms declined: –13.8%, after –5.9% in Q1 2020. It is 19% lower than in Q2 2019.  ( Insee of France)

That is like two explosions going off with the 5.9% being credit crunch like but then it being followed by a much louder bang. The total of -19% is somewhat chilling.

We know the cause.

 GDP’s negative developments in first half of 2020 is linked to the shut-down of “non-essential” activities in the context of the implementation of the lockdown between mid-March and the beginning of May

But the beginning of the recovery seems understated.

The gradual ending of restrictions led to a gradual recovery of economic activity in May and June, after the low point reached in April.

In terms of the detail well everything in the domestic economy fell with one of the components being rather curious.

Household consumption expenditures dropped (–11.0% after –5.8%), as did total gross fixed capital formation in a more pronounced manner (GFCF: –17.8% after –10.3%). General government expenditure also stepped back (–8.0% after –3.5%).

I wonder how they managed to find a category of government spending that fell?! Maybe it was stuff they could not buy as it was out of stock. But it rather sticks out as does this.

 Food expenditure slightly decreased (–0.5% after +2.8%).

In the UK we still seem to be spending more on food whereas France seems to have stocked up and then begun to de-stock.

Although the numbers are larger trade turns out to be a much smaller factor which reminds us that trade numbers are unreliable at the best of times and maybe nearly hopeless right now.

In Q2 2020, imports declined strongly (–17.3% after –10.3%), notably in manufactured goods. Exports fell in a more pronounced manner (–25.5% after –6.1%), in particular in transport equipment. All in all, foreign trade contributed negatively to GDP growth this quarter (–2.3 points after –0.1points).

Make of that what you will.

Spain

This starts especially grimly as the opening page tells us there has been a 22.1% fall in GDP. So let us look more deeply at the state of play.

The Spanish GDP registers a variation of -18.5% in the second quarter of 2020 compared to the previous quarter in terms of volume. This rate is 13.3 points lower than that registered in the first quarter.

which brings us to this.

The year-on-year change in the GDP stood at −22.1%, compared to −4.1% for the quarter
preceding.

That is a bit of a “Boom! Boom! Boom!” moment although notin an economic sense and the breakdown is as follows.

The contribution of domestic demand to year-on-year GDP growth is −19.2 points, 15.5 points lower than that of the first quarter. For its part, external demand represents a contribution of −2.9 points, 2.5 points lower than that of the previous quarter.

We get a sort of confirmation from all of this from the hours worked numbers which at the same time provide a critique of the unemployment data.

In year-on-year terms, hours worked decreased by 24.8%, rate 20.6 points lower than in the first quarter of 2020, and full-time equivalent positions down 18.5%, 17.9 points less than in the first quarter, which represents decrease of 3,394 thousand full-time equivalent jobs in one year.

Some areas saw not far off a collapse in demand, because of past issues the construction numbers stood out to me.

Household final consumption expenditure experiences a year-on-year decrease of 25.7%, 19.9 points less than in the last quarter. For its part, the final consumption expenditure of the Public Administrations presented an inter annual variation of 3.5%, one tenth less than that of the preceding quarter.
Gross capital formation registered a decrease of 25.8%, 20.5 points higher than that of previous quarter. The investment in tangible fixed assets decreases at a year-on-year rate of 30.8%, which it represents 22.4 points more than in the previous quarter. By components, the investment in homes and other buildings and constructions decreased 22.6 points, going from −8.3% to -30.9%, while investment in machinery, capital goods and weapons systems it decreases 23 points when presenting a rate of −32.3%, compared to −9.3% in the previous quarter.

The reason why that sector stands out is the way it affected the economy and the banks as the credit crunch rolled into the Euro area crisis.

Italy

We advance on Italy nervously because of its past record but the fall was in fact the smallest of these three.

 In the second quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 12.4 per cent with respect to the previous quarter and by 17.3 per
cent over the same quarter of previous year.

As to the breakdown well it was everything if we skip over a slightly bizarre focus on farming.

The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and
fishing, in that of industry as well as in services. From the demand side, there is a negative contribution
both by the domestic component (gross of change in inventories) and the net export component.

Farming is of course very important but it hardly the main player in this context.

Comment

There are a lot of contexts to this so let us start with the national ones. Spain was the main “Euro Boom” beneficiary with annual economic growth reaching 4.2% in early 2015 but now we are reminded that it can be the leader of the pack in down as well as upswings. Italy has lost less but it is hard not to think that is because it has less to lose and this from  @fwred is rather chilling.

As the morning has developed we can now look at the overall picture for the Euro area.

In the second quarter 2020, still marked by COVID-19 containment measures in most Member States, seasonally
adjusted GDP decreased by 12.1% in the euro area and by 11.9% in the EU, compared with the previous quarter,
according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union.
These were by far the sharpest declines observed since time series started in 1995. In the first quarter of 2020,
GDP had decreased by 3.6% in the euro area and by 3.2% in the EU.

We can use the numbers to compare with the United States as the annual decline of 15% of the Euro area is larger than the 9.5% there. I think this is outside the margin of error but potential errors right now will be large.

There is a collective assumption that these things will bounce back and I am sure that some areas will. But there are others where it will not and if we think of the “girlfriend in a coma” it never seems to do that. Quarterly economic output in Italy was 417 billion Euros at the beginning of 2017 rising to 431 billion and now falling to 356 billion.

In the end this is the problem with all the can kicking. We have arrived at the next storm without fixing the damage caused by the last one. Where do you go when the official interest-rate is -0.6% and of course -1% for the banks?

Germany sees quite a plunge in economic output or GDP

After last night’s rather damp squib from the US Federal Reserve ( they can expand QE within meetings) the Euro area takes center stage today. This is because the leader of its economic pack has brought us up to date on its economy.

WIESBADEN – The gross domestic product (GDP) in the 2nd quarter 2020 compared to the 1st quarter 2020 – adjusted by price, season and calendar – by 10.1%. This was the sharpest decline since the beginning of quarterly GDP calculations for Germany in 1970. It was even more pronounced than during the financial market and economic crisis (-4.7% in the first quarter of 2009).

So in broad terms we have seen a move double that of the credit crunch which was considered to be severe at the time.  The economy had also contracted in the first quarter of this year which we can pick up via the annual comparison.

Economic output also fell year-on-year: GDP in the second quarter of 2020 was 11.7% lower than in the previous year after adjustment for prices (including calendar adjusted). Here, too, there had not been such a sharp decline even in the years of the financial market and economic crisis of 2008/2009: the strongest decline to date was recorded in the second quarter of 2009 at -7.9% compared to the same quarter of the previous year.

So the worst annual comparison of the modern era although by not as large an amount.

We do not get an enormous amount of detail at this preliminary stage but there is some.

As the Federal Statistical Office (Destatis) further reports, both exports and imports of goods and services collapsed massively in the second quarter of 2020, as did private consumer spending and investments in equipment. The state, however, increased its consumer spending during the crisis.

Just like in the film Airplane they chose a bad time to do this…

Beginning with the second quarter of 2020, the Federal Statistical Office published GDP for the first time 30 days after the end of the quarter, around two weeks earlier than before. The fact that the results are more up-to-date requires more estimates than was the case after 45 days.

Although not a complete disaster as they would have been mostly guessing anyway. One matter of note is that 2015 was better than previously though and 2017 worse both by 0.3%. That is not good news for the ECB and the “Euro Boom” in response to its policies.

Unemployment

There has been bad but not unexpected news from the Federal Employment Agency as well this morning.

Unemployment rose by 2.0% compared to the previous month and by 27.9% year-on-year to 2.9 million. Underemployment without short-time work increased by 1.3% compared to the previous month and by 14.6% compared to the previous month. It is 3.7 million The unemployment rate is 6.3%, the underemployment rate is 7.9%.

Now things get a little more awkward as the statistics office has reported this also.

According to the results of the labor force survey, the number of unemployed was 1.97 million in June 2020. That was 39,000 people or 2.1% more than in the previous month of May. Compared to June 2019, the number of unemployed rose by 653,000 (+ 49.2%). The unemployment rate was 4.5% in June 2020.

What we are comparing is registered unemployment or if you prefer those receiving unemployment benefits with those officially counted as unemployed. Whilst we have a difference in timing ( July and then June) the gap is far wider than the change. The International Labour Organisation has some work to do I think…..

Being Paid To Borrow

Regular readers will be aware that this has essentially been the state of play in Germany for some time now. In terms of the benchmark ten-year yield this started in the spring of last year, but the five-year has been negative for nearly the last five years. That trend has recently been picking up again with the ten-year going below -0.5% this week. With the thirty-year at -0.12% then at whatever maturity Germany is paid to borrow,

This represents yet another defeat for the bond vigilantes because even Germany’s fiscal position will take a pounding from the economic decline combined with much higher public spending. But these days a weaker economy tends to lead to even lower bond yields due to expectations of more central bank buying of them.

ECB Monthly Bulletin

After the German numbers above we can only say yes to this.

While incoming economic data, particularly survey results, show initial signs of a recovery, they still point to a historic contraction in euro area output in the second quarter of 2020.

The problem is getting any sort of idea of how quickly things are picking back up. The ECB seems to be looking for clues.

Both the Economic Sentiment Indicator and the PMI display a broad-based rebound across both countries and economic sectors. This pick-up in economic activity is also confirmed by high-frequency indicators such as electricity consumption.

Meanwhile it continues to pump it all up.

The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion…………Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year……..The Governing Council will also continue to provide ample liquidity through its
refinancing operations. In particular, the latest operation in the third series of targeted
longer-term refinancing operations (TLTRO III) has registered a very high take-up of
funds, supporting bank lending to firms and households.

As to the last bit I can only say indeed! After all who would not want money given to you at -1%?

Comment

We now begin to have more of an idea about how much the economy of Germany has shrunk. Also this is not as some are presenting it because the economy changed gear in 2018 and the trade war of last year applied the brakes. Of course neither were on anything like the scale we have noted today. Whilst the numbers are only a broad brush they are a similar decline to Austria ( -10.7%) which gives things a little more credibility. Markets were a little caught out with both the Euro and the Dax falling as well as bond yields.

Looking ahead we can expect a bounce back in July but how much? The Markit PMI surveys seem to have lost their way as what does this mean?

The recovery in the German economy remained on
track in July, according to the latest ‘flash’ PMI® data
from IHS Markit

Which track?

“July’s PMI registered firmly in growth territory and
well above expectations, in a clear sign that
business conditions are improving across Germany
as activity and demand recover. Furthermore, for
an economy that is steered so much by exports, it
was encouraging to see manufacturers reporting a
notable upturn in sales abroad.”

I am not sure that anyone backing their views with actual trades are convinced by this. Of course things will have picked up as the lockdown ended but there will now be worries about this,

Germany records the highest number of new coronavirus cases in about six weeks ( Bloomberg)

So the recovery seems set to have ebbs and flows. Accordingly I have no idea how places can predict such strong bounce backs in economic activity in 2021 as we still are very unsure about 2020. I wish anyone ill with this virus a speedy recovery but I suspect that economies will take quite some time.

Are UK house prices rising again?

Today we get to look at the money supply and credit situation in the UK  But before we get there yesterday brought news to warm a central banker’s heart. From Zoopla.

The annual rate of growth edged up to 2.7% in June, after rising 0.2% on the month. Price growth is highly localised, but there is little evidence of material declines at regional or city levels, although a small proportion of local areas are seeing price declines of up to -0.2%.

If the Bank of England had any bells they would be ringing right now with Governor Bailey stroking a cat whilst smiling. As to why? We are told this.

Buyer demand has risen strongly since housing markets reopened, as shown on the purple bar in the chart below. Although the number of new homes being listed for sale has also risen, it hasn’t increased by the same margin. This creates an imbalance of low supply and high demand – and contributes to house price growth.

So simply more buyers than sellers then. To be specific the purple bar in their chart shows a 25.3% imbalance.

This imbalance is most stark in cities in the North of England, including Manchester, Liverpool and Sheffield, and it is notable that these are in the top six cities for levels of annual house price growth.

I note a mention of Gloucestershire seeing a mini boom. The 20 cities sampled show the nearest ( Bristol) being one of the weaker areas albeit having more demand than 2019 unlike Belfast and Edinburgh. Interestingly London looks quite strong and is fifth on the list. Another house price rally in London would be a turn up for the books and here is Zoopla’s explanation.

The biggest change in the market spurred by the Chancellor’s announcement of a stamp duty holiday for England and Northern Ireland has been seen in London. Sales jumped by 27% in the weeks after the change. Given the higher average house prices in London and the South East, these are where the largest benefits from the stamp duty holiday will be felt. The stamp duty holiday will continue to support demand in these higher value markets.

Have they managed to bail it out again? Well it would appear that they intend to keep trying. From the Financial Reporter.

The Government is reportedly drawing up plans to extend the Help to Buy scheme due to Covid-19 delays.

According to the FT, ministers have been asked to extend the Scheme beyond its planned December deadline to support buyers whose purchases have been delayed by the pandemic.

The scheme is due to end in April 2021 and a new version of the scheme will run from April 2021 to March 2023, for first-time buyers only. If the original scheme ends when planned, sales transactions will need to be agreed by December 2020.

Help to Buy seems to be covered by The Eagles in Hotel California.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

There is another route funded by the Bank of England and Nicola Duke or @NicTrades has kindly highlighted it.

I got my first mortgage in 1997 and the 2 yr fixed rate was 7.7% Today I got a fixed rate at 1.13% Amazing………..2yrs – the 5 yr is 1.3 and 10yr 1.44

As the band Middle of the Road put it.

Ooh wee chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

Mortgages

This morning’s Bank of England release would also have cheered Governor Andrew Bailey.

On net, households borrowed an additional £1.9 billion secured on their homes. This was higher than the £1.3 billion in May but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected both more new borrowing by households, and lower repayments. Gross new borrowing was £15.8 billion in June, below the pre-Covid February level of £23.4 billion.

Since the introduction of the Funding for Lending Scheme in the summer of 2012 they have been targeting net mortgage lending in my opinion. This time around they have kept is positive and as you can see it appears to be rising again. It is much less than earlier this year but after the credit crunch we saw negative net lending for some time. Even when the FLS was introduce it took until 2013 for there to be a return to positive net mortgage lending.

Approvals still look weak.

The number of mortgages approved also increased in June. The number of mortgage approvals for house purchase increased strongly, to 40,000, up from 9,300 in May. Nevertheless, approvals were 46% below the February level of 73,700 (Chart 3). Approvals for remortgage (which capture remortgaging with a different lender) have also increased, to 36,900; but they remain 30% lower than in February.

At these levels remortgage if you can is my suggestion, although not advice as that has a specific meaning in law.

Consumer Credit

The Governor will be chipper about these numbers as well and presenting them at the monthly morning meeting will not have been potentially career ending unlike the last few.

Household’s consumer credit borrowing recovered a little in June, following three particularly weak months (Chart 2). But it remains significantly weaker than pre-Covid. On net, people repaid £86 million of consumer credit in June following repayments totalling £15.6 billion over the previous three months. The small net repayment contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows in recent months meant that the annual growth rate was -3.6%, the weakest since the series began in 1994.

We have discovered ( via large revisions) that these numbers are not accurate to £86 million so substantial repayments have been replaced by flatlining and the junior at the meeting would do well to emphasise this.

The smaller net repayment compared to May reflected an increase in gross borrowing. Gross borrowing was £17.7 billion, up from £13.6 billion in May, but this was still below the average £25.5 billion a month in the six months to February 2020. Repayments on consumer borrowing were broadly stable in June, at £18.1 billion, below their pre-Covid February level of £24.6 billion.

So gross borrowing is picking up.

As a point of note it is the credit card sector which really felt the squeeze.

Within total consumer credit, on net there was a further small repayment of credit card debt (£248 million) and a small amount of additional other borrowing (£162 million). The annual growth rate for both credit cards and other borrowing fell back a little further, to -11.6% and 0.2% respectively.

Maybe it is because in a world of official ZIRP (a Bank Rate of 0.1%) the reality is this.

The cost of credit card borrowing fell from 18.36% in May to 17.94% in June, also the lowest rate since the series began in 2016.

By the way if we switch to the quoted series the overdraft rate is 31,53%. Mentioning that at the Bank of England will be career ending as it was an enquiry at the FCA ( boss one Andrew Bailey) that was so poor it drove them higher as opposed to lower.

Comment

Can the UK housing market leap Lazarus style from its grave one more time? Well the UK establishment are doing everything that they can to prop it up. Meanwhile the business lending that the policies are supposed to boost is doing this.

Overall, PNFCs borrowed an additional £0.4 billion of loans in June. Strong borrowing by small and medium sized businesses (SMEs) was offset by repayment by large businesses.

The borrowing by smaller businesses would ordinarily be really good except we know a lot of it will be out of desperation and of course as the bit I have highlighted shows is nothing to do with the Bank of England.

Small and medium sized businesses continued borrowing a significant amount from banks. In June, they drew down an extra £10.2 billion in loans, on net, as gross borrowing remained strong. This was weaker than in May (£18.0 billion), but very strong compared to the past. Before May, the largest amount of net borrowing by SMEs was £0.6 billion, in September 2016. The strong flow in June meant that the annual growth rate rose further, to 17.4%, the strongest on record (Chart 5). This strength is likely to reflect businesses drawing down loans arranged through government-supported schemes such as the Bounce Back Loan Scheme.

This bit is really curious.

Large non-financial businesses, in contrast, repaid a significant amount of loans in June. The net repayment, of £16.7 billion, was the largest since the series began in 2011 and followed a net repayment of £13.0 billion in May.

So we see a complex picture in an economy which is now awash with cash. If we switch to the money supply then it ( M4 or Broad Money) has risen by 11.9% over the past year. Of this around £174 billion has come in the last four months.

Me on The Investing Channel

More QE will be on the agenda of the US Federal Reserve

Later today the policymakers of what is effectively the world’s central bank meet up to deliberate before making their policy announcement tomorrow evening UK time. Although there is a catch in my description because the US Federal Reserve goes through sustained periods when it effectively ignores the rest of the world and becomes like the US itself can do, rather isolationist. The Financial Times puts it like this.

US coronavirus surge to dominate Federal Reserve meeting…..Central bank policymakers face delicate decision on best way to deliver more monetary support.

As it happens the coronavirus numbers look a little better today. But there are clearly domestic issues at hand which is a switch on the initial situation where on the middle of March the US Federal Reserve intervened to help the rest of the world with foreign exchange liquidity swaps. We were ahead of that game on March 16th. Anyway, that was then and now we see the US $446 billion that they rose to is now US $118 billion and falling.

The US Dollar

There has been a shift of emphasis with Aloe Blacc mulling a dip in royalties from this.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

This was represented back in the spring not only by a Dollar rally that especially hit the Emerging Market currencies but the Fed response I looked at above. Since then we have gone from slip-sliding away to the Fallin’ of Alicia Keys. Putting that into numbers the peak of 103.6 for September Dollar Index futures on March 19th has been replaced by 93.9 this morning.

If we look at the Euro it fell to 1.06 versus the Dollar and a warning signal flashed as the parity calls began. They had their usual impact as it is now at 1.17. Actually there were some parity calls for the UK Pound $ too so you will not be surprised to see it above US $1.28 as I type this. In terms of economic policy perhaps the most significant is the Japanese Yen at 105.50 because the Bank of Japan has made an enormous effort to weaken it and looks increasingly like King Canute.

There are economic efforts from this as I recall the words of the then Vice-Chair Stanley Fischer from 2015.

Figure 3 uses these results to gauge how a 10 percent dollar appreciation would reduce U.S. gross domestic product (GDP) through the net export channels we have just discussed. The staff’s model indicates that the direct effects on GDP through net exports are large, with GDP falling over 1-1/2 percent below baseline after three years.

We have seen the reverse of that so a rise in GDP of 1.5%. Of course such moves seem smaller right now and they need the move to be sustained but a welcome development none the less.

Whilst the US economy is less affected in terms of inflation than others due to the role of the US Dollar as the reserve currency in which commodities are prices there still is an impact.

This particular model implies that core PCE inflation dips about 0.5 percent in the two quarters following the appreciation before gradually returning to baseline, which is consistent with a four-quarter decline in core PCE inflation of about 0.3 percent in the first year following the shock.

Again this impact is the other way so inflation will rise. For those unaware PCE means Personal Consumption Expenditures and as so familiar for an official choice leads to a lower inflation reading than the more widely known CPI alternative.

Back Home

Interest-Rates

This is a troubled area for the US Federal Reserve which resembles the shambles of General Custer at Little Big Horn. We we being signposted to a “normalisation” where the new interest-rate would be of the order of 3%+ or what was called r*. I am pleased to report I called it out at the time as the reality was that the underpinnings of this particular Ivory Tower crumbled as the eye of Trump turned on it. The pandemic in this sense provided cover for the US Federal Reserve to cut to around 0.1% ( strictly 0% to 0.25%).

Back on March 16th I noted this and you know my view in official denials.

#BREAKING Fed’s Powell says negative interest rates not likely to be appropriate ( @AFP )

I also not this from Reuters yesterday,

With U.S. central bank officials resisting negative interest rates,

How are they resisting them? They could hardly have cut much quicker! This feels like a PR campaign ahead of applying them at some future date.

Yield Curve Control

This is the new way of explaining that the central bank is funding government policy. Although not on the scale some are claiming.

Foreigners have levelled off buying US Debt. Federal Reserve buying has gone parabolic. This tells us all this additional debt the govt is issuing by running HUGE budget deficits is being purchased by directly the Fed. That is what they do in “banana republics”. #monetizethedebt

That was from Ben Rickert on Twitter and is the number one tweet if you look for the US Federal Reserve. Sadly for someone who calls himself The Mentor actual purchases of US government bonds have declined substantially.

the Desk plans to continue to increase SOMA holdings of Treasury securities at that pace, which is the equivalent of approximately $80 billion per month.  ( New York Fed.)

That is less in a month than it was buying some days as I recall a period when it was US £125 billion a day.

If Ben had not ramped up his rhetoric he would be on the scent because Yield Curve Control is where the central bank implicitly rather than explicitly finances the government. Regular readers will have noted my updates on the Bank of Japan doing this and there have been several variations but the sum is that the benchmark ten-year yield has been kept in a range between -0.1% and 0.1%.

There is an obvious issue with the US ten-year yield being around 0.6% and we may see tomorrow the beginning of the process of getting it lower. On the tenth of this month I pointed out that some US bond yields could go negative and if we are to see a Japanese style YCC then the Fed needs to get on with it for the reasons I will note below.

Comment

As the battleground for the US Federal Reserve now seems to be bond yields it has a problem.

INSKEEP: Senator, our time is short. I’ve got a couple of quick questions here. Is there a limit to how much the United States can borrow? Granting the emergency, its another trillion dollars here. ( NPR)

Even in these inflated times that is a lot and the Democrat opposition want treble that. With an election around the corner we are likely to see more grand spending schemes. But returning to the Fed that is a lot to fund and $80 billion a month looks rather thin in response. So somewhere on this yellow brick road I am expecting more QE.

Oh and if you look at Japan if it has done any good it is well hidden. But that seems not to bother policymakers much these days. Also another example of Turning Japanese is provided by giving QE  new name. After all successes do not need one do they?

Still at least the researchers at the Kansas City Fed have kept their sense of humour.

Based on the FOMC’s past use of forward guidance, we argue that date-based forward guidance has the potential to deliver much, though not all, of the accommodation of yield curve control.

Money Supply Madness in the Euro area

This morning has brought a consequence of the actions of the European Central Bank into focus. In response to the Covid-19 pandemic it found itself out of interest-rate ammunition having already cut interest-rates to -0.6%. Or rather interest-rate ammunition for businesses and consumers as of course it has set a record low of -1% for The Precious! The Precious! So it found itself only able to employ more unconventional measures such as Quantitative Easing ( QE) and credit easing ( TLTROs). Of course it was already indulging in some QE which is looking ever more permanent along the lines such about by Joe Walsh.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door

Money Supply

We have been observing the consequences of the above in this area for some months now. Today is no different.

Annual growth rate of narrower monetary aggregate M1,, comprising currency in circulation and overnight deposits, stood at 12.6% in June, compared with 12.5% in May.

If we look back we see that it was 7.2% a year ago and then the extra monetary easing of the autumn of 2019 saw it rally to around 8%. So the new measures have pretty quickly had an impact. That has not always been true as regular readers will know. Also whilst we have seen an annual rate of 13.1% in the past ( late 2009 when the credit crunch hit) the money supply is much larger now. Mostly of course due to all the official effort pushing it up!

In terms of totals M1 pushed past the 9.7 trillion Euros barrier in June and also cash in circulation pushed past 1.3 trillion. Cash is not growing as fast as the rest but in other terms an annual growth rate of 9.7% would be considered fast especially as it has been out of favour as a medium of exchange for obvious possible infection reasons. More woe for the media reporting of it.

Broad Money

As you can see this is on the surge too.

The annual growth rate of the broad monetary aggregate M3 increased to 9.2% in June 2020 from 8.9% in May, averaging 8.8% in the three months up to June. 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, stood at 12.6% in June, compared with 12.5% in May. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at 0.7% in June, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) increased to 10.1% in June from 5.7% in May.

The relative move has been even stronger here as the annual rate of growth on a year before has doubled from 4.6%. In more recent terms it has risen from around 5.5% if we ignore the odd print at the end of 2019. As to the breakdown much of the growth (8.5%) is M1 and it is noticeable that M2 seems very out  of fashion these days. I guess with interest-rates so low why have your money deposited for longer terms? But M3 growth has picked up noticeably.  We should not be surprised as that is one of the main targets of ECB policy both implicitly via corporate bond purchases and explicitly such as the purchase of commercial paper.

So we have more overnight deposits backed up by more cash and more money market fund shares. There was also a noticeable slowing in June to 95 billion Euros as the growth rate ( Taking us to 13.89 trillion)

There is another way of looking at this and as usual let me remind you not to take these numbers too literally. That went horribly wrong in my home country back in the day.

the annual growth rate of M3 in June 2020 can be broken down as follows: credit to the private sector contributed 5.1 percentage points (down from 5.3 percentage points in May), credit to general government contributed 5.0 percentage points (up from 3.6 percentage points), net external assets contributed 1.0 percentage point (as in the previous month), longer-term financial liabilities contributed 0.3 percentage point (up from 0.0 percentage point), and the remaining counterparts of M3 contributed -2.0 percentage points (down from -0.9 percentage point).

It was only a few days ago I pointed out that the main role of the ECB these days seems to have become to make sure the Euro area government’s can fund themselves cheaply.

Credit

I consider this to usually be a lagging indicator but there are some points of note and the credit to governments leaps off the page I think.

 The annual growth rate of credit to general government increased to 13.6% in June from 9.8% in May, while the annual growth rate of credit to the private sector stood at 4.8% in June, compared with 4.9% in May.

Credit to government was -2% as recently as February so the pedal has been pushed to the metal.

The ECB will be troubled by the latter part of the numbers below.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 4.8% in June from 5.3% in May. Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.0% in June, unchanged from the previous month, while the annual growth rate of adjusted loans to non-financial corporations decreased to 7.1% in June from 7.3% in May.

Private-sector credit declined noticeably in the circumstances when adjusted but that seems to go missing in the detail. So let me help out.

New bank loans to euro area corporates slowed to €9bn in June, following a massive increase of €245bn over the previous three months. ( @fwred)

Putting it another way credit growth fell to 178 billion Euros in June of which 153 billion went to governments.

Comment

The response of the ECB to the Covid-19 pandemic has been to sing along with MARRS.

Brothers and sisters!
Pump up the volume
Pump that beat
Brothers and sisters!
Pump up the volume
We gonna get ya!

But just like their other moves of applying large interest-rate cuts and then negative bond yields it does not seem to be working. Back in the day I was taught this as “pushing on a string”. As a concept it is clear but in the intervening decades the monetary system has changed enormously. Personally I think the concepts of money and credit have merged in certain areas such as people paying for things with their phone. Another is the use of credit cards.

Putting it another way the economic impact is money supply multiplied by velocity with the catch being we do not know what velocity is. We can have a stab at what it was but right now we neither know what it is nor what it will be. So we know it has fallen over time undermining the central bank efforts making it push on a string but we can only say that looks like it is happening all over again, we cannot measure it with any precision.

Thus a likely consequence from this is inflation. We can see this in two ways. The official denials combined with increasingly desperate efforts to miss measure inflation. Or as the news overnight has highlighted and my subject of a few days ago, another high for the price of Gold.

Let me offer an olive branch to economics 101. How is the Euro rallying ( 1.17 versus the US Dollar). Well the US Money Supply is growing even faster.

Podcast

UK Retail Sales surge in June

The Covid-19 pandemic has brought about all sorts of economic events. Yesterday evening I went for a stroll in Battersea Park and it was quite noticeable how the number of people going for a picnic there has increased. We do not know how permanent that will be but I suspect at least some of it will be as people discover that the same bottle of wine is so much cheaper than at a wine bar or pub. Oh yes and some seem to forget the food part of the picnic! I can see that BBC Breakfast have put their own spin on it.

9-year-old Sky had this message on #BBCBreakfast for people dropping litter in parks and open spaces

Yes more people have created more litter. Kudos to @PolemicPaine who pointed out ahead of a flurry of such media reports that it would happen. Some people’s behaviour is bad but in recent years the cleanliness of Battersea Park has improved a lot and thank you to the workers there.

Retail Sales

These are the numbers which were likely to be harbingers of change in the trajectory of the UK economy. So this morning’s news was rather welcome.

In June 2020, the volume of retail sales increased by 13.9% when compared with May 2020 as non-food and fuel stores continue their recovery from the sharp falls experienced since the start of the coronavirus (COVID-19) pandemic.

That was quite a surge and means this.

The two monthly increases in the volume of retail sales in May and June 2020 have brought total sales to a similar level as before the coronavirus pandemic; however, there is a mixed picture in different store types.

There is another way of looking at this.

In June, total retail sales continued to increase to reach similar levels as before the pandemic, with a fall of just 0.6% when compared with February.

So is it in modern language, like well over? Not quite as the text is a little reticent in pointing this out but volumes were some 1.6% lower than last June. Whilst growth had been slowing we usually have some so perhaps 3% lower than we might usually expect. However these are strong numbers in the circumstances and will have come as an especial shock to readers of the Financial Times with the economics editor reporting this. I have highlighted the bit which applies to June.

The latest numbers on card payments and bank account transactions from Fable Data show that in the week to July 19, total spending in the UK was 25 per cent down on the same week in 2019, a deterioration from a 13 per cent decline four weeks earlier.

As you can see whilst consumption is a larger category than Retail Sales there is quite a difference in the numbers here. According to the report by the economics editor of the FT a bad June was followed by a woeful July.

The latest indications from unofficial data on spending patterns in the UK suggests the economic recovery that began in late April has stalled — and possibly even moved backwards in July. Separate figures from the Bank of England’s payment system and from card payments collected by Fable Data show a worse picture for spending in mid-July than at the start of the month.

More on this later.

The Breakdown

Whilst the overall picture is pretty much back to February there have been some ch-ch-changes in the pattern.

In June, while non-food stores and fuel sales show strong monthly growths in the volume of sales at 45.5% and 21.5% respectively, levels have still not recovered from the sharp falls experienced in March and April.

My personal fuel sales shot up as I bought some diesel and went to visit an aunt and my mother;s house at the end of June but on a more serious level traffic in Battersea picked up noticeably. This is in spite of the official effort to discourage driving just after telling people to drive! Anyway switching sectors this is interesting.

Following this peak, sales returned to a level higher than before the pandemic. In June 2020, despite a small monthly decline of 0.1% in volume sales, food stores remained 5.3% higher than in February 2020.

I say that because of this.

Feedback from food retailers had suggested that consumers were panic buying in preparation for the impending lockdown.

If they were we would expect a dip going ahead. On a personal level I did put some extra stuff in my freezer in case I had to quarantine ( it was 7 days then) and bought some more tinned food. But collectively the other side of that has not been seen so far. Maybe it is because the June numbers do not see the opening of restaurants and the like which began on July 4th.

I doubt anyone is going to be surprised by this.

Non-store retailing has reached a new high level in June 2020, with continued growth during the pandemic and a 53.6% increase in volume sales when compared with February 2020.

Let me now give you the two polar opposites starting with the bad.

Textile, clothing and footwear stores show the sharpest decline in total sales at negative 34.9%. This was because of a combination of a large fall within stores at negative 50.8% along with a slower uptake in online sales, with a 26.8% increase from February.

Now the up,up and away.

Household goods stores, as the only store type to show an increase since the start of the pandemic, has a large uptake in online sales, increasing by 103.2%. In addition, household goods stores saw the smallest decline in store sales when compared with other non-food stores, at negative 15.2%.

I am glad to see my friend who has been painting his garage door and some windows pop up in the figures.

In June, electrical household appliances, hardware, paints and glass, and furniture stores all returned to similar levels as before the pandemic.

Comment

This is welcome news for the UK economy and it provides another piece of evidence for one of my themes. For newer readers I argued back in January 2015 that lower prices boost the economy ( the opposite of the Bank of England view) and we see that lower prices in retail have led us to getting right back to where we started from. I am sure that some PhD’s at the Bank of England are being instructed to sufficiently torture the numbers to disprove this already.

Actually the Bank of England is in disarray as in response to the FT data above one of its members seems to have switched to analysing health.

Jonathan Haskel, an external member of the BoE’s Monetary Policy Committee, said the evidence was beginning to show that household concerns about health were more likely to drive spending than government lockdown rules.

Oh well. Also this made me laugh, after all who provided all the liquidity?

“The need for more equity finance creates a case for authorities to be ambitious in reforming the financial system to remove any biases against the patience that’s needed for many equity investments,” he said.

“Even investors who should have the longest horizons seem to have a fetish for liquidity and an aversion to really illiquid growth capital assets.” he said. ( Reuters)

I do hope somebody pointed out to Alex Brazier, the BoE’s Executive Director for Financial Stability Strategy and Risk that the speech should be given to his own colleagues who have been singing along to Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

Let me finish by pointing out that these retail numbers are imprecise in normal times and will be worse now. So we have seen quite an upwards shift of say around 10%. Moving onto numbers which are even more unreliable there was more good news but regular readers will know to splash some salt around these.

At 57.1 in July, up from 47.7 in June, the headline seasonally
adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered above the 50.0 no-change value for the first time since February.

Today’s surveys show that any economic recovery in France remains distant

Today out focus shifts to the second largest economy in the Euro area as La Belle France takes centre stage. Let us open with the thoughts of the finance minister on the economic state of play.

PARIS (Reuters) – Recent economic indicators for France are satisfactory but too fragile to change the forecast for an 11% economic contraction this year, Bruno Le Maire said Thursday.

The Minister of the Economy, speaking to the National Assembly for the debate on the orientation of public finances for 2021, said he expected economic growth of 8% for France next year and expressed the will that the in 2022, activity returns to its levels preceding the crisis linked to the new coronavirus.

Only a politician could use the words “satisfactory” and “too fragile” in the same sentence and it is a grim one of a 11% decline in GDP ( Gross Domestic Product) for this year. This means that the expectations for France are worse than those for the Euro area as a whole.

The expectations of SPF respondents for euro area real GDP growth averaged -8.3%, 5.7% and 2.4% for 2020, 2021 and 2022, respectively. ( ECB 16th July)

So around 3% worse which is interesting and I note that there is a similar pattern of predicting most but far from all of it returning in 2021. That is what you call making a forecast that is like an each-way bet where if you do recover no-one will care and if you do worse than that you highlight you did not expect a full recovery. The truth is that none of us know how 2020 will finish let alone what will happen next year. Maybe the quote below suffers from translation from French but “expressed the will?”

expressed the will that the in 2022, activity returns to its levels preceding the crisis

What does that mean? So let us move on knowing 2020 will be bad with a likely double-digit fall in economic output.

Right Here, Right Now

This morning has brought the latest in the long-running official survey on the economy.

In July 2020, the business climate has continued its recovery started in May. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 7 points. At 85, the business climate is however still significantly below its long-term average (100), and a fortiori below its relatively high pre-lockdown level (105).

The ending of the lockdown has seen a welcome rally of 7 points but sadly only to 85% of the long-term average. If we look back though I note it was recording a relatively high 105 which makes me mull this.

In Q1 2020, real gross domestic product (GDP)* fell sharply: -5.3% after -0.1% in Q4 2019, thus a revision of +0.5% compared with the first estimate published in April.

I think the relevant number is the contraction in the last quarter of 2019 and how does that relate to a relatively high reading. As the fall is only 0.1% we could argue the economy was flat lining but we still have a measure recording growth when there wasn’t any.

Going back to the survey we see a similar pattern but weaker number for employment.

In July 2020, the employment climate has continued to recover sharply from the April low. At 77, it has gained 10 points compared to June, but it still remains far below its pre-lockdown level.

Manufacturing

The position here is particularly bad.

According to the business managers surveyed in July 2020, the business climate in industry has continued to improve. The composite indicator has gained 4 points compared to June, after losing 30 points in April due to the health crisis. However, at 82, it remains far below its long term average (100).

Looking ahead the order book does not look exactly auspicious either.

In July 2020, slightly fewer industrialists than in June have declared their order books to be below normal. The balances of opinion on total and foreign order books have very slightly recovered. Both stand at very low levels although slightly higher than in 2009.

If we look back this measure had a recent peak around 112 as 2018 began. This represented quite a rally compared to the dips below 90 seen at times in 2012 and 13. But after that peak it began slip-sliding away to around 100 and now well you can see above.

Saving

Whilst debt hits the headlines the breakdown of the GDP data shows that it is not the only thing going on.

At the same time, household consumption fell (-5.6% after +0.3%), resulting in a sharp rise of the saving rate to 19.6% after 15.1% in Q4 2019.

The pandemic has seen higher levels of saving which has two drivers I think. Firstly many simply could not spend their money as so many outlets closed. Next those who can look like they have been indulging in some precautionary saving which is something of a disaster for supporters of negative interest-rates.

National Debt

Having just looked at ying here is part of the yang.

In Q1 2020 the public deficit increased by 1.1 points: 4.8% of GDP after 3.7% in Q4 2019.

So we see that pandemic France was borrowing more and regular readers will have noted this from past articles. For the year as a whole France had its nose pressed against the Growth and Stability Pact threshold of 3% of GDP. I know some of you measure an economy by tax receipts so they were 1.275 trillion in 2019.

Moving to the national debt we see this.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Looking ahead this is the view of the Bank of France.

As a result of the wider deficit and the fall in GDP, government debt should rise substantially to 119% of GDP in 2020, from 98.1% in 2019, and should scarcely decline over the rest of the projection horizon. The average debt-to-GDP ratio for the euro area should also increase in parallel, but to a more limited extent (to 101% of GDP in 2022, easing to 100% by end-2022).

Comment

There are some familiar patterns of a sharp drop in economic output followed by plenty of rhetoric about a sharp recovery next year. However the surveys we have looked at show a very partial recovery so far so that the “V-shaped” hopium users find themselves singing along with Bonnie Tyler.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning

Switching to the mounting debt burden it is a clear issue in terms of capital and if you like the weight of the debt. Also estimates of economies at around 120% of GDP went spectacularly wrong in the Euro area crisis. But in terms of debt costs then with a ten-year yield of -0.19% France is often being paid to issue debt. Although care is needed because the ECB does not buy ultra long bonds ( 30 years is its limit) meaning that France has a fifty-year bond yield of 0,58%. We should not forget that even the latter is very cheap, especially in these circumstances.

Also there is this from the head of the ECB Christine Lagarde.

In my interview with @IgnatiusPost

, I explained that price stability and climate change are closely related. Consequently, we must take climate-related risks into account in our central banking activities.

 

 

 

What is the case for Gold?

It is time to look again at a subject which pops up every now and then and this morning has done exactly that. From The Guardian

The price of gold hit $1,865 per ounce for the first time since September 2011 this morning.

Gold has surged by 20% since the depths of the pandemic, and some analysts reckon it could hit $2,000 for the first time ever.

A weak dollar is good for gold, given its reputation as a safe-haven from inflation and money-printing.

Let us start with the price noting that this is a futures price ( August) as we remind ourselves that there is often quite a gap between futures prices and spot gold these days. That leads to a whole raft of conspiracy theories, but I will confine myself to pointing out that in a world where interest-rates are pretty much zero one reason for the difference is gone. Strictly we should use the US Dollar rate which is of the order of 0.1% or not much.

Actually a rally had been in play before the Covid-19 pandemic as we ended 2019 at US $1535 and the rallied. However like pretty much all financial markets there was a pandemic sell-off peaking on March 19th a date we keep coming back to. My chart notes a low of US $1482. Since then it has not always been up,up and away but for the last 6 weeks or so the only way has indeed been up. Of course there is a danger in looking at a peak highlighted by this from The Stone Roses.

I’m standing alone
I’m watching you all
I’m seeing you sinking
I’m standing alone
You’re weighing the gold
I’m watching you sinking
Fool’s gold

What is driving this?

Weak Dollar

The Guardian highlights this and indeed goes further.

Marketwatch says the the US dollar is getting “punched in the mouth” – having dropped 5.1% in the last quarter.

It’s lost 2.3% just in July so far, partly due to a revival in the euro. And there could be wore to come:

There is some more detail.

The US dollar is taking a pummelling, sending commodity prices rattling higher.

The dollar has sunk to its lowest level since early March, when the coronavirus crisis was sweeping global markets. The selloff has driven the euro to its highest level in 18 months, at $1.1547 this morning.

Sterling has also benefited, hitting $1.276 last night for the first time in six weeks.

Here we do have a bit of a problem as whilst the US Dollar is lower it is not really weak. Of course it is against Gold by definition but it was not long ago we were considering it to be strong and it certainly was earlier this year especially against the emerging market currencies. At the beginning of 2018 US Dollar index futures fell to 89 as opposed to the 95.4 of this morning but the Gold price was US $1340. So whilst monthly charts are a broad brush our man or woman from Mars might conclude that a higher Dollar has led to a higher Gold price.

If we stay with currencies those from my country the UK have done much better out of Gold. Looking at a Sterling or UK Pound £ price we see £1465 this morning compared to a previous peak of less than US $1200 and before this surge a price of around US $1000. Another perspective is provided by India a nation with many Gold fans and those fans should they have owned Gold will according to GoldPrice.org have made 996% over the past 20 years.

Negative Interest-Rates

Whilst there has been a general trend towards this super massive black hole there are particular features. For example a nation renowned for being Gold investors cut its official interest-rate to -0.75% in January 2015 and it is still there. That is Switzerland and the Swissy has remained strong overall, so the weak currency argument fades here. We have a small pack of “Carry Trade” nations who end up with strong currencies and negative interest-rates including Japan and more recently the Euro.

The generic situation is that we have seen substantial interest-rate cuts. The UK cut from 0.75% to 0.1% for example reducing the price of holding Gold. But I think that there is more than that. You see official interest-rates are increasingly irrelevant these days as we note cutting them has not worked and the way that people have adapted for example the increased number of fixed-rate mortgages. If we look a my indicator for that I note that we have seen a new record low of -0.11% for the UK five-year bond yield this morning. So now all of the countries I have noted have negative interest-rates or if you prefer the 0% provided by Gold is a gain and not a loss.

As I pointed out in my article of July 10th the US does not have negative bond yields but is exhibiting so familiar trends. The five-year yield has nudged a little nearer at 0.26% this morning. That contrasts sharply with the (just under) 3% of October 2018. So a 2.7% per annum push since then in Gold’s favour.

Inflation

The arrival of the pandemic was accompanied by a wave of experts predicting zero and negative inflation. As I pointed out back then I hope I have taught you all what that means and this highlighted by @chigrl earlier links in with the Gold theme.

India can expect inflation to surge to more than double the central bank’s target and the currency could lose a quarter of its value if the Reserve Bank of India begins printing money to fund the government’s spending…….Rabobank estimates that inflation could surge to an average of 12% in 2021 if the RBI was to finance a second stimulus package of $270 billion, a similar amount to what was announced in the first spending plan earlier this year. The rupee could plunge 16% against the dollar from 2020 levels and almost 25% from 2019 under that scenario.

They are essentially making a case for Indians being long Gold although they have not put it like that.

In the UK last night saw the latest in an increasingly desperate series of attempts by the UK Office for National Statistics to justify its attempt to reduce the UK RPI by around 1% per annum. That would affect around 10 million pensioners according to the actuary who spoke. Indeed the economics editor of the Financial Times Chris Giles was reduced to quoting a couple of anonymous replies to one of his own articles as evidence.How weak is that? Still I guess that when you are impersonating King Canute any piece of wood looks like a branch.

But inflation is on the horizon which of course is why the UK keeps looking for measures which produce lower numbers.

Comment

As you can see there are factors in play supporting the Gold price. The only issue is when they feed in because having established an annual gain of 2.7% from lower US bond yields only an Ivory Tower would expect that to apply each year. In fact I think I can hear one typing that right now. In reality once we come down to altitudes with more oxygen we know that such a thing creates a more favourable environment but exactly when it applies is much less predictable. I have used negative interest-rates rather than the “money printing” of The Guardian because it is a more direct influence.

I have posted my views on the problems of using Gold ( the fixed supply is both a strenght and a weakness) before as a monetary anchor. It was also covered in my opinion by Arthur C. Clarke in 2061. So let move onto something that used to be used as the money supply and some famous British seafarers made their name by stealing.

Silver rallied Tuesday to finish at its highest level since 2014, up by more than 80% from the year’s low, benefiting as both a precious and industrial metal as it looks to catch up with gold’s impressive year-to-date performance…..In Tuesday trading, September silver contract SIU20, 3.26% rose $1.37, or 6.8%, to settle at $21.557 an ounce on Comex. Prices based on the most-active contracts marked their highest settlement since March 2014, according to Dow Jones Market Data. They trade 83% above the year-to-date low of $11.772 seen on March 18, which was the lowest since January 2009. ( MarketWatch)

So I will leave you with those who famously advised us that we may not get what we want but we may get what we need.

Oh babe, you got my soul
You got the silver you got the gold
If that’s your love, it just made me blind