Yesterday in financial markets was a slow day in some respects. Equity markets appear to have calmed down for now and perhaps an element of a mid-summer lull has hit us, although I have learnt in the past that such thoughts can be dangerous! Relatively the UK FTSE 100 is edging forward as the share price of BP recovers and the FTSE 99 get help rather than hindrance from it. There was some interesting news on the UK economy yesterday and as we are due an update on the UK’s consumer and retail price indices today which measure her inflation I will look at UK issues today.
Greek Treasury Bond issuance
Before I move on I have noticed that there has been a change in the planned issue of Greek 12 month treasury bills which was due yesterday and ended up being dropped. However Greece will sell 1.25 billion euros of six-month bills today and I will check on what interest rate they are issued at. Just to give a comparison the yield on the April issue of six-month paper reached 4.55 per cent, up from 1.38 per cent in January.
I have to confess it still escapes me as to why Greece is doing this and why the 110 billion Euro fund is not being used. I said this when the plans were revealed for this issue (by a comment on this blog) and have discussed before what I think of the Greek public debt management agency and the way it has performed during her crisis. Now we end up with everybody knowing that Greece has 2.16 billion Euros of debt to roll-over and yet she is only issuing 1.25 billion Euros. There is not much space as next week on the 20th another auction is set for when Greece is due to roll over €2.4bn of 13-week bills.
As to why the 12 month issuance was abandoned well as one year Greek yields are just under 7% and she can borrow at 5% from the European rescue fund….. Except that was true when the plans were announced. Should todays issue go well then the danger is that people wonder what the ECB’s Securities Market Programme was up to today, as in some ways it buying the issue would be logical. It would be good politics (supporting Greece) and good finance as they would get a good 6 month yield and they are making sure Greece does not default over this period anyway.
I notice that Greece is currently claiming something of an improvement in her public finances for this year and I also notice that this appears to have happened before the implementation of her austerity measures. I remember Greek readers of my blog suggesting that any improvement was due to the Greek government not paying its bills and would welcome their up to date views.
UK GDP revision: we are all poorer than we thought
One of the curiosities of economic statistics is that as we get new numbers telling us about the recent past we sometimes also get quite substantial revisions of further back in time. Yesterday was such a day and in fact was particularly significant. The growth rate for the first quarter of 2010 was left unchanged at +0.3% and this was no surprise. However there was a change in the depth of the UK recession which was deeper at -6.4% of Gross Domestic Product (GDP) than the previously reported -6.2% and we grew less in 2007/08 than we thought. This meant that in total we took 0.4% off what we thought our economic output or GDP was. So if you reduce a number by 0.4% and increase it by 0.3% you are worse off. So we have growth but we are poorer at the end of the quarter than we thought we were!
The composition of the growth in the first quarter also had some disturbing implications. If we start with the good news that manufacturing increased by 1.4% on the quarter one also has to report that net exports were revised down such that they had an -0.9% effect over the period. So we are in many respects still waiting for the impact one might have hoped for from the sterling depreciation of 2007/08. You may have noticed that since we remained at the same growth rate that something must have taken up the slack. Unfortunately government spending on public services rose by 1.5 % rather than the 0.5 % previously estimated and fixed investment by the government also grew strongly.
As I mentioned yesterday these numbers have disturbing implications. Not only are we all poorer in spite of there being growth (due to revisions) but we also do not have the growth in exports that we might have hoped for from our past currency depreciation and the growth we did have came from government spending which is in the process of being cut. This is not reassuring for the rest of the year and I hope that the NIESR’s estimate for the second quarter proves true at 0.7% of GDP or our recovery will seem very weak and insipid.
I have mentioned the problems that adherents of output gap theory have with the recent “outperformance” of UK inflation compared with their theoretical analysis. To put this into scale many of them were worried that we would have falling prices right now rather than the inflation we have seen and the Monetary Policy Committee followed this group predicting that currently inflation would be around or below 1%. Well as UK economic output has just been revised down they have a bigger problem than before. I will leave it to them to try to bend reality to fit their theory which is being hung onto like it is a religious belief.
One question that does remain is the reason for the delay in the production of these numbers. It was unfortunate that the Office for National Statistics (ONS) did not give a full explanation as this in my view would have enhanced their credibility and their secrecy will only reduce it.
UK Trade Figures
These were as ever something of a curates egg and there was an example of rather outrageous spinning by the ONS using the title “Current account returns to deficit”. This was technically true as we did apparently have a surplus in the last quarter of 2009. However if you look at the numbers which the ONS shows on a chart, every other quarter since 2005 has shown a deficit often a substantial one so I am afraid it is quite possible that it was due to the highly erratic nature of this series. Indeed in the first quarter of 2010 we returned to a current account deficit of over 2.5% of GDP. So I would love to confirm signs of more than a modest overall improvement since our exchange rate depreciation in 2007/08 but it simply is not there and I have been somewhat amazed to see experienced economists claiming it.
However I wish to repeat again my view that Current Account figures are very erratic and incredibly unreliable. I discuss them from time to time as they are all we have on the subject but they are of very poor quality and are often heavily revised years after the event.
UK Inflation remains well above target
The Office for National Statistics has today reported that Consumer Price Inflation was 3.2% in June down from 3.4% in May, that Retail Price Index (RPI) inflation was 5% in June down from 5.1% in May and that our old inflation target RPIX (which excludes mortgage costs) was also down from 5.1% to 5%. So better but still way above target (again).
What caused this months changes?
Falling petrol and diesel prices are by far the main drivers to the downward pressure to CPI annual inflation between May and June. Prices for fuels and lubricants fell by 1.9 per cent this year between May and June but rose by 3.8 per cent between the same two months a year ago. The next most significant downward pressure came from clothing and footwear where price falls this month are a record for the June sales season.
The largest upward pressures to the change in CPI inflation between May and June came from miscellaneous goods and services and air transport. Rather curiously the annual inflation rate for all insurance in June 2010 stands at 22.2 per cent, a record.
Additionally there was upward pressure to the change in the RPI annual rate from housing. This was driven by house depreciation, which rose this year but fell a year ago.
Producer Price Inflation
Last week we got figures for producer price inflation in the UK. According to the Office for National Statistics output price ‘factory gate’ annual inflation for all manufactured products rose 5.1 % in June compared with 5.7% in May. Input price annual inflation rose 10.7 % in June compared to a rise of 11.5 % in May.
So again these were lower figures but are still way above what one might expect at this stage of the cycle. Please take a look again at what input price annual inflation is because this is a sign of what inflation is at the beginning of the cycles for our manufacturing and production industries and it has been above 10% for some time now.
There is no escaping the fact that the UK has a serious inflation problem which has persisted now for the first half of 2010. Whilst it may drift lower as the year goes on unless we see substantial falls in the oil price or a rally in our exchange rate (particularly against the US Dollar) I do not expect it to fall substantially and we may well be still above target when it gets a boost from the rise in Value Added Tax expected in January 2011. I notice for example that Deutsche Bank expect it to average 3.1% this year. So yet again I would like to ask the Monetary Policy Committee for their definition of the words “temporary” and”blip”.
Petrol prices (or rather diesel in my case) have drifted lower so they may in the short-term be a dampening influence but I notice that last months fall in inflation was caused by also sales of clothing and footwear. So the implied view is that many other prices did not fall. Now think again of the economic growth figures that we saw yesterday. These were not convincing giving us slow weak growth (particularly with the depth of the recession we have just had….) which is now combined with seemingly persistent inflation. Whilst the inflation levels are lower this does again remind me of the stagflation of the 1970s.
As a theoretical thought I notice that for once many people are concentrating on the tail ends of the probability distribution. What I mean by this is that there is much talk of deflation/depression at one polar extreme and high or hyper-inflation at the other. As for much of my career I have been an options trader this is a curious development as you see usually investors translate low probabilities as being zero. At the moment low probabilities are being multiplied and exacerbated to such a degree that some seem to think there is no alternative which of course itself has echoes of the past with the acronym tina being associated with Mrs.Thatcher. For now I wish to point out that there are many other alternatives.
I regularly point out the difference between our current inflation target and our old one as there has been quite a gap this year and notice that when people talk to me they often mention this as being a surprise to them. This month we find that CPI is 1.2% over its starget.However our old index of RPIX is at 5% which makes it some 2.5% over its old target or double it if you like. I find it an eloquent observation on the changes which were made in 2003 to our inflation targets. It is a shame in my view that those responsible for the change are not made to explain and justify their action in this regard.
Just to add to the mix we had figures yesterday for the narrow version of our money supply where annual growth in notes and coins in circulation fell sharply to 5.8% in June from 6.5% in May. Unfortunately this only reinforces the dangers of a version of stagflation developing.