Monetary Policy Committee Minutes reveal indecision whilst UK public finances improve

After a trading session which swung both ways the US Dow Jones Industrial Average closed only 9  points up yesterday. In some ways that summed up both the asset risk and economic position at this time which is uncertain and unsure. That had been some insight on this front by a member of the FOMC which I shall talk more about later. This was followed by a 122 point rally in the Nikkei 225 index in Japan which narrowed the gap between it and the Dow which as I have mentioned recently was historically quite wide. In spite of today’s narrowing it is still some 1053 points. The reason for the Japanese equity market rally seems to be rumours of a new Japanese stimulus package. The lost decade has seen plenty of those come and go so to have a real impact I suspect some more imagination will be required. Either way there is an expectation of some news overnight probably from the Bank of Japan. If it actually wants to improve things let us hope it does not simply repeat past (failed) actions

Commodity prices as measured by the Commodity Research Board spot index edged some 0.74 higher to 452.76 with some components rising and some falling for a mixed picture and for once the metals component fell a little.

The FOMC says it didn’t know anything more than the markets when it acted

On Tuesday night Minneapolis Federal Reserve President Narayana Kocherlakota gave an interesting speech which reflected on the recent FOMC policy move or QE-lite. As markets always speculate as to whether a central bank knows more than it is letting on we got an interesting reply to this.

The FOMC’s decisions were largely predicated on publicly available data about real GDP, its various components, unemployment, and inflation. I would say that there is no new information about the current state of the economy to be learned from the FOMC’s actions or its statement.

So that’s a no then although the reason for the concern was tucked away in the same paragraph as we also got.

The FOMC’s decision has had a larger impact on financial markets than I would have anticipated.

Now you can look at this two ways. The first is to say that this is reasonable as in comparison to previous efforts at asset purchases the new effort is relatively small. But if you look again we have government bond prices rising rather unsurprisingly in both instances but what might be called riskier assets such as equities and crude oil fell after QE-lite which contrasts with the rises after the original QE. So by larger President Narayana Kocherlakota may actually mean the wrong way! Central bankers often do speak in a type of code.

At the bottom of this is probably the increasing concern as to how much influence policy measures such as QE actually have on the real economy.

UK Monetary Policy Committee Minutes

Perhaps the most revealing part of these minutes was this section.

The Committee considered arguments in favour of a further easing in the stance of monetary policy…………. But there were also arguments in favour of a small increase in Bank Rate from its exceptionally low-level………….. There were also arguments for maintaining the stance of policy this month.

I am sure that some reading this will be thinking of the old joke about economists “on the one hand,on the other hand” etc. although the MPC  have expanded this to all three possibilities! At least Paul the Octopus doesn’t have the job because on such logic he could maybe come up with eight possibilities,although to be fair to him his football predictions betrayed no such uncertainty.

The MPC did however have an interesting view on the Euro zone

A key question was how much of the strength in Germany was also being seen in France and the Benelux countries – which together accounted for a significant share of UK exports.

This is a key question which got a little nearer an answer with the strong economic growth in Germany in the second quarter of this year which was not matched elsewhere in the euro zone. We also got a summary of the economic issues facing the United States.

GDP had risen by 0.6% in Q2, although revisions to the back data had lowered the estimated level of output by 1%. Retail sales had fallen again in June, and consumer confidence had fallen in July. The housing market remained moribund. Manufacturing output had fallen in June, and the PMI had fallen in July. It remained possible that these weak indicators simply reflected the normal volatility of data in the early stages of recovery. And there were some positive indicators: for example, the non-manufacturing PMI had risen in July.

This is interesting because central banks are always very careful about treading on other central banks toes but even so there is/was a message here I think. Moving onto inflation we did get one or two insights from the MPC.

The recent decline in goods price inflation suggested that the impact on prices of sterling’s depreciation might be near to completion

That may turn out to be true as the 2007/08 depreciation in the value of the pound will not affect us forever but we also got.

Despite the fall on the month, the annual rate of producer input price inflation was still high. And there were upside risks from wholesale food and utility prices in the near term. It remained difficult to quantify the effect of past and prospective relative price movements – such as shifts in commodity prices and in indirect tax rates – on the near-term path for CPI inflation.

High producer price inflation has been a problem for the MPC all this year and even they I suspect from this statement are starting to wonder about the real meaning of their own use of “temporary blip”. In UK economic history this phrase has been used a lot more often than it has actually been true particularly with regard to inflation and its trends.

Letters between the Governor and the Chancellor to explain inflation divergences from target

It appears that the explanatory letter from the Governor to the Chancellor and indeed the reply is getting more perfunctory and shorter. Whilst writing the letter has become a regular routine for the Governor and is likely to become one for the Chancellor I suspect I am not alone in hoping that they show a little more interest in this task. Perhaps the Governor might also like to show at least some contrition as it is after all part of his job to try to avoid such a task.

UK Public Finances and Retail Sales

After disappointing figures for June these improved in July according to the Office for National Statistics. Public-sector net borrowing was £3.2 billion in July which is much better than last year’s £5.5 billion. So far for this financial year we have borrowed some £42.6 billion which is lower than last year’s £46.4 billion for the same period so it looks like there is an improving trend. The movement in our ratio of national debt to Gross Domestic Product is not quite so heartening as it has risen from 53.0% to 62.1% over the past year.

The main driver for the improvement was what are classified as taxes from income on wealth which rose from £21 billion last July to £24 billion this. Perhaps this reflects the growth in the UK economy recently reported for the second quarter of this year and backs this up to some extent but as ever the picture is incomplete.

One disappointing feature is the way that ONS data on this subject leads with numbers which exclude financial interventions. You have to look carefully at the data to track figures which include them. I wish they would stop this as unless I am very much mistaken the UK taxpayer remains heavily invested in the UK financial sector and accordingly the headline figures should represent this in my opinion. It is not the ONS’s job to undertake what is in effect a spinning of the news.

There was more mixed news on retail sales which between June and July increased by 1.1 % which was better than forecast but the year on year numbers were not quite so good as they rose by only 1.3%. However these numbers are an erratic series so not too much weight should be put on them either way.

Market Omens

There has been some discussion recently about long-term signals on equity markets such as the aggressively named Hindenburg Omen. The Financial Times has drawn my attention to some work in the past by George Tritch back in the nineteenth century. I am afraid his market sell signal took place in 2007 so those who want to sell have missed the best opportunity according to him.However his chart suggests that 2012 will be a good year to buy. I will leave everyone to make their own mind up on this….

Stanley Druckenmiller

I notice that Stanley Druckenmiller is retiring. This is a signal of the passage of time in a way as it was some time ago I met him in the course of having dealings with him and Soros Fund Management.  I would like to wish him well for the future. Also it reminds me of the fact that the building I had lunch at  in its top floor restaurant later that day is no longer in existence.


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