Yesterday was a day which saw strong rallies in equity markets. It started in the Far East with the Nikkei 225 rallying 116 points and carried on around the world. The UK FTSE 100 surged nearly a hundred points to over 5600 and the Dow Jones Industrial Average rallied some 145 points to 10753. This meant that the Nikkei can still not get within 1000 points of the Dow Jones in spite of its favourable response to the Bank of Japan’s currency intervention to try to weaken the Yen of last Wednesday. Indeed as this morning the Nikkei slipped slightly to 9602 the spread now stands at 1151 points. At the same time the US government bond market rallied too with the ten-year yield falling by 0.04 to 2.71%. To me these rallies look as though there still may be some hope that the Federal Open Markets Committee which meets today will launch the so-called QE 2. For the uninitiated QE 2 means a resumption of asset purchases which are likely to be US government bonds and would be an expansion of the current rate of purchases which will be some US $27 billion this month. The purpose of this is to put more money into the economy in the hope of leading to looser credit conditions and encouraging economic growth. Although there is a theoretical inconsistency as the requirement for QE 2 means that QE 1 which spent some US $1300 billion failed.
Moving onto currency markets this morning has seen a slight weakening of the Yen as it now stands at 85.30 versus the US dollar and 111.69 versus the Euro. Perhaps we are seeing the first challenge to the intervention by the markets and the Bank of Japan had better be alert and those who had for some strange reason called the intervention a success already might be a little more willing to let time pass in future.We have not even had a week yet.
These continued what seems to be an inexorable march upwards yesterday with the Commodity Research Bureau’s spot index rising by 3.23 to 478.72. Indeed there was a strong “agflation” element to the rise as the fats and oils component rose by 20.96 to 460.26 for a move of 4.7% on the day,and the livestock component rose by 15.91 to 512.63 for a rise of 3.2% on the day. So we are seeing sustained rises in food products at this time which will feed into prices and are likely to contribute to retail price inflation, this of course sits oddly with disinflation fears.
The UK Economy: is it slowing down?
After a very strong performance in the second quarter of 2010 where economic growth was measured at 1.2% more recent evidence on the UK has shown signs of a slowdown. Some only takes us back down to what in themselves are solid numbers for example the most recent growth estimate from the NIESR suggested that we were growing at a quarterly growth rate of 0.7% which would have led to smiles at the beginning of the year. The European Commission has raised it forecast for UK growth in 2010.
In 2010 as a whole GDP is expected to increase by 1.7%, up by ½ pp. when compared to the spring 2010 forecast.
I quote from it because in their usual regard for the rules of mathematics they project growth in the third and fourth quarters to be 0.5% and 0.6% which of course leads to a much higher number than 1.7%. It does say 2010 as a whole….
So the forecasts remain okay but some of the underlying data is more troubling and of course the forecasters records are patchy at times,for example the European Commission has just raised its forecast for Germany from 1.2% to 3.4% for 2010 so really the forecast does not inspire great confidence in itself.
UK Money Supply: M4 and bank lending
These figures are important because they go to the heart of the credit crunch and all the talk about lack of bank lending and liquidity etc. They are one of our better windows into what has been happening in this area. There had recently been some signs of an improvement and for a while the Bank of England was using it as an example of how its asset purchases had helped the economy although they soon tired of this for some reason.Improving credit conditions would be seen as perhaps a return to normal times and all that entails.
Unfortunately the provisional figures for August tell a disappointingly weak tale. If we look at M4 growth because it is one of our widest measures of the money supply we got the following.Seasonally adjusted M4 decreased by £4.1 billion (0.2%) in August, compared with an average monthly increase for the previous six months of £2.2 billion. The 12-month growth rate fell to a new low of 1.8% from 2.3% in July. The month on month rate dropped from 0.4% to -0.2%.
If we move onto M4 lending we find that this decreased by £18 billion (0.7%) in August. The 12-month growth rate fell to 0.6% from the 1.5% recorded in July. Indeed the Bank of England’s preferred measure which is M4 lending (excluding the effects of securitisations etc.) decreased by £18 billion (0.7%) in August as well. Its 12-month growth rate fell to -0.5% from 0.5% in July.
If we look at M4 lending from May 2010 to August we now have had growth figures of -13.8,-3,-12.6 and -18 billion respectively which is troubling.
If these provisional numbers are repeated in the revisions then we are seeing weak numbers which imply weak economic performance going forwards. There is something of an irony in economic growth forecasts being revised upwards as the broad measure of money supply weakens but in truth monetary changes like this usually do not have an immediate impact and are more likely to be felt in 2011 than 2010. Combining this with the governments cuts in public spending may make for an unhappy mix in 2011.
UK Housing Market
One of the main subjects which touches on money supply and bank lending levels is the UK housing market. For those unaware the UK has a higher percentage of owner-occupiers than its peers and most borrow the money to do so. However the market has suffered from low volume levels in terms of transactions for a while now, and indeed this has been a clear feature of the credit crunch as well as a drop in prices followed by a rally which took them back to 2007 levels at least where I live.
Yesterday gave us some further data on this matter as the number of mortgages granted to first-time home buyers fell in July to 19,400 from 19,700 in June and 20,100 a year earlier the Council of Mortgage Lenders reported. It also reported that approvals for loans to buy homes made by Britain’s six biggest lenders also fell to 45,000 in August from 47,000 in July, the lowest since April 2009. The total amount of borrowing for mortgage purposes was £11.4 billion in August which is a ten-year low for August and is down 14% on July.
Added to this there is more and more evidence that house prices in the UK are falling. We appear to be turning downwards and in my opinion this has been due for some time but has been delayed by a lack of liquidity and volume combined at least in London with the emergence of foreign buyers as the fall in the pound versus other currencies made UK property look cheaper in their home currency. Most of the surveys are showing this now although the proliferation of these surveys often leads to more confusion than clarity.
The UK housing market compared with Ireland’s
This is a matter which has troubled me for some time. I understand that Ireland had more of a property boom than the UK and so is likely to have more of a bust. My point is that in the UK we were in danger of having no bust at all in terms of residential property and even though commercial property did have falls I am not sure it fell by enough. Here are the thoughts which trouble me.
1. Some UK banks were players in the Irish property market but we hear little about this and in particular the likely losses.One of the features of the credit crunch is the lack of transparency from banks and indeed often from their regulators too.
2. Irish banks were involved in the UK commercial and residential property markets and on the latest figures out this week it would appear that 21% of the loans that have gone into NAMA were on the mainland UK and 6% in Northern Ireland. These will have to be sold over time.
3.The problems in the Irish economy will impact on the UK in the end if they carry on as they are as there is a lot of trade and travel between the two countries.
UK Public Finances: the price of higher inflation
After an improving recent trend the figures for August which have been released by the Office for National Statistics are disappointing. Net borrowing was 15.3 billion pounds compared with 13.5 billion pounds a year earlier and this is the highest figure for August since records started to be kept in this format in 1993. The figures I quote here include everything as I feel that is the right measure,the official figures are attempting to emphasise those which exclude financial intervention in a disappointing attempt to spin our level of national debt. Unless I am very much mistaken we have borrowed money to prop up our banks and they have not yet repaid it.
These figures exceeded forecasts too and this will be disappointing for the forecasters. I have examined the breakdown of the numbers and the factor which mainly caused the rise was debt interest which rose from £1.1 billion to £3.8 billion. This reminded me that August is the month where the figures for index-linked gilts are a strong component and if anyone is aware that inflation has been higher than last year it should be the economists doing the forecasts. Accordingly index-linked gilts which are linked to the Retail Price Index on a lagged basis are more expensive to finance than last year.
So there is an element for once of a genuine one-off influence for now anyway but even so the figures will be something of a warning shot for those who felt that our public finances could improve on their own.
Whilst 2010 has so far been a much stronger year than expected for the UK economy there are some worrying cross-winds developing which means that 2011 may open with a few challenges to it. Our housing market looks as though it is finally starting to turn downwards and that carries quite a few implications for the wider economy. We return yet again to the question is this a normal lull in a recovery phase or something worse? I suspect that I will be typing that sentence more than a few times in the months ahead!
The Federal Reserve and Ireland
There are two significant events today. As I stated earlier the Fed is meeting and just to be absolutely clear my view is that with such an unclear picture they should stay their hand and do nothing. However they have buckled under pressure before and perhaps a saving grace on this front is that the pressure on them has declined recently.
As I reported yesterday Ireland has two bond issues and in her current circumstances these will be watched closely. Just to add to the mix Spain will also be issuing some bonds and Greece some Treasury Bills.