Both the Euro zone and the United States try to massage their financial statistics whilst the UK’s housing market continues to trouble me

Sometimes in economics and finance there are ironies and over the past 24 hours Japan has suffered one in a way. After the downgrade by Standard and Poors that I reported on yesterday markets responded. The exchange rate of the Yen against the US dollar fell towards 83 and the Nikkei 225 equity index dropped by 118 points to 10,360, although her government bond market brushed it off and ignored it! I did point out yesterday that it was trading as if it had a completely different rating and that it questioned many published views on the effect of ratings changes. The irony comes with the data on the Japanese economy that has been released. After pointing out that her exports were growing strongly yesterday, today saw a surprise fall in Japanese unemployment from 5.1% to 4.9% with 190,000 more Japanese finding work.

In addition we saw a reduction in the rate of Japan’s disinflation as the measure the Bank of Japan follows consumer prices excluding fresh food declined 0.4 percent against a year earlier,which is the lowest annualised fall since 2009.  If we take the consumer price index without such a distortion the rate of fall reduced to 0.7% from 0.9%. If we look for what has caused this it appears to be our familiar friend rising commodity prices feeding into the system. Remember that because of her sustained disinflation or falling prices this is welcome in Japan and is helping her achieve one of the Bank of Japan’s objectives that of ending 21 months of falling prices. However whilst this may be good news for the Bank of Japan it is not so good news for Japan’s workers as they will see their real wages squeezed which is becoming a familiar theme around the world.

Rising Commodity Prices continue

On the matter of commodity prices they are continuing to rise. The Commodity Research Bureau spot index has now breached the 550 level as it rose 1.88 points to 550.04 which continues its strong growth trend since the beginning of December 2010, and all of the sub-components rose. The oil price is much harder to read at present. The West Texas Intermediate (WTI)  measure which I follow has dropped back to just under US $86 per barrel but the UK Brent measure has not dropped at all and has remained around US $98 and some of the Asian measures have behaved like it. I am told that some of this is down to demand for diesel but it is confusing as I always thought that WTI was supposed to be sweeter lighter crude and hence better.

The human cost of these rising commodity prices is being felt in North Africa right now where we are seeing riots to which they have contributed in both Tunisia and Egypt. Let us hope that these do not spread.

US Unemployment rises

We have got used to improvements in the US initial claims or registered unemployment figures which we receive each Thursday. Accordingly the figures below added to what has been a weak of surprises. From the US Department of Labor.

In the week ending Jan. 22, the advance figure for seasonally adjusted initial claims was 454,000, an increase of 51,000 from the previous week’s revised figure of 403,000. The 4-week moving average was 428,750, an increase of 15,750 from the previous week’s revised average of 413,000.

If we move on from the shock headline figure and move to the (hopefully) more reliable four week average we see a disturbing rise of 15,750. Just like in the UK the numbers were blamed on bad weather aka snow, and just like the UK we will need to see more data before we can make our mins up. Perhaps we got a reason in these figures why the US central bank the FOMC was particularly circumspect on the subject of unemployment in Wednesday’s statement.

The durable good figures for December were a little disappointing too, according to the Census Bureau.

New orders for manufactured durable goods in December decreased $5.0 billion or 2.5 percent to $191.0 billion, the U.S. Census Bureau announced today. This decrease, down four of the last five months, followed a 0.1 percent November decrease. Excluding transportation, new orders increased 0.5 percent. 
Now these numbers are an erratic series but a decrease in four of the last five months has a more reliable significance and for this month if we exclude the most erratic part of transportation although there was a small rise it was less than hoped for. Just to explain why one might exclude transportation there have been many occasions in the past where the numbers have been influenced by how many planes Boeing has delivered or not as the case may be.
 The ending of the Supplementary Financing Programme will boost the US Money Supply
 Back in 2008 the US Treasury instituted this programme as part of its crisis measures.  In essence this programme is where the US Treasury issues Treasury Bills on behalf of the US central bank or Federal Reserve, and as market participants buy them they exchange them for cash and the money supply shrinks. You might wonder why the Federal Reserve does not do this itself after all it is a classic central bank operation. When I wonder this it occurs to me that the money not used for this purpose can then be used to expand the Fed’s balance sheet. This might explain why the programme was ended before but then came back.

The amount is not inconsiderable as the reduction is from US $200 billion to US $ 5 billion. So we will see a boost to the US money supply and a matching effect on the already rather extended  balance sheet of the US central bank. You might wonder why this is happening, well it is because the United States is in danger of breaching its US $ 14,300 billion debt ceiling and this provides some US $195 billion of flexibility. One fiddle meeting another you might think and you would be right!

Eurostat blocks an attempted fiddle by the Euro zone regarding the European Financial Stability Facility

I have written often on the subject of the European Financial Stability Facility and its flaws. Well Eurostat yesterday created one more. In my opinion the hope of Europe’s leaders was that by creating a supranational body which then lends money the debt would not appear on any countries national debt figures. In this way they presumably intended to mimic the International Monetary Fund which has the ability to provide relief to (politicians overspending) fiscal problems without the money appearing in a national debt ledger. Magic isn’t it?

Eurostat has spotted this and is on the case and the emphasis is mine.

Eurostat therefore considers that the EFSF is an accounting and treasury tool to enable the same conditions for access to borrowing for members of the euro area, acting exclusively on behalf of them and under their total control.  

Based on the preceding analysis, Eurostat therefore considers that the debt issued by the EFSF for each support operation for a member of the euro area must be reallocated to the public accounts of States providing guarantees, in proportion to their share of the guarantees for each debt issuing operation. It will be therefore accounted for in the government debt of States having provided guarantees.

The significance of this

I have written on several occasions about the way that using Germany’s credit rating has appeared to affect the prices of her government bonds adversely and raised the yields which have risen at the ten-year maturity by 1% since last summer. Now some of the EFSF lending will find its way onto Germany’s national debt figures which may led to some further thoughts in Berlin. However there is a deeper problem many of the countries with issues going forward such as Spain and Portugal will find their figures affected by this too in yet another misfire of this flawed rescue plan.So it may now manage to weaken the fiscal figures of the countries it is likely next to help which is not much of an effort from something badged as a rescue scheme is it? Whisper it quietly but France may start to look a little vulnerable too if the EFSF finds itself having to lend more and more.

Market Impact

After considering the implications of this you will be unsurprised to learn that government bond yields rose and prices fell across the Euro zone yesterday. Portugal’s ten-year yield went above 7% to close at 7.07% and at the moment the European Central bank has stopped buying her debt which I think proves my point that it effectively bankrolled her last debt auction. Now it is over it seems much less inclined to intervene. If we look at Italy her equivalent yield rose to 4.8% putting her close to the threshold of being sucked into the crisis and Spain’s rose back to around 5.5%.

So a rescue now damages the public accounts of the rescuers which includes countries which may be in need of future rescue! If we look for a musical theme I think we find it in the Alan Parsons Project’s ” Damned if I do I’m damned if I don’t”. Although one point should be made and that is well done to Eurostat.

More bad news for the UK economy

We have received more bad news for the UK economy over the past 24 hours. The GFK consumer confidence survey has dropped by 8 points to minus 29. Whilst this is worrying I think some caution is always required when dealing with such surveys which can be unreliable. For me more worrying is Hometrack’s report that house prices have fallen for the seventh month in a row and by 0.5% in January so far . I have written before that I feel that this is going to be a hard year for the UK housing market. Please do not get me wrong it needs a downward adjustment but my fear is that this adjustment could accelerate in 2011 and there is a danger of it becoming something of a rout. I wrote an article elsewhere back in December about the Bank of England’s withdrawal of its Special Liquidity Scheme  and the impact I feel that withdrawal around £9 billion per month is likely to have on the availability of credit in 2011 and in particular on mortgage finance. I feel more and more that this move was and is a policy error.

Here is a link to that article:


9 thoughts on “Both the Euro zone and the United States try to massage their financial statistics whilst the UK’s housing market continues to trouble me

  1. Looking at the housing situation we have very high salary multiples at a time of exceptionally low interest rates (due to rise) and high taxes (also due to rise again).

    I don’t see this as sustainable. Either house prices fall, or incomes must rise. Now with inflation at 5% incomes could errode the over pricing, but the recession is holding wage demands lower, and with both tax rises and essential spending costs rising the real cost of housing is actually increasing at a time when many simply can’t afford it.

    Unless pay rises take off I can only see a situation where the market will fall significantly.

  2. Hi Shaun

    Regarding the UK housing market and bank lending, I would be interested to know the proportion of secured bank lending going in to a) London residential property b) rest of UK residential property. A few anecdotes suggest that national high street banks are having an exciting time lending in to the London bubble with penthouses reaching pre-crisis valuations. Then, arises the question of there being two UK economies : London and its environs / the rest.

    I wonder if policy-makers understand the implications of a global sub-state sucking credit in to itself and away from SMEs?

    • ”I wonder if policy-makers understand the implications of a global sub-state sucking credit in to itself and away from SMEs?”


      I’m sure they don’t. We have a comparable situation locally where a PROPOSED large scale development is actually sucking in all possible inward investment, to the detriment of what I would consider perfectly costed and sustainable smaller developments in neighbouring areas. When I brought it to the attention of the powers that be they told me that was an impossible scenario it couldn’t happen. Not only can it happen it’s actually happening and that is before they get detailed planning!

    • Hi Shire
      I think that you are right about the London property bubble but have heard the private banks are probably doing more business than the high street ones so the numbers may be more obscure than usual. As to what may happen going forwards this article in tonights London Evening Standard was drawn to my attention.
      “Property agent King Sturge predicts Greater London property prices will jump nearly 30% by the end of 2015, with average prices rising £84,000 to around £368,000.

      This far outstrips the 14% increase expected across the rest of the UK during the same period as prices are boosted by stronger growth, the Olympics and a shortfall of property in the capital.”

      The moral hazard in the article is those two words property agent but if we take their optimistic forecast out of it the London property bubble is continuing to decouple from the rest of the country. There is not much volume in many areas but yes as far as I can tell pre-crisis prices have been matched or even beaten in some places. The image it creates of haves and accordingly have-nots is an unwelcome one…

      And bubbles have a habit of feeding crashes.

  3. I predict the return of the special liquidity scheme or some other version. In my opinion the last government followed a policy of lifting house prices as this has many virtues, including people feeling that they are doing well.

    I do not believe any government can afford a sharp contraction in house prices as confidence would fall from the system. I would be particularly interested to see a time line, average house price (inflation adjusted) with QE, SLS, Interest Rates marked. Does anyone know where I might find such a thing? The reason being I have a suspicion that the entire monetary policy may have been supporting house prices? Coincidentally or not.

  4. Where is the money going to come from to fund this SLS? The last one was put in place by Labour to cover their election. If you pour capital into housing then there is less for the rest of the economy. Money doesnt grow on trees unless you like inflation.

    London house prices are exploding because the financial institutions have been massively bailed out as well as business booming from shares and commodities. This is driving employment in London and with interest so low it drives the market. The rest of the country is being squeezed by the inflation, so whilst London booms the rest of the economy crashes.

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