Are we on the road to a US $100 oil price?

As Easter ends – and one which was simply glorious in London – those of us reacquainting ourselves with financial markets will see one particular change. That is the price of crude oil as the Financial Times explains.

Crude rose to a five-month high on Tuesday, as Washington’s decision to end sanctions waivers on Iranian oil imports buoyed oil markets for a second day.  Brent, the international oil benchmark, rose 0.8 per cent to $74.64 in early European trading, adding to gains on Monday to reach its highest level since early November. West Texas Intermediate, the US marker, increased 0.9 per cent to $66.13.

If we look for some more detail on the likely causes we see this.

The moves came after the Trump administration announced the end of waivers from US sanctions granted to India, China, Japan, South Korea and Turkey. Oil prices jumped despite the White House insisting that it had worked with Saudi Arabia and the United Arab Emirates to ensure sufficient supply to offset the loss of Iranian exports. Goldman Sachs said the timing of the sanctions tightening was “much more sudden” than expected, but it played down the longer-term impact on the market.

 

So we see that President Trump has been involved and that seems to be something of a volte face from the time when the Donald told us this on the 25th of February.

Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile! ( @realDonaldTrunp)

After that tweet the oil price was around ten dollars lower than now. If we look back to November 7th last year then the Donald was playing a very different tune to now.

“I gave some countries a break on the oil,” Trump said during a lengthy, wide-ranging press conference the day after Republicans lost control of the House of Representatives in the midterm elections. “I did it a little bit because they really asked for some help, but I really did it because I don’t want to drive oil prices up to $100 a barrel or $150 a barrel, because I’m driving them down.”

“If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.” ( CNBC)

If we stay with this issue we see that he has seemingly switched quite quickly from exerting a downwards influence on the oil price to an upwards one. As he is bothered about the US economy right now sooner or later it will occur to him that higher oil prices help some of it but hinder more.

Shale Oil

Back on February 19th Reuters summarised the parts of the US economy which benefit from a higher oil price.

U.S. oil output from seven major shale formations is expected to rise 84,000 barrels per day (bpd) in March to a record of about 8.4 million bpd, the U.S. Energy Information Administration said in a monthly report on Tuesday……..A shale revolution has helped boost the United States to the position of world’s biggest crude oil producer, ahead of Saudi Arabia and Russia. Overall crude production has climbed to a weekly record of 11.9 million bpd.

Thus the US is a major producer and the old era has moved on to some extent as the old era producers as I suppose shown by the Dallas TV series in the past has been reduced in importance by the shale oil wildcatters. They operate differently as I have pointed out before that they are financed with cheap money provided by the QE era and have something of a cash flow model and can operate with a base around US $50. So right now they will be doing rather well.

Also it is not only oil these days.

Meanwhile, U.S. natural gas output was projected to increase to a record 77.9 billion cubic feet per day (bcfd) in March. That would be up more than 0.8 bcfd over the February forecast and mark the 14th consecutive monthly increase.

Gas production was about 65.5 bcfd in March last year.

Reinforcing my view that this area has a different business model to the ordinary was this from Reuters earlier this month.

Spot prices at the Waha hub fell to minus $3.38 per million British thermal units for Wednesday from minus 2 cents for Tuesday, according to data from the Intercontinental Exchange (ICE). That easily beat the prior all-time next-day low of minus $1.99 for March 29.

Prices have been negative in the real-time or next-day market since March 22, meaning drillers have had to pay those with pipeline capacity to take the gas.

So we have negative gas prices to go with negative interest-rates, bond yields and profits for companies listing on the stock exchange as we mull what will go negative next?

Economic Impact on Texas

Back in 2015 Dr Ray Perlman looked at the impact of a lower oil price ( below US $50) would have on Texas.

To put the situation in perspective, based on the current situation, I am projecting that oil prices will likely lead to a loss of 150,000-175,000 Texas jobs next year when all factors and multiplier effects are considered.  Overall job growth in the state would be diminished, but not eliminated.  Texas gained over 400,000 jobs last year, and I am estimating that the rate of growth will slow to something in the 200,000-225,000 per year range.

Moving wider a higher oil price benefits US GDP directly via next exports and economic output or GDP and the reverse from a lower one. We do get something if a J-Curve style effect as the adverse impact on consumers via real wages and business budgets will come in with a lag.

The World

The situation here is covered to some extent by this from the Financial Times.

In currency markets, the Norwegian krone and Canadian dollar both rose against the US dollar as currencies of oil-exporting countries gained.

There is a deeper impact in the Middle East as for example there has been a lot of doubt about the finances of Saudi Arabia for example. This led to the recent Aramco bond issue ( US $12 billion) which can be seen as finance for the country although ironically dollars are now flowing into Saudi as fast as it pumps its oil out.

The stereotype these days for the other side of the coin is India and the Economic Times pretty much explained why a week ago.

A late surge in oil prices is expected to increase India’s oil import bill to its five-year high. As per estimates, India could close 2018-19 with crude import bill shooting to $115 billion, a growth of 30 per cent over 2017-18’s $88 billion.

This adds to India’s import bill and reduces GDP although it also adds to inflationary pressure and also perhaps pressure on the Reserve Bank of India which has cut interest-rates twice this year already. The European example is France which according to the EIA imports some 55 million tonnes of oil and net around 43 billion cubic meters of natural gas. It does offset this to some extent by exporting electricity from its heavy investment in nuclear power and that is around 64 Terawatt hours.

The nuclear link is clear for energy importers as I note plans in the news for India to build another 12.

Comment

There are many ways of looking at this so let’s start with central banks. As I have hinted at with India they used to respond to a higher oil price with higher interest-rates to combat inflation but now mostly respond to expected lower aggregate demand and GDP with interest-rate cuts. They rarely get challenged on this U-Turn as we listen to Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

Next comes the way we have become less oil energy dependent. One way that has happened has been through higher efficiency such as LED light bulbs replacing incandescent ones. Another has been the growth of alternative sources for electricity production as right now in my home country the UK it is solar (10%) wind (15%) biomass (8%) and nukes (18%) helping out. I do not know what the wind will do but solar will of course rise although its problems are highlighted by the fact it falls back to zero at night as we continue to lack any real storage capacity. Also such moves have driven prices higher.

As to what’s next? Well I think that there is some hope on two counts. Firstly President Trump will want the oil price lower for the US economy and the 2020 election. So he may grow tired of pressurising Iran and on the other side of the coin the military/industrial complex may be able to persuade Saudi Arabia to up its output. Also we know what the headlines below usually mean.

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Australia faces both falling house prices and a falling money supply

This morning has brought us up to date with news from what the Men at Work described as.

Living in a land down under
Where women glow and men plunder
Can’t you hear, can’t you hear the thunder?

That is of course what was called Australis and then Australia and these days in economic terms can be considered to be the South China Territories. The monetary policy statement from the Reserve Bank of Australia (RBA)  reinforces the latter point as you can see.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.

One needs to read between the lines of such rhetoric as for a central banker “remains reasonable” is a little downbeat in reality as we note the following use of “declined” “softened” and “slower”.But he was providing a background to this.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

In essence the heat is on for another interest-rate cut and if you are wondering why? There is this.

GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output.

I will come to the central bankers fear of negative wealth effects from what they call an “adjustment in housing markets” in a moment as we note they cannot bring themselves to mention lower house prices. The pattern of GDP growth looks really rather poor as we see that the trend goes 1.1%,0.8% and then 0.3% and now 0.2%. So we see a familiar pattern of much weaker growth in the second half in 2018 which if we see again in the first half of this year will see the annual rate of growth halve. Actually it may be worse than that as the only factor driving growth according to Australia Statistics was this.

Government final consumption expenditure increased 1.8% during the quarter contributing 0.3 percentage points to GDP growth.

So without it the economy would have shrunk and Australia might be on course for something it has escaped for quite a while which is a recession. Also according to the Australia Treasury Budget from earlier it is planning a dose of austerity.

The total turnaround in the budget balance between 2013-14 and 2019-20 is projected to be $55.5 billion, or 3.4 per cent of GDP.

The Government’s plan for a stronger economy ensures it can guarantee essential services while returning the budget to surplus.

This budget year will see a surplus of $7.1 billion, equal to 0.4 per cent of GDP.

Budget surpluses will build in size in the medium term and are expected to exceed 1 per cent of GDP from 2026-27.

So as you can see it seems unlikely that government spending will continue to boost the economy. Also as they are assume growth of 2.25% then those numbers as so often seem rooted in fantasy rather than reality. Next if we switch back to the RBA the austerity plan comes at this time.

 In Australia, long-term bond yields have fallen to historically low levels.

In fact they fell to an all time low for the benchmark ten-year at 1.72% recently and is spite of a bounce back are still at a very low 1.82%. So yet again we are observing a situation where countries borrow heavily when it is expensive and try in this instance not to borrow at all when it is cheap. I know it is more complicated than that but we also have this into an economic slow down.

The Government is focused on reducing net debt as a share of the economy, which is expected to peak in 2018-19 at 19.2 per cent of GDP.

The Government is on track to eliminate net debt by 2029-30.

So it may look to be Keynesian but reality seems set to intervene especially on the economic growth forecasts.

House Prices

Again we see that the Governor of the RBA cannot bring himself to say, falling house prices. It is apparently just too painful.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low.

Even worse it has implications for “the precious”.

 At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased.

Indeed a central banker would have his/her head in their hands as they see the negative wealth effects in the latest quarterly national accounts.

Real holding losses on land and dwellings were $170.8b. This marks a fourth consecutive quarter of losses and reflects the falling residential property prices over the past year. ……The real holding losses have translated into the first fall in household assets (-1.5%) since the September quarter 2011. Household liabilities increased 1.0%.

Some of the latter was falling equity prices which have since recovered but house prices have not. Here is ABC News on the first quarter of 2019.

On a national basis, the average house price fell 2.4 per cent to $540,676, and apartment prices dropped 2.2 per cent to $484,552 during that period.

CoreLogic observed that markets which experienced their peaks earlier had experienced sharper downturns.

Darwin and Perth property prices skyrocketed during the mining boom, but peaked in 2014. Since then dwelling values in both capitals have fallen by 27.5 per cent and 18.1 per cent respectively.

So it seems likely that the value of the housing stock fell again. If we move to the official series we see that in the rather unlikely instance you could sell all of Australia’s houses and flats in on e go then from the end of 2015 to early 2018 the value rose by one trillion Aussie Dollars from a bit below 6 trillion to a bit below 7. Now in a development to pack ice round a central bankers heart it has fallen to 6.7 trillion officially and if we factor in other measures is now 6.6 trillion Aussie Dollars and to quote Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fallin’

Comment

Australia escaped the worst of the credit crunch via its enormous natural resource base. According to the RBA index of commodity prices that has not ended.

Preliminary estimates for March indicate that the index decreased by 0.9 per cent (on a monthly average basis) in SDR terms, after increasing by 5.3 per cent in February (revised)…….Over the past year, the index has increased by 11.0 per cent in SDR terms, led by higher iron ore, LNG and alumina prices. The index has increased by 16.6 per cent in Australian dollar terms.

But now we see that the domestic economy has weakened whilst the boost from above has faded. If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February. If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms. Thus the outlook for the domestic economy remains weak and could get weaker.

 

 

Argentina is counting the cost of its 60% interest-rates

In these times of ultra low interest-rates in the western world anywhere with any sort of interest-rate sticks out. In the case of Argentina an official interest-rate of 60% sticks out like a sore thumb in these times and in economic terms there is a second factor in that it has been like that for a while now. So the impact of this punishing relative level of interest-rates will be building on the domestic economy. Also the International Monetary Fund is on hand as this statement from Christine Lagarde yesterday indicates.

“I commended Minister Dujovne and Governor Sandleris on decisive policy steps and progress thus far, which have helped stabilize the economy. Strong implementation of the authorities’ stabilization plan and policy continuity have served Argentina well, and will continue to be essential to enhance the economy’s resilience to external shocks, preserve macroeconomic stability and to bolster medium-term growth.

“I would like to reiterate the IMF’s strong support for Argentina and the authorities’ economic reform plan.”

The opening issue is that sounds awfully like the sort of thing the IMF was saying about Greece when it was predicting a quick return to economic growth and we then discovered that it had created an economic depression there. Of course Christine Lagarde was involved in that debacle too although back then as Finance Minster of France rather than head of the IMF. Also the last IMF press conference repeated a phrase which ended up having dreadful connotations in the Greek economic depression.

It’s on track as of our last mission which was, you know, in December.

As the track was from AC/DC.

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell
No stop signs, speed limit
Nobody’s gonna slow me down

So let us investigate further.

Monetary policy

The plan is to contract money supply growth so you could look at this as like one of those television programmes that take us back to the 1970s.

In particular, the BCRA undertakes not to raise the monetary base until June 2019. This target brings about a significant monetary contraction; while the monetary base increased by over 2% monthly in the past few months, it will stop rising from now onwards. Then, the monetary base will dramatically shrink in real terms in the following months.

So you can see that the central bank of Argentina is applying quite a squeeze and is doing it to the monetary base because it is a narrow measure, Actually it explains it well in a single sentence.

The BCRA has chosen the monetary base as it is the aggregate it holds a grip on.

It is doing it because it can. Although I am a little dubious about this bit.

The monetary base targeting will be seasonally adjusted in December and June, when demand for money is higher.

It is usually attempts to control broad money that end up targeting money demand rather than supply. It is being achieved with this.

the BCRA undertakes to keep the minimum rate on LELIQs at 60% until inflation deceleration becomes evident.

Also there will be foreign exchange intervention if necessary, or more realistically there has been a requirement for it.

The monetary target is supplemented with foreign exchange intervention and non-intervention measures. Initially, the BCRA would not intervene in the foreign exchange market if the exchange rate was between ARS34 and ARS44. This range is adjusted daily at a 3% monthly rate until the end of the year, and will be readjusted at the beginning of next year. The BCRA will allow free currency floating within this range, considering it to be adequate.

Finally for monetary policy then monetary financing of the government by the central bank is over.

As it has already been reported, the BCRA will no longer make transfers to the Treasury.

Fiscal Policy

Another squeeze is on here as the BCRA points out.

Finally, the new monetary policy is consistent with the targets of primary fiscal balance for 2019 and of surplus for 2020.

Yes in terms of IMF logic but the Greek experience told a different story. There a weaker economy made the fiscal targets further away and tightening them weakened the economy in a downwards spiral.

So where are we?

The squeeze is definitely as my calculations based on the daily monetary report show that the monetary base has shrunk by just under 4% in the last 30 days. If we move onto the consequences of this for the real economy then any central bankers reading this might need to take a seat as the typical mortgage rate in December was 48%. To give you an idea of other interest-rates then an overdraft cost 71% and credit card borrowing cost 61%.

If we look for the impact of such eye-watering levels we see that mortgage growth was on a tear because annually it is 54% up of which only 0.1% came in the last month. Moving to unsecured borrowing overdraft growth has been -1.2% over the past 30 days but credit card growth has been 3.5% so perhaps there has been some switching.

Economic growth

This has gone into reverse as you can see from this from the statistics office.

The provisional estimate of the gross domestic product (GDP), in the third quarter of 2018, had a fall of 3.5% in relation to the same period of the previous year.
The seasonally adjusted GDP of the third quarter of 2018, with respect to the second quarter of 2018, showed a variation of -0.7%.

So a weaker quarter following on from a 4.1% dip in the second quarter of 2018 which was mostly driven by the impact of a drought on the agricultural sector. Looking back the Argentine economy did recover from the credit crunch pretty well but the recorded dip so far takes us back to 2011 or eight years backwards.

The IMF points out this year should get the agricultural production back which is welcome.

However,
in the second quarter, a rebound in agricultural
production (expected to fully recover the 30 percent
production lost in 2018 because of the drought)
should lead to a gradual pickup in economic activity.

But if we put that to one side there has to be an impact from the credit crunch. Also whilst this is good.

The recession and peso depreciation are quickly lowering the trade deficit.

It does come with something which has a very ominous sign for domestic consumption.

The adjustment mainly reflects
lower imports, reflecting a contraction in
consumption and investment.

Moving to inflation then here it is.

The general level of the consumer price index (CPI) representative of the total number of households in the country registered in December a variation of 2.6% in relation to the previous month.

Comment

There is a fair bit to consider here as we see a monetary squeeze imposed on an economy suffering from a drought driven economic contraction. Also I have form in that I warned about the dangers of raising interest-rates to protect a currency on May 3rd.

However some of the moves can make things worse as for example knee-jerk interest-rate rises. Imagine you had a variable-rate mortgage in Buenos Aires! You crunch your domestic economy when the target is the overseas one.

Interest-rates were half then what they are now and I have already pointed out what mortgage rates now are. As to what sort of a economic crunch is coming the latest from the statistics office looks rather ominous.

The statistics office’s monthly economic activity index fell 7.5% y/y in November after dropping 4.2% in the previous month.

As to the business experience this from Reuters gives us a taste of reality.

Like many small businessmen, Meloni has found himself caught in a vice. Sales from his plant in the town of Quilmes, 30 km (19 miles) outside the capital Buenos Aires, shrank by just over one third last year as Argentina’s economy sank deep into recession…..

 

Meloni said the plant, which makes fabrics, used to operate 24 hours a day from Monday to Saturday but now just operates 16 hours a day, five days a week. Like many other businesses, Meloni advanced the holidays to his roughly 100 employees with the hope that once summer ends in March, demand will pick up.

It is very expensive to make people in Argentina which keeps people in a job (good) but with lower pay from less work (bad) and if it keeps going will collapse the company (ugly).

Back in the financial world I also wonder how this is going?

About a year after emerging from default, Argentina has surprised investors by offering a 100-year bond.

The US-dollar-denominated bond is offered with a potential 8.25 per cent yield.

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Here are my answers to questions asked about the Euro area economy

Chinese economic growth looks set to slow further in 2019

This morning brings us up to date on what has been a theme for a little while now as we have observed one of the main engines of world economic growth starting to miss a beat or two. This from Bloomberg gives us some context and perspective.

China accounted for more than 36% of global GDP growth in 2016.

That sort of growth has led to this according to the Spectator Index.

China’s GDP as a share of US GDP. (nominal) 2009: 35.4% 2019: 65.8%

This has led to all sorts of forecasts around China overtaking the US in terms of total size of its economy with of course the same old problem so familiar of simply projecting the past into the future. Let us know switch to the official view published this morning.

In 2018, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the general working guideline of making progress while maintaining stability, committed to the new development philosophy, promoted high quality development, focused on the supply-side structural reform, stayed united and overcame difficulties.

And I thought I sometimes composed long sentences! It also provokes a wry smile if we convert that to the country where we are in as I mull Theresa May telling the UK we “stayed united and overcame difficulties.”

Gross Domestic Product

Firstly we are told a version of tractor production being on target.

According to the preliminary estimation, the gross domestic product (GDP) of China was 90,030.9 billion yuan in 2018, an increase of 6.6 percent at comparable prices over the previous year, achieving the set target of around 6.5 percent growth for the year.

But then we get a version of slip-sliding away.

Specifically, the year-on-year growth of GDP was 6.8 percent for the first quarter, 6.7 percent for the second quarter, 6.5 percent for the third quarter, and 6.4 percent for the fourth quarter.

The trend is exactly as we have been expecting. Also let us take a moment to note how extraordinary it is that a nation as described below can produce its economic output data in only 21 days. There’s mud in the eye of the western capitalist imperialists.

By the end of 2018, the total population of mainland China was 1,395.38 million  an increase of 5.30 million over that at the end of 2017.

That brings us to a clear problem which is that we can I think have confidence in the GDP trend but not in the outright number. Not everyone seems to believe that as many have repeated this sort of line.

According to just-released official statistics, ‘s grew 6.6% in 2018. While it’s the lowest annual annual expansion in almost 30 years, it still is quite a robust rate for an that faced — and is facing — several internal and external uncertainties.

That was Mohammed El-Erian of Allianz.

Industrial Production

Perspective is provided as I note that 6.2% growth is described as “slow but stable” and we remain on message with this.

the value added of the state holding enterprises was up by 6.2 percent……. and enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan, up by 4.8 percent.

A clear superiority of the state over foreign private investors and especially the pesky Taiwanese. But they cannot hide this.

In December, the total value added of the industrial enterprises above the designated size was up by 5.7 percent year-on-year, 0.3 percentage point higher than that of last month, or up by 0.54 percent month-on-month.

We are told about the monthly improvement which is welcome but it is still below the average.

The real growth of the total value added of the industrial enterprises above the designated size in 2018 was 6.2 percent, with slow yet stable growth.

So with 6.2% being slow and stable if 5.7% just slow? Many countries would love such a rate of growth but not China.

Services

Again we see a monthly rise being reported.

In December, the Index of Services Production was up by 7.3 percent year-on-year, 0.1 percentage point higher than that of last month.

However this is also against a backdrop of a weakening over the full year.

In 2018, the Index of Services Production increased by 7.7 percent over that of last year, maintained comparatively rapid growth.

That theme continues as we note that year on year growth was 8.3% in December of 2017.

Retail Sales

We find ourselves in familiar territory.

In 2018, the total retail sales of consumer goods reached 38,098.7 billion yuan, up by 9.0 percent over last year which kept fast growth……..In December, the growth of total retail sales of consumer goods was 8.2 percent year-on-year, or 0.55 percent month-on-month.

If we look back the reported growth rate in December 2017 was 10.2%.

Property

This has been an area that has fueled growth in China but Reuters now have their doubts about it.

Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2 percent in December from a year earlier, down from 9.3 percent in November, according to Reuters calculations based on data released by National Bureau of Statistics (NBS) on Monday.

That was just ahead of the slowest pace of growth last year at 7.7 percent recorded for October.

So the two lowest numbers were at the end of the year and compare to this.

For the full year, property investment increased 9.5 percent from the year-earlier period, down from 9.7 percent in January-November.

I note that in the official data whilst prices are still rising volume growth has slowed to a crawl in Chinese terms.

The floor space of commercial buildings sold was 1,716.54 million square meters, up by 1.3 percent. Specifically, the floor space of residential buildings sold was up by 2.2 percent. The total sales of commercial buildings were 14,997.3 billion yuan, up by 12.2 percent, among which the sales of residential buildings were up by 14.7 percent.

Trade

This was a factor in things slowing down as we note the faster import growth over 2018 as a whole.

The total value of exports was 16,417.7 billion yuan, up by 7.1 percent; the total value of imports was 14,087.4 billion yuan, up by 12.9 percent.

Those who consider the trade surplus to be one of the world’s economic imbalances should echo the official line.

the Trade Structure Continued to Optimize

Comment

So we find that the official data is catching up with our view of an economic slow down in China. Those late to the party have the inconvenience of December showing some data a little better on a monthly basis but the trend remains clear. Looking ahead then even the official business survey shows a decline because the 54s and 53s were replaced by 52.6 in December.

However if we switch to my favourite short-term indicator which is narrow money we see that the economic brakes are still on. The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

Still it is not all bad news as it has been a while since there has been so little publicity about the annual shindig in Davos. Perhaps someone has spotted that flying to an Alpine resort to lecture others about climate change has more than a whiff of hypocrisy about it.

Lower UK inflation provides some welcome good news for real wages

This morning allows us to take a deep breath and move from last night’s excitement which rapidly turned to apparent stalemate to a whole raft of UK inflation data. As we stand the UK Pound has rallied a bit to US $1.288 and 1.129 versus the Euro but in inflation terms that represents a drop as it was around 7% higher versus the US Dollar a year ago. So that is what is around the corner as today the influence will be a bit more than that as the UK Pound was weaker in December versus the Dollar which is the currency in which commodities are priced.

Moving to the price of crude oil there will be a downwards influence on today’s numbers from it as we note a March futures price which peaked at US $84.58 and was more like US $56 around the time the UK numbers are collected. If we look at the weekly fuel prices we see that petrol prices dropped from being around 12 pence per litre dearer than a year before to more like 2 pence. However this gain has been offset to some extent by the way that diesel has become much more expensive than petrol with the gap between the two being around 4 pence in December 2017 but more like 10 pence in December 2018. Does anybody have a good reason for this?

Inflation Targeting

Bank of England Governor Mark Carney answered some online questions on the 9th of this month at what is called the Future Forum. Let me open with a point of agreement.

On your question about the level of the inflation target, long and varied experience has shown that price stability is the best contribution monetary policy can make to the public good.

The problem is that whilst I mean price stability he is being somewhat disingenuous as that is not what he means. Let me highlight with this.

There are good reasons why central banks around the world, including the Bank of England, target a low, positive rate of inflation not no inflation.

As you can see he talks the talk but does not walk the walk and here is his explanation.

 A little inflation ‘greases the wheels’ of the economy, for example by helping inflation-adjusted wages adjust more smoothly to changes in companies’ demand for labour and facilitating shifts in resources between sectors in response to changes in supply and demand. Moreover, a positive inflation rate gives monetary policy space to deliver better outcomes for jobs and growth

So it helps him to look like a master of the universe and helps wages adjust. Seeing as wages have adjusted downwards I hope he was challenged on that point. But there is more.

From a more technical point of view, the official rate of inflation might also over-estimate the true rate at which prices are rising because it is hard to strip out increases that reflect improvements in the quality of goods and services on offer. Aiming for a 0% inflation target would risk forcing the economy into deflation in the medium term.

That is really rather breathtaking! Let me explain why by comparing his “might” by the reality that UK consumer inflation has since the change to CPI as the inflation target in 2003 consistently under recorded inflation via the way that owner occupied housing is ignored completely. They always meant to get around to it but somehow forget until they managed to find a way ( imputed rent) of having one of the fastest areas of inflation recorded as one of the slowest in the new “comprehensive” CPIH measure.

At least he has dropped the effort to claim that relative prices could not move with a 0% inflation target. This is because I kept pointing out that when we had around 0% around 3 years ago there was a big relative price shift via the much lower price of crude oil which had driven it. So it is good that this particular fantasy had its bubble burst but not so good that the Ivory Towers responsible carry on regardless.

Also if we return to the quality issue a powerful point was made by the statistician Simon Briscoe who stood up and stated that each time he bought a new I-Pad it cost him more than a thousand pounds. But whilst he realised each one was better how does that work if he neither needs nor uses the additions or only uses a few of them?

Inflation

As we had been expecting the consumer inflation numbers provided some good news this morning.

The all items CPI annual rate is 2.1%, down from 2.3% in November……..The all items RPI annual rate is 2.7%, down from 3.2% last month.

The main driver here was transport costs as we expected because if we throw in the whole sector then annual inflation was cut by a bit more than 0.2% due to it. Actually slightly more for the RPI as it has a higher weight for air fares. Also the RPI was affected by something a little embarrassing for a Bank of England which had raised Bank Rate in November by 0.25%.

Mortgage interest payments, which decreased the RPI 12-month rate by 0.09 percentage points between November and December 2018 but are excluded from the CPIH.

Of course they are excluded from the woeful CPIH which essentially only includes things which do not exist in its calculations about owner occupied housing and ignores things which are paid. Here is its major player.

Private rental prices paid by tenants in the UK rose by 1.0% in the 12 months to December 2018, up from 0.9% in November 2018.

As you can see even at the new overall lower trend for house price growth (which was previously around 5% per annum ) it way undershoots the number.

Average house prices in the UK increased by 2.8% in the year to November 2018, up slightly from 2.7% in October 2018 (Figure 1). Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 0.7% over the year to November 2018, unchanged from October 2018.

 

Comment

There are two entwined elements of good news here as we note first the fact that the annual rate of inflation has fallen and done so quite sharply if we look at RPI. The next is that it has helped UK real wage growth into positive territory on a little more clear-cut basis. Should total pay growth continue to exceed 3% ( it was last 3.3%) then it is hardly a boom but hopefully we will see a sustained rise. At a time when the economic outlook has plenty of dark clouds this is welcome especially as the outlook seems set fair.

The headline rate of output inflation for goods leaving the factory gate was 2.5% on the year to December 2018, down from 3.0% in November 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 3.7% on the year to December 2018, down from 5.3% in November 2018.

Inflationary pressure in the system has slowed.

Moving to measurement I have some hopes for this from the House of Lords Economic Affairs Committee.

Next Thursday 17 January we will publish “Measuring Inflation”, our report on the use of RPI.

It did appear that something of a stitch-up was underway but efforts were made to provide an alternative view as for example I invited them to a debate at the Royal Statistical Society on the subject. They then became quite critical of the way that our official statistician have refused to update the RPI even for changes which would be simple. So fingers crossed! Although of course the establishment is a many-headed hydra.

Sticking with the RPI I referred yesterday to an article in the Financial Times about index-linked Gilts and here is the most relevant sentence.

 This implies inflation of about 3.2 per cent — well above current levels and the Bank of England’s 2 per cent target.

So it implies inflation of 3.2% which was well above the 3.2% the RPI was at the time the piece was written?!

 

 

China may have landed on the moon but its economy is slowing

This morning has brought more news on the economic theme of late 2018 and early 2019 which is of a slowing. As ever at the beginning of the week it comes from the Far East as eyes turn to China. From the South China Morning Post.

Total exports fell to US$221.25 billion in December, down 1.4 per cent from November, and 4.4 per cent from the same month in 2017, according to data from China’s General Administration of Customs.

This is at least party driven by the ongoing trade war.

The December figures give the first indication of the full impact of the US-China trade war.

Exports in previous months were supported by “front loading” of orders by Chinese producers to beat the planned rise in US tariffs to 25 per cent, scheduled to go into effect on January 1 before Chinese President Xi Jinping and his US counterpart Donald Trump agreed to a 90-day tariff ceasefire in their meeting on December 1.

So we move on noting that external demand for the Chinese economy is showing a sign of weakening and as usual the experts were whistling in the wind.

The December drop – the biggest since December 2016, when China grew at its slowest pace since 1990 – was unexpected, with analysts forecasting a 2 per cent rise, according to a Bloomberg survey.

However in my opinion there was something even more significant which was this.

Total imports fell to US$164.19 billion, a fall of 10 per cent from last month and down 7.6 per cent a year earlier.

This is because falls in import volumes are usually a sign of a weakening economy as lower consumption leads to lower import demand.  But to see this fully we need to remind ourselves that the Chinese consume in Yuan and that in it the numbers were down 9.7% on a monthly basis but 3.1% on an annual basis with the difference reflecting a fall in the Yuan. This is quite a change as the numbers for 2018 as a whole showed imports to be 12.9% higher. There is of course an irony in this as we note that imports are a subtraction from GDP ( Gross Domestic Product) numbers so this change will boost it as highlighted below.

Those trade flows still resulted in a trade surplus of $57bn in December, the highest in three years. ( Financial Times)

Although of course contrary to the way the media has reported all this it will be reported in the Chinese GDP data in Yuan as 395 billion.

If we switch to the Financial Times I suspect Donald Trump will be focusing on this bit.

China’s annual trade surplus with the US rose to $323bn for 2018, a jump of more than 17 per cent to the highest level on record, according to Reuters data reaching back to 2006.

Meanwhile there was plenty of food for thought for those in the South China Territories ( Australia) from this bit.

Data also showed that China’s imports of iron ore fell for the first time since 2010, a development that will have impacted commodity exporters.

Xinhua News

It is always interesting to see how things are being reported in China itself so here we go.

 China’s foreign trade rose 9.7 percent year on year to a historic high of 30.51 trillion yuan (about 4.5 trillion U.S. dollars) in 2018, the General Administration of Customs (GAC) said Monday……..Exports rose 7.1 percent year on year to 16.42 trillion yuan last year, while imports grew 12.9 percent to 14.09 trillion yuan, resulting in a trade surplus of 2.33 trillion yuan, which narrowed by 18.3 percent.

No mention of any declines but there was space and indeed time to mention something else favourable to China.

Trade with countries along the Belt and Road registered faster-than-average growth, with the trade volume standing at 8.37 trillion yuan, up 13.3 percent year on year.

If we stay with Chinese reporting then we can take a look at the value of the Yuan as well.

The central parity rate of the Chinese currency renminbi, or the yuan, strengthened 349 basis points to 6.7560 against the U.S. dollar Monday, according to the China Foreign Exchange Trade System.

The new rate was the strongest since July 19, 2018, according to data from the system.

Since the beginning of this year, the yuan’s central parity rate has strengthened more than 1.5 percent against the dollar.

Presumably driven by the stronger trade figures… ( sorry couldn’t resist it). But the Bank of China New York branch plays along with the official drumbeat.

China’s economy has been undergoing structural reform with the introduction of various macro-economic policies. The bank believed that the yuan’s strong buying momentum showed world financial markets have restored confidence in the Chinese currency.

“With the deepening of China’s reform and opening-up, steady expansion of the domestic financial market, and the higher status of CNY in the international monetary system, it is expected that investors’ willingness to hold CNY will increase further,” said the bank’s foreign exchange desk.

I must say they do have rather eloquent foreign exchange traders as most of the ones I have met communicate mostly in words with only four letters in them.

Indeed things are even going rather well in space.

To better understand the lunar environment and prepare for a human return to the moon, the Chang’e-4 probe, which has just made the first-ever soft landing on the far side of the moon, carries payloads jointly developed by Chinese, German and Swedish scientists to conduct research.

This of course contrasts with the efforts of the evil capitalist Imperialists.

U.S. space technology firm SpaceX, led by Elon Musk, will lay off about 10 percent of its more than 6,000 employees, according to media reports.

Also there is something which reminds us of the Belt and Road plan.

Passengers waiting to board a train from Nigeria’s capital Abuja on Saturday were wowed when they were informed that the train service had been safely operating for 900 days.

A male voice announced from a public address system that the train service had been in commercial operation for 900 days and without any major accident recorded since its inception.

This Chinese built railway is apparently a modern wonder.

Many looked in amazement, expressing satisfaction at the safe operation of the Abuja-Kaduna train service, the first standard gauge railway in Nigeria and West Africa…..Many looked in amazement, expressing satisfaction at the safe operation of the Abuja-Kaduna train service, the first standard gauge railway in Nigeria and West Africa.

One should not be too churlish as there are plenty of issues both security and otherwise in Nigeria but “many looked in amazement” is the sort of thing written about the first journey’s of George Stephenson and his Rocket back in the day.

Football

Another example of a combination of economics combining with foreign policy is the way Chinese football clubs have been offering very high wages to marquee players. West Ham fans will currently be fearing that Marko Anautovic will leave especially if the rumours of a new £45 million bid plus £300,000 a wage wages are true. But it is hard not to raise a wry smile at this perspective from Barney Ronay of the Guardian.

Marco Arnautović latest: am hearing he will move to a club whose wealth is built on a state-subsidised stadium, owned by “colourful” businessmen and with a manager brought in from Hebei China Fortune… Hang on. No sorry, that’s his current club. My mistake

Comment

It is always difficult to measure an economic slow down because of the way that vested interests and the establishment move to delay and block such efforts. This is how they invariably end up being presented as a surprise. China is of course particularly opaque with much of its data leading people to use alternative measures such as electricity consumption before it too got gamed and manipulated. But we are getting more and more signs of a slowing trend. If we look for other signs then we maybe saw one from Europe earlier as well.

In November 2018 compared with October 2018, seasonally adjusted industrial production fell by 1.7% in the euro
area (EA19) and by 1.3% in the EU28, according to estimates from Eurostat,

Which no doubt reflects this from Reuters.

China car sales fell 13 percent in December, the sixth straight month of declines, bringing annual sales to 28.1 million, down 2.8 percent from a year earlier, China’s Association of Automobile Manufacturers (CAAM) said.

This was against a 3-percent annual growth forecast set at the start of 2018 and is the first time China’s auto market has contracted since the 1990s.

Beneath all this though the move into Africa via the Belt and Road policy continues as seemingly does the football combination of economics and diplomacy. They also seem to have been listening to Pink Floyd.

And if the cloud bursts, thunder in your ear
You shout and no one seems to hear.
And if the band you’re in starts playing different tunes
I’ll see you on the dark side of the moon.

 

 

Did the Riksbank of Sweden just panic?

This morning has brought news of an event that had been promised so many times but turned out to be a false dawn. Indeed on their way to apparently making sense of this world Rosa & Roubini Associates told us this.

Riksbank Likely to Wait Longer Before Lift-Off

I guess you are now all expecting this.

Economic activity is strong and the conditions are good for inflation to remain close to the inflation target in the period ahead. As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly. The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent.

Actually there is quite a bit that is odd about this as indeed there has been, in my opinion, about the monetary policy of the world’s oldest central bank for some time. Let me give you two clear reasons to be doubtful. Firstly GDP growth plummeted from the 1% of the second quarter of this year to -0.2% in the third. Or as the Riksbank puts it.

As expected, Swedish GDP growth has slowed down during
the second half of this year. However, the downturn in the third  quarter was greater than expected.

So if we step back we immediately wonder why you raise rates when economic growth is slowing when you could have done so when it was rising? The excuse provided looks weak especially as we note the automobile industry has continued to struggle.

One contributory cause of  this was that household consumption fell by a surprisingly large  degree, but this can partly be explained by temporarily weak car sales.

Also inconvenient numbers are regularly described as temporary even when they are nothing of the sort.

Moving onto inflation the outlook has also changed as we have moved towards the end of 2018.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.1 percent in November 2018 (2.4 percent in October). The CPIF decreased by 0.1 percent from October to November.  ( Sweden Statistics)

Here is FXStreet from last week when these numbers came out.

Nordea Markets 1/2: : CPIF inflation stood at 2.1% in November, below consensus and 0.3% point below the ’s forecast. Core inflation, i.e. CPIF ex energy, came out at 1.4%, as much as 0.3% point below the Riksbank’s call.

To be fair to Nordea they were expecting a hike so perhaps they had received an official nod because there is now another factor at play. That is of course the lower trajectory of the oil price which looks set to depress headline inflation numbers in the weeks and months ahead. If we take a broad sweep the price of a barrel of Brent Crude Oil has fallen some US $30 since the Riksbank balked at raising Swedish interest-rates. I think you can spot the problem here. Apparently the wages fairy will turn up which of course is yet another central banking standard view in spite of reality not being that helpful.

Wage growth has certainly become a little lower than
the Riksbank’s forecast over recent months and the forecast has been revised downwards slightly.

The Riksbank’s own view

Let me know switch to some sections of their monetary report which frankly would fit better with an interest-rate cut.

The global economy, which has grown rapidly in recent years, is now entering a phase of more subdued GDP growth, which is in line with the Riksbank’s earlier forecasts.

So Sweden is swimming against the trend?

Economic activity in Sweden is still strong, although GDP growth and inflation have been weaker than expected.

So definitely maybe. What about inflation prospects?

Even though inflation has been lower than expected, the conditions remain good for inflation to stay close to the inflation target going forward.

Then we get quite a swerve because you might think that with the claimed view of the Riksbank more interest-rate hikes will be on the way. It would be logical assuming there is anyone who believes the growth path remains strong and inflation will be ~2% per annum. But apparently not.

The forecast for the repo rate has therefore been revised downwards to indicate that the next repo rate rise will probably occur during the second half of 2019 . After this, the forecast indicates approximately two rate rises per year by 0.25 percentage points each time.

If we skip the last sentence on the grounds that this has been not far off the promised pattern since the Riksbank last raised back in 2011 we see that what is now called a “dovish hike” has just taken place. What that means is that whilst there has been a rise the future expected path falls. Thus if you follow central banking forward guidance interest-rates as 2019 develops may now be lower than you were expecting.

Operation Twist and QE

The other factors in Sweden’s monetary policy are described below.

At the end of November, the Riksbank’s government bond
holdings amounted to just under SEK 350 billion, expressed as a nominal amount.

But they are giving Operation Twist an extra squeeze.

In December 2017, the Executive Board also decided that reinvestments of the large principal payments due in the first six months of 2019 should be allocated evenly across the period from January 2018 to June 2019 . This means that the Riksbank’s holdings of government bonds will increase temporarily in 2018 and the beginning of 2019.

If you wished to tighten monetary policy then you could simply let these bonds mature and not replace them.

US Federal Reserve

As we were expecting it did this last night.

Today, we raised our target range for short-term interest
rates by another quarter of a percentage point. ( Chair Powell)

Not everyone was on board however as there was a nearly 800 point swing in the Dow Jones Industrial Average in response to it. This also meant it ignored the advice from President Trump not to do so and to cut the amount of Quantitative Tightening. The issue was summed up by the Wall Street Journal but not in the way the author thought it meant.

The data says the economy is doing great; the markets say it could be headed for a recession.

At turning points the data is always too late by definition which means that some sort of judgement call is required. Central banks have about a 0% success rate in predicting recessions.

Comment

There is a fair bit to consider in the latest central banking moves but the major point is one of timing. Monetary policy is supposed to lead events and not to lag them which is why “data dependency” is not only flawed it is illogical. To be fair to the US Federal Reserve it has at least tried to get ahead of events whereas the Riksbank has not.

Meanwhile there is a country with a central bank meeting today which has just had some strong economic news.

The quantity bought in November 2018 when compared with October 2018 increased by 1.4%, with a strong monthly growth of 5.3% in household goods stores….The strongest growth can be seen in comparison with the same period a year earlier where the amount spent increased by 5.0% and the quantity bought increased by 3.6%.

Is anybody expecting Mark Carney and the Bankof England to have raised interest-rates in response to the strong retail sales data? I am using the past tense as the vote was last night.

Number Crunching