What can we expect from the Bank of England in 2018?

Today we find out the results of the latest Bank of England policy meeting which seems set to be along the lines of Merry Christmas and see you in the new year. One area of possible change is to its status as the Old Lady  of Threadneedle Street a 200 year plus tradition. From City AM.

The Bank will use further consultations to remove “all gendered language” from rulebooks and forms used throughout the finance sector, a spokesperson said.

Perhaps it will divert attention from the problems keeping women in senior positions at the Bank as we have seen several cases of “woman overboard” in recent times some for incompetence ( a criteria that could be spread to my sex) but not so in the case of Kristin Forbes. There does seem to be an aversion to appointing British female economists as opposed to what might be called “internationalists” in the style of Governor Carney.

Moving onto interest-rates there is an area where the heat is indeed on at least in relative terms. From the US Federal Reserve last night.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative

The crucial part is the last bit with its clear hint of more to come which was reinforced by Janet Yellen at the press conference. From the Wall Street Journal.

Even with today’s rate increase, she said the federal-funds rate remains somewhat below its neutral level. That neutral level is low but expected to rise and so more gradual rate hikes are likely going forward, she said.

The WSJ put the expectation like this.

At the same time, they expect inflation to hold steady, and they maintained their expectation of three interest-rate increases in 2018.

Actually if financial markets are any guide that may be it as the US Treasury Bond market looks as though it is looking for US short-term interest-rates rising to around 2%. For example the yield on the five-year Treasury Note is 2.14% and the ten-year is 2.38%.

But the underlying theme here is that the US is leaving the UK behind and if we look back in time we see that such a situation is unusual as we generally move if not in unison along the same path. What was particularly unusual was the August 2016 UK Bank Rate cut.

Inflation Targeting

What is especially unusual is that the Fed and the Bank of England are taking completely different views on inflation trends and indeed targeting. From the Fed.

 Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In spite of the fact that consumer inflation is below target they are raising interest-rates based on an expectation ( incorrect so far) that it will rise to their target and in truth because of the improved employment and economic growth situation. A bit of old fashioned taking away the punch bowl monetary policy if you like.

The Bank of England faces a different inflation scenario as we learnt on Tuesday. From Bloomberg.

The latest data mean Carney has to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

If you were a Martian who found a text book on monetary policy floating around you might reasonably expect the Bank of England to be in the middle of a series of interest-rates. Our gender neutral Martian would therefore be confused to note that as inflation expectations rose in the summer of 2016 it cut rather than raised Bank Rate. This was based on a different strategy highlighted by a Twitter exchange I had with former Bank of England policymaker David ( Danny) Blanchflower who assured me there was a “collapse in confidence”. To my point that in reality the economy carried on as before ( in fact the second part of 2016 was better than the first) he seemed to be claiming that the Bank Rate cut was both the fastest acting and most effective 0.25% interest-rate reduction in history. If only the previous 4% +  of Bank Rate cuts had been like that…….

 

Even Norway gets in on the act

For Norges bank earlier today.

On the whole, the changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the September Report.

China is on the move as well as this from its central bank indicates.

On December 14, the People’s Bank of China launched the reverse repo and MLF operation rates slightly up 5 basis points.

I am slightly bemused that anyone thinks that a 0.05% change in official interest-rates will have any effect apart from imposing costs and signalling. Supposedly it is a response to the move from the US but it is some 0.2% short.

The UK economic situation

This continues to what we might call bumble along. In fact if the NIESR is any guide ( and it has been in good form) then we may see a nudge forwards.

Our monthly estimates of GDP suggest that output expanded by 0.5 per cent in the three months to November, similar to our estimate from last month.

The international outlook looks solid which should help too. This morning’s retail sales data suggested that the many reports of the demise of the UK consumer continue to be premature,

When compared with October 2017, the quantity bought in November 2017 increased by 1.1%, with household goods stores showing strong growth at 2.9%……..The year-on-year growth rate shows the quantity bought increased by 1.6%.

As ever care is needed especially as Black Friday was included in the November series but Cyber Monday was not. Although I note that there was yet another signal of the Bank of England’s inflation problem.

Total average store prices increased by 3.1% in November 2017 when compared with the same period last year, with price increases across all store types, in particular food stores had the largest price increase of 3.6% since September 2013.

Comment

The Bank of England finds itself in a similar position to the US Federal Reserve in one respect which is that it had two dissenters to its last interest-rate increase. The clear difference is that the Fed is in the middle of a series of rises whereas the Bank of England has so far not convinced on this front in spite of saying things like this. From the Daily Telegraph.

“We’ve said, given all the things we assume in our forecast, many of which will be misses – there are always unknown things and unpredictable things happening – but given our outlook currently, we anticipate we will need maybe a couple more rate rises, to get inflation back on track, while at the same time supporting the economy,” Ben Broadbent told the BBC’s Today programme.

I wonder if he even convinced himself. Also it is disappointing that we will not get the formal letter explaining the rise in inflation until February as it is not as if Governor Carney has been short of time.

So it seems we will only see action from the Bank of England next year if its hand is forced and on that basis I am pleased to see that Governor Carney plans to get about.

Me on Core Finance

http://www.corelondon.tv/inflation-employment-uk/

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Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.

U.K. GAS FUTURES SURGE ON BAUMGARTEN EXPLOSION, NORWAY OUTAGE………front month futures jump about 20%.

Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),

Comment

There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.

 

 

Bitcoin futures trading indicates plenty of problems ahead

Last night saw a change in the Bitcoin world. This is because a Bitcoin futures contract started trading on the Chicago Board Options Exchange or CBOE. It would appear that plenty were watching as this took all of 30 minutes.

Due to heavy traffic on our website, visitors to may find that it is performing slower than usual and may at times be temporarily unavailable. All trading systems are operating normally.

The system trouble was accompanied by yet another surge in the price. From Bloomberg.

Bitcoin futures expiring in January were priced at $17,780 as of 12:57 p.m. Hong Kong time, up from an opening level of $15,000. About 2,300 contracts changed hands.

So not an enormous amount of contracts but the interest and price swings did have an impact.

Futures on the world’s most popular cryptocurrency surged as much as 25 percent during their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts meant to cool volatility. Dealers said initial volumes exceeded expectations, while traffic on Cboe’s website was so strong that it caused delays and outages. The exchange said all its trading systems were normal.

Who could possibly have forecast that lots of people would be watching? Anyway as I type this the price for the January 2018 contract is US $17640 ( up 14%)  with the volume being 2695 and the high having been US $18850.

What is the point of a futures contract?

The purpose of a futures contract is to bring trading on a particular instrument into one place. Why? Well even what are considered to be active markets may have bursts of activity followed by quiet periods which are awkward to say the least if you wish to trade in them. The impact can be boosted by the contract covering a concept rather than a particular asset as for example in bond futures where a generic is traded rather than an individual bond. So the ultimate end product of a successful futures contract is liquidity or the ability to trade consistently which benefits investors and traders as well as the exchange itself which charges fees on the trades.

It also brings into play the ability to “short” an instrument as you can sell as your opening trade whereas with ordinary trading you have to buy something before you sell it. This is much simpler than what you have to do in equity markets which is borrowing the stock so you can sell it which you have to plan and work at rather than just contacting an exchange and selling.

Obviously the exchange is at risk as prices move so you have to put up cash or margin to cover your position. When people refer to gearing on a futures contract this is one way of measuring it as if you have to put up 10% margin then if you wished you could buy  ten times as much of the instrument concerned for the same outlay. Some care is needed though as there is also variable daily margin to cover losses ( as well as lower margin if profits arise)

Success or failure comes essentially from volume and liquidity and from that flows the other factors.

How does it work?

The basis is that you have a point in time when everything has to be settled hence the concept of a January contract in the case of Bitcoin ( there are also February and March).  At that point anything outstanding is delivered for example I had a colleague some years back who had 2 potato futures contracts delivered on him and was in danger of getting more spuds than he could handle even with his barn.

Also there is a clearing house who organises and guarantees settlement. In the UK the main clearing banks back the London clearing house which back in my main trading times was seen as a big strength. Well we all make mistakes don’t we? Also the exchange is regulated.

The point for Bitcoin

In a way futures trading is a sort of coming in from the cold for Bitcoin. It gives the potential for there being one price rather than the multitude of them we currently see. That would be a clear gain and if we add in the regulated and clearing issue another potential gain is that institutional investors join the party. This would have positive impacts on volume and liquidity which would be likely to settle the price down and make it more stable.

Problems

Something has troubled me from the beginning and it is this. From the CBOE.

XBT futures are cash-settled contracts based on the Gemini’s auction price for bitcoin, denominated in U.S. dollars.

This needs to turn out to be both stable and reliable as for example the market would be damaged if there were even suspicions that there were ways of manipulating the settlement price. I do not know Gemini but their price will have to be 100% reliable and what if the overall Bitcoin price is squeezed?

Next is that one of the benefits of futures trading may not actually apply and h/t to @chigrl for raising the issue. Remember I said that allowing short selling was one of the key points of a futures contract? Well here are the rules of Interactive Brokers and the emphasis is mine.

Due to the extreme volatility of cryptocurrencies, clients will be unable to assume a short position including as part of a spread. The only time a short order will be allowed will be in the case of a roll trade that results in a long position. In addition, market orders will not be accepted.

If this is in any way widespread the whole concept of a futures contract on Bitcoin may be holed below the waterline. As I pointed out earlier the ability to sell short is if not the modus operandi a big point of having a futures market. Added to that is that there are of course plenty of risks in being long Bitcoin at current levels. Are market prices supposed to bring a balance between the risk of buying and selling?

Comment

Actually although the media seems to have mostly overlooked it there was a clear signal of the inability for at least some to short Bitcoin futures.

No wonder sellers want a premium if it is difficult or even not possible to sell unless you have already bought.  On such a road then the price may well keep singing along with Jackie Wilson.

Higher (lifting me)
Higher and higher (higher)

As someone who has spent plenty of years in such markets the apparent inability to do spreads ( trading January versus March for example) is another issue. Say there is a large buyer for January futures and a seller in March, what used to be called locals would arbitrage that out adding to liquidity. You see these markets need someone to trade with otherwise they curl up and die. Another sign of trouble can be higher fees like this from the FT earlier.

The Singapore Exchange is to increase fees as much as 10-fold for derivative trading members next year, following a recent large technology upgrade. As of January, annual fees for proprietary trading members such as big global banks with direct market access will jump from S$2,000 to as much as S$25,000 in some cases, SGX said on Monday.

Also there is the underlying issue of what is a Bitcoin and if it is suitable for a futures contract in the first place?

Some of the issues I have raised today could be fixed if not at a stroke quite easily. But they need to be done as you see once a contract gets a reputation for being illiquid then it tends to die a death. So far 2768 is not all that brilliant especially if we allow for this.

CFE is waiving all of its transaction fees for XBT futures in December 2017.>

All that is before the Merc ( CME) starts trading them too.

Oh and some are suggesting option contracts ( my old stomping ground). How would that work unless you had the ability to hedge via selling futures?

Car production for export is boosting the UK economy

This morning has brought us a barrage of news on the UK economy and no I do not mean the apparent progress on the negotiations with the European Union. Though even if we dodge the politics it is nice to see a better phase for the UK Pound £ with it rising to above US $1.34 and 1.14 to the Euro as well as above 153 Yen. The barrage came as it is one of the theme days at the Office for National Statistics giving us an outpouring of data on the UK economy.

Let us start with a nod to my subject of Wednesday which was the automotive or car sector.

In October 2017, car production grew by 4.6% compared with September 2017 to match the record index level reached in July 2017.

If we look into the detail we see this.

Motor vehicles, trailers and semi-trailers provided a similar contribution and rose by 6.3%. An increase in export turnover of 20.7% was reported by this sub-industry compared with October 2016;

This further reinforces the view that UK car production is mostly for export as otherwise the rise in production of 4.6% in October would look very odd with the fall in registrations of 11.2% on a year on year basis. Here is the data in chart form.

A little care is needed as this is a value or turnover index and not volume so it is a little inflated but not I would suspect a lot. With the same caveat it is in fact a record.

 Within the MBS production industries dataset, the value of exports for the motor vehicle, trailers and semi-trailers were at a record level in October 2017, exceeding £4 billion for the first time.

Of course single monthly data can be misleading but the news remains good if we look further back for more perspective.

Within this sector, transport equipment provided the largest contribution, rising by 2.5%, due mainly to an increase of 3.2% in motor vehicles, trailers and semi-trailers following an increase of 4.2% in the three months to September 2017. The index level for motor vehicles, trailers and semi-trailers averaged 107.1 in the three months to October 2017 due to a strong increase in exports during October 2017, compared with 103.8 in the three months to July 2017, due mainly to a weak June 2017.

If we look further back we see that vehicle production was blitzed by the credit crunch falling from 95.1 in August 2007 where  2015 = 100 to a chilling 45.6 in February 2009. It is no coincidence that the Bank of England introduced QE then when you look at that icy cold plummet. We did not reach the levels of the summer of 2007 until the spring of 2014 which makes one think. Over that period there was scope for plenty of what might come under the category of “tractor production is increasing” but it is also true that there were nearly seven lost years. Since then we have done well with both exports and home sales rising but the latter has been a smaller influence which is fortunate as it is now over!

Over the years and decades I have followed the UK economy it is not that often one can say or type that the economy is being helped by strong car production and exports.

Manufacturing

This is also having a good phase.

The largest upward contribution came from manufacturing, which increased by 3.9%. There was broad-based strength throughout the sector, with 11 of the 13 sub-sectors increasing.

So there was a strong increase on a year ago and as well as the car sector we have already looked at we seem to have ambitions for what in the end will be the largest market of all.

Within this sub-sector, air and spacecraft and related machinery increased by 11.5%, continuing the prolonged month-on-same-month a year ago strength for this sub-industry since November 2014.

Not quite the “space aliens” that Paul Krugman once opined we needed but we seem to be doing well in the more mundane business of satellites and the like.

Just for clarity the pharmaceutical industry seems to be growing modestly as opposed to the yo-yo movements we did see and the overall picture still could do with some improvement.

manufacturing output has risen but remain below its level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 2.1% respectively in the three months to October 2017.

At least we are getting there.

Trade

Some might say that the better vehicle export data might take us from our desert of deficits in this area into an oasis. But maybe we will have to live forever to see that.

When erratic commodities are excluded, the value of the total UK trade deficit widened by £0.8 billion to £6.9 billion in the three months to October 2017.

 

We did export more but in a familiar pattern we imported at an even faster rate.

The widening excluding erratic commodities was due primarily to trade in goods imports increasing 2.9% (£3.3 billion) to £116.5 billion, which was offset slightly by a 0.5% (£0.2 billion) decrease in trade in services imports. Although trade in goods exports increased 1.7% (£1.4 billion) to £81.7 billion, the increase in imports was larger, therefore the total trade deficit excluding erratic commodities widened.

 

However if we switch to volumes maybe there is a little by little improvement.

Total goods export volumes increased 3.2% in the three months to October 2017, which was the fourth consecutive and largest increase since January 2017. Import volumes increased 0.5% over the same period.

 

Production

This was driven higher by the manufacturing data.

In the three months to October 2017, the Index of Production was estimated to have increased by 1.2% compared with the three months to July 2017…….Total production output for October 2017 compared with October 2016 increased by 3.6%

The other factor pushing it up was North Sea Oil and Gas where not only less maintenance but some new oilfields opened in the summer. Thus for once we seem to have higher output with higher prices ( Brent Crude is ~ US $63 as I type this).

We also got an example of why economics is called the dismal science as most people would be pleased to have better weather and not to have to turn the heating on!

 energy supply provided the largest downward contribution, decreasing by 3.3%, mainly because of unseasonably warm temperatures in October 2017,

Its effect was to subtract 0.39% from production in October meaning the monthly change was 0%.

The overall picture here lags the manufacturing one partly due to the decline of North Sea Oil.

production output has risen but remains below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.1% in the three months to October 2017.

Construction

These did fit with the view I expressed on Monday. The present seems recessionary.

Construction output contracted for the sixth consecutive period in the three-month on three-month time series, falling by 1.4% in October 2017.

The future looks brighter.

New orders saw record growth in Quarter 3 (July to September) 2017, growing by 37.4% compared with the previous quarter.The record growth was driven predominantly by growth in the infrastructure sector, caused by the awarding of several high-value new orders relating to High Speed 2 (HS2).

So a definitely maybe then especially as we note that it is for HS2 which seems so set in stone such that we will have to roll with it I guess.

Comment

In terms of official data and business surveys the UK is seeing a good period for manufacturing particularly in the vehicle sector which is pulling overall production higher. Whilst it is only 14% of our economy these days the improvement is welcome. The rise in vehicle exports has not yet been picked up by the trade figures as I note the use of the phrase “to be exported” in the production data so hopefully we will see this in the trade figures for November and December.

The trade figures have a problem as you see there is plenty of detail on the goods sector but virtually nothing on services! I have scanned it again and can only seem a mention of services imports. This is pretty woeful if you consider it is the largest sector of our economy and frankly no wonder these numbers are “not a national statistic”. It is frightening that they then go into the GDP numbers and even more frightening that we will get monthly GDP data soon.

The construction series is “not a national statistic” meaning that in this instance I have to disagree with Meatloaf about the three main series analysed today.

Now don’t be sad (Cause)
‘Cause two out of three ain’t bad

 

 

 

 

Bitcoin both is and is not a store of value

The weekend just gone has seen some extraordinary price moves and yet as I looked through most of the media early this morning there was no mention of it. For example I have just scanned the front page of the online Financial Times and there was not a peep. One mention on Bloomberg seems a little confused.

Bitcoin’s march toward respectability faces another hurdle as hedge-fund platforms reject the overtures of firms trading cryptocurrencies.

I didn’t realise it was marching towards respectability myself and if it was are hedge funds a benchmark? Apparently things are going badly.

It’s the latest blow for a digital currency that’s struggling to break into the financial mainstream.

The next bit I found particularly fascinating.

Joe Vittoria, CEO of the Mirabella platform, said he has doubts over bitcoin’s liquidity and where oversight might come from. There are also suggestions that the digital currency’s valuation should be below where it’s currently trading, he said.

You see that second sentence applies to so many markets right now for example many of the world’s bond markets have been pumped up by central bank buying. Others might be wondering is another example is the online food delivery company Just Eat in the UK which looks set to join the FTSE 100 as it has a larger market capitalisation than the supermarket chain Sainsburys.

For an article posted around 4 hours ago they seem rather behind the times.

While investors have embraced bitcoin, sending it soaring above $8,000.

Last night as I checked how financial markets were starting the week in the far east I noted this and put it on Twitter.

Bitcoin has been on another surge and is US$ 9396 now.

Of course it is soaring above $8000 technically but is behind events. Indeed this morning it has risen again as Reuters point out.

Bitcoin’s vertiginous ascent showed no signs of stopping on Monday, with the cryptocurrency soaring to another record high just a few percent away from $10,000 after gaining more than a fifth in value over the past three days alone.

The digital currency has seen an eye-watering tenfold increase in its value since the start of the year, and has more than doubled in value since the beginning of October.

It BTC=BTSP surged 4.5 percent on the day on Monday to trade at $9,687 on the Luxembourg-based Bitstamp exchange.

There are different pricing platforms but on the one I look at it reached US $9771 earlier. Although as ever there is a fair bit of volatility as it is US $9606 as I type this sentence.

Jamie Dimon

The Chief Executive of JP Morgan hit the newswires back on the 12th of September.

If a JPMorgan trader began trading in bitcoin, he said, “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.” ( Bloomberg)

Considering the role of the banking sector in money laundering and financial crime this bit was somewhat breathtaking.

“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,” he said. “So there may be a market for that, but it’d be a limited market.”

This intervention can be seen two ways. The first is simply expressed by the fact that the price of Bitcoin has more than doubled since then. The second is ironically also that it has doubled as of course that is a building block in determining whether something is a bubble or not.

What has driven this surge?

Back on the 29th of December last year I pointed out the Chinese connection.

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops!

If we move onto this morning Reuters have been on the case.

By some estimates, China’s overall debt is now as much as three times the size of its economy……..Outstanding household consumer loans have surged close to 30 percent since the middle of last year and reached 30.2 trillion yuan as of October.

This has the government worried.

China’s central bank governor, Zhou Xiaochuan, made global headlines with a warning last month of the risks of a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.

In such a position Bitcoin investment may seem a lot more sensible than otherwise. If nothing else those caught in the clampdown on the shadow banking sector may think that it is worth a go and the funds involved are so large it would only take a relatively small amount to have a large impact.

It was also be a particular irony if some of the money the Bank of China pumped into the system last week found its way into Bitcoin.

ECB and the war on cash

This is something which must provide some support to Bitcoin which is simply fears over what plans central banks have for cash. This particularly applies to those who have been willing to dip into the icy world of negative interest-rates such as the European Central Bank and I am reminded of this from the 22nd of this month.

The general exception for covered deposits and claims
under investor compensation schemes should be replaced by limited discretionary exemptions to
be granted by the competent authority in order to retain a degree of flexibility. Under that approach,
the competent authority could, for example, allow depositors to withdraw a limited amount of
deposits on a daily basis consistent with the level of protection established under the Deposit
Guarantee Schemes Directive (DGSD)34,

Currently those with most to fear seem to be those with money in Italian banks although just to be clear as we stand now the deposit protection scheme up to 100,000 Euros still operates.

If we look forwards to the next recession it would appear that some central banks will arrive at it with interest-rates still negative so if they apply the usual play-book we will  then see interest-rates negative enough to mean that cash will be very attractive. I have postulated before than somewhere around -1.5% to 2% is the threshold. Then they will have to do something about cash. Perhaps they are on the case.

 

Other fears may come from the way that central banks have expanded balance sheets and thus narrow measures of the money supply. The Bank of Japan explicitly set out to double the monetary base.

Comment

There is a mixture of fear and greed in the price of Bitcoin. The fear comes from those wishing to escape domestic worries in China in particular as well as worries about the next moves of central banks. The greed simply comes from the rise in the price which has been more than ten-fold since I looked at it on December 29th last year. So if you have some well done although of course the real well done comes when you realise the profit. I note others making this point.

Bitcoin’s market cap just passed 150 billion USD. For those who do not know, that is how much money NEW bitcoin “investors” will have to spend, in order for the current bitcoin holders to get the money that they THINK they have.  ( @JorgeStolfi )

That statement is true of pretty much every price although of course some have backing via assets or demand. So often we see a marginal price used to calculate a total based on an average price that is not known. Also with a price that has varied between US $8992 and 9771 today alone I would suggest that this below must have more than a few investors screaming for financial stretcher bearers. From @JosephSkinner74

Long/Short Bitcoin swings with up to 100x Leverage at Bitmex! 💰💰 Enjoy a 10% Fee Discount! 👌🏽

What could go wrong?

This leaves us with the issue of how Bitcoin functions as a store of money which depends on time. Today’s volatility shows that over a 24 hour period it clearly fails and yet if we extend the time period so far at least it has worked rather well as one.

A royal wedding

Firstly congratulations to the hopefully – our royal family has form in this area – happy couple. But fans of the magnificent Yes Prime Minister will already be wondering what it is designed to distract us from and whether Theresa May has turned out to be more effective in this regard than Jim Hacker?!

The ECB has it successes but also plenty of problems

Let is continue the central banking season which allows us to end the week with some good news. As this week has developed there has been good news about economic growth in the Euro area.

The Federal Statistical Office (Destatis) reports that, in the third quarter of 2017, the gross domestic product (GDP) rose 0.8% on the second quarter of 2017 after adjustment for price, seasonal and calendar variations. In the first half of 2017, the GDP had also increased markedly, by 0.6% in the second quarter and 0.9% in the first quarter.

It has been a strong 2017 so far for the German economy but of course whilst analogies about it being the engine of the Euro area economy might be a bitter thinner on the ground due to dieselgate there are still elements of truth about it. But we know that a rising tide does not float all economic boats so ECB President Mario Draghi will have been pleased to see this about a perennial struggler.

In the third quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.5 per cent with respect to the second quarter of 2017 and by 1.8 per cent in comparison with the third quarter of 2016.

Of course Mario will be especially pleased to see better news from his home country of Italy especially at a time when more issues about the treatment of non-performing loans at its banks are emerging. Also this bank seems to be running its own version of the never-ending story, from the Financial Times.

A group of investors in the world’s oldest bank, Italy’s Monte dei Paschi di Siena, have filed a lawsuit in Luxembourg after it announced bonds would be annulled as part of a state-backed recapitalisation.

But in Mario’s terms he is likely to consider the overall numbers below to be a delivery on his “whatever it takes” speech and promise.

Seasonally adjusted GDP rose by 0.6% in the euro area…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.5% in the euro
area.

Inflation

This is a more problematic area for Mario Draghi as this from his speech in this morning indicates.

According to a broad range of measures, underlying inflation has ticked up moderately since the start of this year, but it still lacks clear upward momentum.

This matters because unlike the Bank of England the ECB takes inflation targeting seriously and a past President established a rather precise estimate of it at 1.97% per annum. We seem unlikely now to ever find out how Mario Draghi would deal with above target inflation but he finds himself in what for him maybe a sort of dream. Economic growth has recovered with inflation below target so he can say this.

This recalibration of our asset purchases, supported by the sizeable stock of acquired assets and the forthcoming reinvestments, and by our forward guidance on interest rates, helps to maintain the necessary degree of accommodation and thereby to accompany the economic recovery in an appropriate way.

So we will get negative interest-rates ( -0.4%) for quite a while yet as he has hinted in the past that they may persist past the end of his term. Also of course whilst at a slower rate ( 30 billion Euros a month) the QE ( Quantitative Easing) programme continues. Even that has worked out pretty well for Mario as continuing at the previous pace seemed set to run out of German bonds to buy.

Consequences

However continuing with monetary expansion into a boom is either a new frontier or something which later will have us singing along with Lyndsey Buckingham.

(I think I’m in)(Yes) I think I’m in trouble
(I think I’m in) I think I’m in trouble

Corporate Bonds

When you buy 124 billion Euros of corporate bonds in a year and a few months there are bound to be consequences.

“Tequila Tequila” indeed. What could go wrong with this.?

OK, we are officially in la la land. A BBB rated company just borrowed 500 million EUR for 3 years with a negative yield of -0.026 %. A first..  ( h/t @S_Mikhailovich )

You can take your pick whether you think that Veolia is able to issue debt at a negative interest-rate or at only 0.05% above the swaps rate is worse.

Mario Draghi explained this sort of thing earlier in a way that the Alan Parsons Project would have described as psychobabble.

By accumulating a portfolio of long-duration assets, the central bank can compress term premia by extracting duration risk from private investors. Via this “duration extraction” effect, the central bank frees up risk bearing capacity in markets, spurs a rebalancing of private portfolios toward the remaining securities, and thus lowers term premia and yields across a range of financial assets.

Moral hazard anyone?

The dangers of this sort of thing have been highlighted by what has happened to Carillion this morning.

The wages problem

It is sometimes argued in the UK that weak wage growth is a consequence of high employment and low unemployment. But we see that there are issues too in the Euro area where the latter situations whilst improved are still poorer.

A key issue here is wage growth.Since the trough in mid-2016, growth in compensation per employee has risen, recovering around half of the gap towards its historical average. But overall trends remain subdued and are not broad-based.

Indeed if we look back to late May Mario gave us a rather similar reason to what we often here in the UK as an explanation of weak wages growth.From the Financial Times.

Mr Draghi also acknowledged concerns that sinking unemployment was not leading to a recovery in well-paid permanent jobs………….Mr Draghi said he agreed. “What you say is true,” he said. “Some of this job creation is not of good quality.”

The Italian Job

As I hinted earlier in this piece there are ever more signs of trouble in the Italian banking sector. There have been many cases of can kicking in the credit crunch era but this has been something of a classic with of course a dash of Italian style and finesse. From the FT.

Mid-sized Genoan bank Carige’s future looked uncertain this week after a banking consortium pulled its support for a €560m capital increase demanded by European regulators. Shares in another mid-sized bank Credito Valtellinese fell 8.5 per cent to a market value of €144m after it announced a larger than anticipated €700m capital raising to shore up its balance sheet.

There are issues with banks elsewhere as investors holding bonds which were wiped out insist on their day in court.

Comment

As you can see there is indeed good news for Mario Draghi to celebrate as not only is the Euro area seeing solid economic growth it is expected to continue.

From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward.

The problem though is where does it go from here? Even Mario himself worries about the consequences of monetary policy which has been so easy for so long and is now pro cyclical rather than anti cyclical before of course dismissing them. But unless you believe that growth will continue forever and recessions have been banished there is the issue of how do you deal with the latter when you already have negative interest-rates and ongoing QE?

Also the inflation target problem is covered up by describing it is price stability when of course it is anything but.

Ensuring price stability is a precondition for the economy to be able to grow along a balanced path that can be sustained in the long run.

Wage growth would be improved in real terms if inflation was lower and not higher.

Also Mario has changed his tune on the fiscal situation which he used to regularly compare favourably to elsewhere.

This means actively putting our fiscal houses in order and building up buffers for the future – not just waiting for growth to gradually reduce debt. It means implementing structural reforms that will allow our economies to converge and grow at higher speeds over the long-term.

Number Crunching

This from Bloomberg seemed way too high to me.

Italy’s failure to qualify for the soccer World Cup finals for the first time in 60 years may cost the country about 1 billion euros ($1.2 billion), the former chairman of the national federation said.

Me on Core Finance

http://www.corelondon.tv/2-uk-growth-cap-unreliable-predictive-bodies-bad/

 

 

 

 

 

What does the Bank of England think about UK wage growth prospects?

A sense of perspective can give us also a direction of travel so here is this from Sir Jon Cunliffe of the Bank of England yesterday.

The unemployment rate in the UK today is 4.3%. The last time it was that low was 1975 – the year I
graduated from university.
That year, average wages grew by 24%. 42 years later, with unemployment at the same level, whole
economy average weekly earnings grew by 2.2%

Oh and just as a reminder as Sir Jon omitted this bit the wage rises were not a sign of economic triumph as inflation ( measured by the Retail Price Index or RPI) rose to 26.9% in August of that year. Also this is an innovative way of describing a period when RPI inflation went over 5% for a while as the Bank of England sat on its hands.

 energy price inflation between 2010 to 2013;

Actually innovative ( for newer readers this word was twisted in the Irish banking crisis and now in my financial lexicon for this times has an ominous portent to it) move was to claim this.

That is why the Bank of England has a clear primary objective of price stability and a forward-looking inflation
targeting remit. We have an objective to support the government’s economic policy but it is a secondary
objective and subject to the first.

The truth is that it is the other way around as the inflation surge in 2011 that I pointed out earlier or the current phase where the Bank of England cut Bank Rate and expanded QE into an inflation target overshoot proves. In terms of Yes Prime Minister being willing to state things like that would be a qualification for a knighthood or as it described it a K. Indeed another potential qualification for a K might be to write and say this.

Central bank credibility is crucial to anchoring inflation expectations………. Arguably we are only now discovering the impact at very low levels of unemployment of the Bank of England’s credibility as an inflation anchor.

Apparently it is doing this right now while inflation is overshooting! Quite how this triumph fits with the credit crunch era is another fantasy which skips reality.

Wage Growth

There is reality expressed here.

Equally strikingly, that 2.2% is about the same rate of wage growth as in 2011 when unemployment rose
above 8% for the first time since the mid-1990s. Over the following 6 years unemployment has fallen quickly
and continuously but nominal pay growth has largely remained bound between 1 and 3%.

If you think this through logically then this is a basis for my argument that rather than aiming for an inflation rate of 2% per annum you should go lower and then we should find some real wage growth. Also it is sad to see a policymaker skip what are the major issues and causes of what is happening.

I noted above that changes in the world of work have very possibly changed the pricing power of labour and
workers’ appetite for risk (i.e. job insecurity). This is in itself a large area of current debate and I do not want
here to go into these in great detail.

The theme seems to be why look at relevant issues when you can continue to chew over the continuing failure of the Phillips Curve which gets pages and pages as opposed to this one paragraph below.

Some of these important changes in the structure of the labour market, such as the rise in self-employment
and decline in union membership, predated the financial crisis. Others, like the rise in temporary work and
zero hours contracts, are more recent. Technology – and the rise of the gig economy – has further
increased what my colleague Andy Haldane has called the ‘divisibility’ of labour.

Real Wages

It is simply astonishing that a man who voted for the monetary policy easing in August 2016 ignores its role in this.

Inflation is currently above target as a result of the post referendum depreciation of sterling and forecast, for
that reason, to remain so over the next three years.

I find it odd that they forecast the fall in the Pound will keep inflation above target for the next three years because as I explained yesterday the major effects are pretty much behind us now. The inflation Forward Guidance gets odder and indeed somewhat bizarre when you read this.

Domestically generated inflation pressure, however, appears low……..Bank staff calculations suggest that adjusted for this effect indicators of domestic inflation pressure are below levels consistent with the 2% target.

Oh and those who had to make calculations back when inflation was just below 27% are permitted a wry smile at this description of 4% inflation ( using the RPI index).

Measuring domestically generated
inflation when externally generated inflation pressure is high, as at present, is not straightforward.

The general Bank of England view is that wage growth is about to pick up and of course that has been true for years now but specifically it is based around this.

3 month on 3 month annualised AWE growth for regular pay is 2.9%.

As ever central bankers are cherry-picking the data as individuals will care most about total pay. However Sir Jon is less convinced by thoughts of a rise in wages although whilst he does not put it this way they are likely to be supported by lower inflation.

there is in my view a not immaterial risk that the
trade-off is not as it currently appears and that domestic inflation pressure will undershoot the Committee’s
collective expectation.

Today’s Data

This was another disappointing day for the Forward Guidance of the Bank of England.

Between July to September 2016 and July to September 2017, in nominal terms, both regular pay and total pay increased by 2.2%, little changed compared with the growth rates between June to August 2016 and June to August 2017.

This meant that real wages did this and for fans of the RPI subtract around 1%.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.4% including bonuses, and fell by 0.5% excluding bonuses, compared with a year earlier.

Comment

There is fair bit to consider here. In my view the views of the Bank of England are driven mostly by an attempt to avoid having to say that the monetary policy easing of August 2016 was a mistake. The majority in favour of this month’s Bank Rate rise do so by optimism on the wages front although of course there is a weakness there as we currently have fallen real wages. Sir Jon Cunliffe avoids it by thinking that inflation will be weak looking ahead.It remains a shame that whatever their views they continue to persist in their beliefs around the Phillips Curve. Sometimes I wonder what it would take for them to abandon it and put it in the recycling bin?

There was a hopeful sign in today’s data which is summarised below.

*U.K. 3Q OUTPUT PER HOUR RISES 0.9% Q/Q, FASTEST SINCE 2Q 2011 ( h/t @stewhampton)

Economics is not called the dismal science for nothing as we note a possible trajectory change as there were fewer hours worked  ( and indeed a 14000 fall in employment). But we have been looking for a productivity rise and this is one of the first signs of it and any continuation would be welcome. Also my first rule of OBR Club may well be in play as of course it ( and the Bank of England) have just downgraded the UK productivity outlook. Sometimes you really couldn’t make it up!