Of China, Bitcoin, football and innovative finance

This week was one when those who consider themselves to be the world’s elite wanted us to concentrate on events at the World Economic Forum in Davos. However this has gone rather wrong for them as the main news items this week turned out to be the Brexit speech given by Prime Minister May in the UK and of course the inauguration of Donald Trump as the new US President later today. These matters were referred to in Davos as George Soros explained how his profit and loss account would have been so much better except for those pesky voters in the UK and US. Bow down mortals, was the message there. The “open society” he proclaims seems to mean being open to agreeing with him.

China

We have found ourselves looking East quite a few times in 2017 and this morning we saw another instance of a thought-provoking action. From Ioan Smith.

| has cut RRR 1% at Big 5 banks HAS CUT RRR BY 1% temporarily to ease “seasonal liquidity pressure” – source

So the People’s Bank of China has eased pressure in the monetary system by reducing the amount of reserves the big banks need to hold. Reuters has given us more detail on this.

The People’s Bank of China (PBOC) has cut the reserve requirement ratio (RRR) for the banks by one percentage point, taking the ratio down to 16 percent.It will restore their RRR to the normal level at an appropriate time after the holiday, according to sources……….The five biggest lenders are Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB), Bank of China, Bank of Communications Co (BoCom) and Agricultural Bank of China.

 

This adds to other moves on the monetary system as I explained on the 5th of this month.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

We have seen signs of this in two areas since. The first was the collapse in the price of Bitcoin as China applied capital controls. There has been more news about this in the last 24 hours. From the Wall Street Journal.

Chinese banking regulators said two bitcoin exchanges in Beijing improperly engaged in margin financing and failed to impose controls to prevent money laundering, a development that could hurt trading of the virtual currency in its biggest market.

The action by China’s central bank signals heightened government scrutiny of bitcoin trading on the mainland, which has been allowed to expand largely unfettered since 2013.

This chart of Bitcoin volumes is quite something.

As ever there is debate about the exact numbers but I think we get the idea.

Also we have seen it in the world of football where after two extraordinary trades where £60 million was supposedly paid for Oscar and Carlos Tevez is being paid around £1 per second. Yet suddenly limits on foreign players suddenly were tightened and as a Chelsea fan I was very grateful for that! Plenty of food for thought there for Roman Abramovich as in essence football was how he got plenty of money outside Russia.

GDP

This morning the Financial Times tells us this.

China’s gross domestic product, the world’s second-largest in nominal terms but already the largest at purchasing power parity, grew 6.7 per cent for the full year and at an annual rate of 6.8 per cent in the fourth quarter in real terms, down from 6.9 per cent in 2015. It was the slowest full-year growth figure since 1990 but comfortably within the government’s target range of 6.5-7 per cent. The fourth-quarter performance topped economists’ expectations of 6.7 per cent, according to a Reuters poll.

It is extraordinary how quickly they come up with their GDP numbers, it is almost as if they make them up. This of course is a counterpoint to headlines of the number being a “beat”. I also note that China seems to have learned something from the western capitalist imperialists.

But housing was a bright spot. Property sales grew 22.5 per cent in floor-area terms, the fastest pace in seven-years, while prices in major cities soared, prompting warnings of a bubble. Analysts expect the housing market to slow in 2016, as the government moves to cap runaway house prices that are a source of popular anger.

That is an issue that has caused plenty of trouble in western countries. Also I see one economist has had a bad day.

“The excess money supply in 2016 created problems with bubbles. Going forward, more deleveraging will be necessary. Monetary policy can’t be loosened further,” said Zhang Yiping, economist at China Merchants Securities in Beijing.

Industrial Production and Retail Sales

The first was extraordinary and yet also represents a slow down. From Investing.com.

In a report, National Bureau of Statistics of China said that Chinese Industrial Production fell to 6.0%, from 6.2% in the preceding month.

Many countries would give their right arm for industrial production growth like that but for China the noticeable fact is that it is now less than GDP growth. Meanwhile the economy seems to have shifted towards consumption

In a report, National Bureau of Statistics of China said that Chinese Retail Sales rose to an annual rate of 10.9%, from 10.8% in the preceding month.

The rest of the world would quite like China to make such a switch as it would reduce its trade surplus but can it manage it?

Financial Innovation

We have come to be very nervous of the word innovation after its use by Irish financiers. But take a look at this from the South China Morning Post last week.

Step one: Pledge a mainland asset with a mainland bank for a standby letter of credit (SBLC) which is a promise by the bank to pay. Use the SBLC to get a HK$8.8 billion loan in Hong Kong.

Since it’s a deal to pay off a piece of land publicly auctioned by the Hong Kong government, approval from the mainland regulators will be easy.

Step two: Pledge the Kai Tak land with the banks in Hong Kong. Many may find the bid – 70 per cent above market estimate – rather risky. Yet, it won’t be too difficult to find banks to provide a HK$3 billion loan which is only 40 per cent of the land cost.

Step three: Pledge the HK$3 billion cash with a bank in Hong Kong for a SBLC.

Step four: Use the second SBLC as security at a mainland financial institution to purchase debentures and bonds with annual returns of over 6 per cent or above.

Step five: Pledge the HK$3 billion worth of debentures with mainland banks for another SBLC. Given a routine discount of 30 per cent for financial products, the bank will issue a promise to pay HK$2 billion.

Step six: Use the third SBLC as collateral and get a HK$2 billion loan in Hong Kong. Repeat step three to five and so on so forth.

These steps may sound a bit complicated. But in many cases, these steps are all done among the mainland and Hong Kong branches of the same bank, though occasionally several banks are involved to dodge regulatory hurdles.

By the end of it you can “have” up to 25 billion Hong Kong Dollars of which 14 billion have left China.

Comment

As you can see there is much to mull about China as for example we have a wry smile at this week’s claim at Davos that it is all for free trade. On the surface we are told that everything is fine yet beneath it there is ever more debt and a rush to send money abroad. Later this year the Yuan is likely to fall again and the whole cycle will begin again.

Later we will find out a little of what President Trump plans so it could be quite a day. We already seem to have moved from fiscal stimulus to cuts as we await some concrete policies.

 

Central banks face an inflation inspired policy exit dilemma

Later today the ECB ( European Central Bank) will announce it latest policy decisions on interest-rates and extraordinary monetary policy such as QE ( Quantitative Easing) asset purchases. I am not expecting any grand announcement of change as this came last time if you recall.

As regards non-standard monetary policy measures, we will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. From April 2017, our net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

Ever since then they have been keen to tell us this is not a taper and the formal minutes showed quite a bit of debate on the matter.

either to continue purchases at the current monthly pace of €80 billion for an additional six months, or to extend the programme by nine months to the end of December 2017 at a monthly pace of €60 billion. In both cases, purchases would be made alongside the forthcoming reinvestments starting in March 2017.

I think they made the right choice to reduce the size of the monthly purchases but do not see why they guaranteed it to the end of the year apart from them being afraid of markets getting withdrawal symptoms.

What are these policies supposed to do?

Back in 2015 the ECB issued a working paper on how it thought QE worked.

First, via the direct pass-through channel, the non-standard measures are expected to ease borrowing conditions in the private non-financial sector by easing banks’ refinancing conditions, thereby encouraging borrowing and expenditure for investment and consumption.

Actually this is a generic explanation of the claimed benefits of extraordinary policies and applies in some ways more directly to the TLTROs (Targeted longer-term refinancing operations) . As ever it is the “precious” which is considered to be the main beneficiary.

this encourages banks to increase their supply of loans that can be securitised, which tends to lower bank lending rates.

Of course this can have plenty of effects and let us remind ourselves that house prices in Portugal are rising at an annual rate of 7.6% which is the “highest price increase ever observed” as I analysed on Monday. Let us then move on by noting that officially this will be recorded as a “wealth effect” and will benefit the mortgage books of the troubled Portuguese banking sector whereas for first-time buyers and those looking to move up the property ladder it is inflation. Although the Euro area measure of inflation ignores this entirely.

In December 2016, the annual rate of change was 0.9% (0.5% in the previous month)

We note that even so it is rising and move on.

Next we have this effect.

Second, via the portfolio rebalancing channel, yields on a broad range of assets are lowered. Asset purchases by the central bank result in an increase in the liquidity holdings of the sellers of these assets. If the liquidity received is not considered a perfect substitute for the assets sold, the asset swap can lead to a rebalancing of portfolios towards other assets.

This is how the 0.1% and indeed the 0.01% benefit as they of course by definition have plenty of assets overall. It is also part of the road where 8 people have as much wealth as the bottom half of the world’s population.

There is supposed to be a third announcement effect but it is hard not to have a wry smile at the claims made for Forward Guidance when you read this.

It has been found to be muted in the United Kingdom, moderate in the euro area and highly uncertain in the United States,

Inflation Target

Here we have the definition of it.

The primary objective of the ECB’s monetary policy is to maintain price stability…….The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

There is clear abuse of language here as the Euro area his in fact had price stability with inflation ~0% in recent times but the ECB does not want this. Back in the day a past ECB President ( Trichet) gave us a rather precise definition of 1.97% in his valedictory speech.

Where are we now?

Yesterday there was something of a change.

Euro area annual inflation was 1.1% in December 2016, up from 0.6% in November. In December 2015 the rate was 0.2%.

So the broad sweep of higher inflation in December around Europe continued as we saw quite a jump. Some of that may unwind but 2017 is likely to see a higher and higher theme as we note transport for fuel rising at an annual rate of 6% and vegetables at 5.2% so exactly the wrong sort of inflation for consumers and workers. There is only one country now with disinflation which is Ireland but more than a few clustering around 2% including Germany at 1.7%. It makes you think if we move to today’s house price update how statisticians in Ireland can report disinflation with house prices rising at an annual rate of 7.1%. Also we seem set to see a phase of more general inflation worries from Germany which has house price inflation of 6.2%.

Exit strategies

Back in December 2009 my old tutor at the LSE Willem Buiter wrote this.

The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm.

He was not aware then of the scale of what he calls fiscal subsidies which have been handed out by the Bank of England, Bank of Japan and the ECB since amongst others. But here is his crucial conclusion.

Delay in the dropping of the veil is therefore likely.

The prediction that they will delay exiting from monetary policies such as QE is spot on in my view and is where we are now. We have seen a PR campaign for example by Bank of England Governor Mark Carney as he sings along to Shaggy on distributional issues concerning wealth and also income.

She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the scream get louder (It wasn’t me)

However I disagree with Willem completely here.

There are few if any technical problems involved in reversing the unconventional monetary policies – quantitative easing, credit easing and enhanced credit support – implemented by central banks around the world as short-term nominal interest rates became constrained by the zero lower bound.

I was never entirely convinced by this line of argument but of course to be fair to Willem the situation now concerning QE is completely different in terms of scale.  Many bond purchases look to be permanent and the UK for example has bought Gilts which mature in the 2060s.

Comment

If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise? We learn a little from what the US Federal Reserve has done but maybe not as much as we might think for two reasons. Firstly whilst it stopped new QE purchases it continues to reinvest maturing purchases from the past. Secondly in terms of the international picture it did so whilst so many others were on the “More.More,More” road as it got a type of first mover advantage.

The Bank of England is in a particularly bad place as it applied more when in fact there were arguments for less ( likely higher inflation) followed by the Bank of Japan which is buying assets so quickly. Accordingly I wait to see if we get any hints of future moves from the ECB today.

Oh and do you note that the official rationale for QE type policies never seems to involve confessing you would like a lower value for your currency?

Me on TipTV Finance

 

http://tiptv.co.uk/inflamed-inflation-not-yes-man-economics/

Mark Carney plans to do nothing about rising UK inflation

Today is inflation day in the UK where we receive the full raft of data from producer to consumer inflation topped off with the official house price index. We already know that December saw gains elsewhere in the world such as Chinese producer prices and consumer inflation in the Czech Republic and some German provinces so we advance with a little trepidation. That of course is the theme we were expecting for the UK anyway as the oil price was unlikely to repeat the falls of late 2015 ( in fact it rose) and this has been added to by the fall in the value of the UK Pound £ after the EU leave vote last June.

The Bank of England

Governor Mark Carney updated us in a speech yesterday about how he intends to deal with rising inflation. But first of course we need to cover his Bank Rate cut and £70 billion of extra QE ( Quantitative Easing) including Corporate Bond purchases from August as tucked away in the speech was a confession of yet another Forward Guidance failure.

Over the autumn, demand growth remained more resilient than had been expected, particularly consumer spending.

Yet at the same time we were expected to believe that by being wrong the Bank of England was in fact a combination of Superman and Wonder Woman as look what it achieved.

but an output gap of some 1½%, implying around 1/4 million lost jobs

So Mark why did you not cut Bank Rate by a further 1.5% and do an extra £350 billion of QE because then you would have pretty much eliminated unemployment? If only life were that simple! For a start it is rather poor to see a theory (the output gap) which I pointed out was failing in 2010 and did fail in 2011 having a rave from a well deserved grave. I guess any port is  welcome when you are in a storm of your own mistakes.

As to his intention to deal with inflation I summarised that last night as he spoke at the LSE.

Here is the Mark Carney speech explaining how and why he will miss his inflation target http://www.bankofengland.co.uk/publications/Pages/speeches/2017/954.aspx 

It was nice to get a mention on the BBC putting the other side of the debate.

http://bbc.in/2jsktij

You see with his discussion of algebra and “lambda,lambda,lambda” we are given an impression of intellectual rigour but the real message was here.

the UK’s monetary policy framework is grounded in society’s choice of the desired end.

What is that Mark?

monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment

As you see we are being shuffled away from inflation targeting as we wonder how long the “short-term” can last? As we do we see a familiar friend from my financial lexicon for these times.

inflation may deviate temporarily from the
target on account of shocks

So “temporarily” is back and a change in the remit will allow him to extend his definition of it towards the end of time if necessary.

Since 2013, the remit has explicitly recognised that in these
circumstances, bringing inflation back to target too rapidly could cause volatility in output and employment
that is undesirable.

Of course with his Forward Guidance being wrong on pretty much a permanent basis Governor Carney can claim to be in a state of shock nearly always. A point of note is that this is a policy set by the previous Chancellor George Osborne not the current one.

The fundamental problem is that as inflation rises it will reduce real wages ( although maybe not in the Ivory Tower simulations) and thereby act as a brake on the economy just like in did in 2011/12.

Today’s data

We are not surprised on here although I see many messages online saying they were.

The all items CPI annual rate is 1.6%, up from 1.2% in November.

In terms of detail the rise was driven by these factors.

Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier.

So a sign of how air travellers get singed at Christmas and also this.

Food and non-alcoholic beverages, where prices overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year

So Mark Carney and the central banking ilk will be pleased as if we throw in motor fuel rises the inflation is in food and fuel or what they call “non-core”. Of course the rest of us will note that it is essential items which are driving the inflation rise.

Target alert

I have been pointing out over the past year or so the divergence between our old inflation target and the current one. Well take a look at this.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.7%, up from 2.5% last month.

It is above target and whilst there are dangers in using one month’s data we see that this month implies that our inflation target was loosened in 2002/03 by around 0.6%. Good job nothing went wrong later……Oh hang on.

What happens next?

We get a strong clue from the producer prices numbers which tell us this.

Factory gate prices (output prices) rose 2.7% on the year to December 2016 and 0.1% on the month,

As you see they are pulling inflation higher and if we look further upstream then the heat is on.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 15.8% on the year to December 2016 and 1.8% on the month.

The relationship between these numbers and consumer inflation is of the order of the one in ten sung about by the bank UB40 so our rule of thumb looks at CPI inflation doubling at least.

House Prices

What we see is something to make Mark Carney cheer but first time buyers shiver.

Average house prices in the UK have increased by 6.7% in the year to November 2016 (up from 6.4% in the year to October 2016), continuing the strong growth seen since the end of 2013.

So whilst I expect a slow down in 2017 the surge continues or at least it did in November. Surely this will have been picked up by the UK’s new inflation measure which we are told includes owner-occupied housing costs?

The all items CPIH annual rate is 1.7%, up from 1.4% in November……The OOH component annual rate is 2.6%, unchanged from last month.

So no as we see a flightless bird try to fly and just simply crash. That is what happens when you use Imputed Rent methodology which after all is there to convince us we have economic growth and therefore needs a low inflation reading.

As an aside we got an idea of the boom and then bust in Northern Ireland as the average house price rose to £225,000 pre credit crunch but is now only £124,000. Is that a factor in its current crisis?

Comment

Last night saw a real toadying introduction to the speech by Mark Carney at the LSE.

He is someone who thinks very deeply about the big responsibilities he has, and he has that very rare talent of being able to think and act at the same time

The introducer must exist in different circles to me as I know lot’s of people like that and of course the last time Governor Carney acted the thinking was wrong. I did have a wry smile as this definition of the distributional problems that the extra QE has and will create.

He has been thinking very hard about distributional issues

What we actually got was a restatement of Bank of England policy which involves talking about the inflation target as if they mean it and then shifting like sand to in fact giving the reasons why they will in fact look the other way. Last time they did this the growth trajectory of the UK economy fell ( with real wages) rather than rose as claimed. The only ch-ch-changes in the meantime are that the current inflation remit will make it even easier to do.

 

 

 

 

The economic problem that is Italy continues

Today brings the economic situation in Italy into focus as it readies itself for a ratings review. Friday the 13th may not be the most auspicious of days for that! However I should be more precise in my language as the Italian government will know as they get told 24 hours before. So as we live in a world where things leak, today will be a day where some traders will be more equal than others so take care. But there are plenty of worries around due to the fact that one of the central themes of this website which is Italy’s inability to maintain any solid rate of economic growth continues. To be more specific even in the good times it struggled to have GDP (Gross Domestic Product) growth of more than 1% per annum. This it was particularly ill-equipped to deal with the credit crunch and was left with weak economic foundations such as its banks.

Some better news

This was to be found in yesterday’s production numbers.

In November 2016 the seasonally adjusted industrial production index increased by 0.7% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.9.

The calendar adjusted industrial production index increased by 3.2% compared with November 2015

As you can see these were good numbers although not so good for economists whose expectations so often misfire. As the Financial Times pointed out there was a positive change in response to this.

Economists at Barclays have doubled their projected fourth quarter growth forecast for the eurozone’s third largest economy to…0.2 per cent…….. GDP growth is now expected to clock in at 0.2 per cent from an earlier projection of 0.1 per cent in the three months to December,

If you really want to big this up then you can say that the expected growth rate has doubled! Of course the issue is that it is so low and that even this would be a reduction on the 0.3% achieved in the third quarter of 2016. For a little more perspective imagine the outcry if a post EU vote UK had grown like that, twitter would have been broken.

The Labour Market

The data here is far from positive however as on Monday we were told this.

In November 2016, 22.775 million persons were employed, +0.1% compared with October. Unemployed were 3.089 million, +1.9% over the previous month……..unemployment rate was 11.9%, +0.2 percentage points in a month and inactivity rate was 34.8%, -0.2 percentage points over the previous month.

This is the Italian equivalent of a Achilles Heel and separates it from the general Euro area performance where the unemployment rate has been falling and is now at 9.8%. In fact it was one of only four European Union states to see an annual rise in its unemployment rate and we should make a mental note that Cyprus was another as this does not coincide with the message that the bailout was a triumph. Returning to Italy there was more bad news in the detail of the numbers.

Youth unemployment rate (aged 15-24) was 39.4%, +1.8 percentage points over October and youth unemployment ratio in the same age group was 10.6%, +0.7 percentage points in a month.

I hope these sort of numbers do not lose their ability to shock us and also note that time matters here as Italy is in danger of seeing a lost generation as well as a lost decade. So many must have no experience of what it is like to work.

Consumer Inflation

The last week or so has seen quite a few nations recording a pick-up in inflation in December so we see yet another area where Italy is different.

In December 2016, according to preliminary estimates, the Italian harmonized index of consumer prices (HICP) increased by 0.4% with respect to the previous month and by 0.5% with respect to December 2015 (from +0.1% in November 2016).

Yes there was a rise but to a much lower level and in terms of Italy’s own CPI prices fell in 2016 overall albeit by only 0.1%. So as we observe low rates of economic growth we see that Italy is in fact quite near to deflation which for me would be signaled by falling output and prices.

Italian consumers are unlikely to be keen on the rising inflation level such as it is because it was mostly fuel and food driven.

House Prices

Here is another difference as you might think that an official interest-rate of -0.4% and 1.5 trillion Euros or so of bond purchases in the Euro area would lead to house price rises. That is of course true in quite a few places but not in Italy.

In the third quarter of 2016: – the House Price Index (see Italian IPAB) increased by 0.1% compared to the previous quarter and decreased by 0.9% in comparison to the same quarter of the previous year (slightly down from -0.8 registered in the second quarter of 2016);

So not much action at all and in fact Italy has been seeing house price disinflation. The official index has done this after being set at 100 in 2010. It has gone 102.4 (2013), 100.1 (2014), 98.6 (2015) and 97.4 in the third quarter of last year.

So good for first time buyers and in many ways I think more welcome than the UK situation but surely not what the Italian President of the ECB Mario Draghi had planned.

The banks

This is a regular theme as well and I covered the Monte Paschi bailout on the 30th of December and apart from a debate as to how bad the bad loans are there is little change here. Yes the same bad loans which we were told were such great value only a couple of months or so ago. Also Unicredit is continuing with its 13 billion Euro capital raise confirming the view I expressed on Sky Business News just over 5 years ago. Eeek! Where did the time go?

http://www.mindfulmoney.co.uk/mindful-news/unicredit-collapse-the-invasion-of-zombie-banks/

We do have some news on this subject and it does raise kind of a wry smile.

UBI Banca, Italy’s fifth-largest bank by assets, has been cleared to buy for €1 the rump of three lenders rescued by the state in the latest step in Italian bank consolidation. UBI made the offer for Marche, Etruria and Carichieti to the state bank resolution fund on the condition the so-called good banks are stripped of €2.2bn in bad loans. ( Financial Times).

Oh and 1 Euro may turn out to be very expensive if you read my 30th of December post and the relationship of Finance Minister Padoan with reality and honesty.

Pier Carlo Padoan, finance minister, told lawmakers in Rome he was “convinced” the deal was good for the bank in question and confidence in the Italian banking system.

The discussion these days turns a lot to those bad loan ratios and how much of them have been dealt with. As ever there appears to be some slip-sliding-away going on.

Comment

The simplest way of looking at Italian economic performance this century is to look at economic growth and then growth per head. Sadly we see that GDP of 1555.5 billion Euros in 2000 ( 2010 prices) was replaced by a lower 1553.9 billion in Euros in 2015. But the per head or per capita performance was much worse as the population rose from 57.46 million in 2000 to 60.66 million at the end of 2015.

It is that economic reality which has weakened the banks (albeit with not a little corruption thrown in) and also led to the problems with the national debt about which we have also learned more today.

Italian General Government Debt (EUR) Nov: 2229.4B (prev 2223.8B) ( h/t @LiveSquawk )

The bond vigilante wolf is being kept from the door by the amount of bond purchases being made by the ECB.

What hope is there? Perhaps that the unofficial or unregulated economy is larger than we think. Let us hope so as Italy is a lovely country. But in contrast to Germany which I analysed on Monday the level of the Euro looks too high for Italy.

 

 

 

When will the Riksbank of Sweden cross it’s own Rubicon?

This week is posing more than a few questions for the pattern of world monetary policy and it is only Thursday morning. It is hard not to have a wry smile at my own country where the Governor of the Bank of England Mark Carney was busy talking the UK Pound £ down yesterday as well as performing a hand brake U-Turn and I believe a hand stand only to be well,Trumped later! We will have to see how that settles down as those selling the Pound ( Morgan Stanley and Deutsche Bank) have seen their stops fired off this morning and the Financial Times twitter feeds have stopped its regular mentions of its level.

However we are going to continue on what might be called our grand tour to Europe and pop over to the Kingdom of Sweden which of course is a familiar stopping point for me. The reason for that is the extraordinary monetary experiment which is taking place there which is approaching the zone where there should be ch-ch-changes. This morning they have updated us with their monetary policy minutes so let us take a look.

Riksbank

Policy is summarised below.

All of the Executive Board members assessed that it was now appropriate to hold the repo rate unchanged at –0.50 per cent and to reinvest maturities and coupon payments on the government bond portfolio until further notice…….Moreover, a majority of the Executive Board members considered that the risks to the upturn in inflation call for a continuation of the government bond purchases during the first half of 2017 and that they should be extended by SEK 30 billion, corresponding to SEK 15 billion in nominal bonds and SEK 15 billion in real bonds.

Newer readers will be beginning to see my interest as we see something of a full house of negative interest-rates, QE (Quantitative Easing) government bond purchases and an Operation Twist style reinvestment of maturing bonds. In short even Paul Krugman of the New York Times can call them “sadomonetarists” although of course my avoidance of politics means I can only rarely mention him these days although I suppose I can point out his current plan to boost the US economy by buying some bathroom fixtures.

So we see that the monetary pedal is close to the metal although it would seem that the Riksbank has dropped its threat/promise to intervene in foreign exchange markets. although we do have some Forward Guidance.

Increases in the repo rate are not expected to begin until the beginning of 2018.

Care is needed though as Riksbank Forward Guidance has had all the success of Forward Guidance from the Bank of England.

Inflation is on its way

This morning Sweden Statistics has told us this.

In December 2016, the inflation rate according to the Consumer Price Index (CPI) was 1.7 percent, up from 1.4 percent in November. The CPI rose by 0.5 percent from November to December 2016.

If you are wondering why well it is not a particular surprise.

mainly due to a rise in prices for transport services (9.1 percent), which contributed 0.3 percentage points.

There were other effects of the higher price of oil (package holidays were 4.8% more expensive) and the cost of food rose. So in terms of essential goods ( food and fuel) inflation is particularly rising although of course central bankers consider these to be non-core. If you try to allow for the initial effects of the official negative interest-rate then you see this.

The inflation rate according to the CPIF (CPI with a fixed interest rate) was 1.9 percent in December, up from 1.6 percent in November.

All this matters because this is badged as the modus operandi of the Riksbank.

More precisely, the Riksbank’s objective is to keep inflation around 2 per cent per year.

No doubt you are seeing the point which is that the level of consumer inflation is plainly on its way into that zone in 2017. Also you may note a difference from the ECB (European Central Bank) which aims to keep it just below 2%. So the Riksbank has an easier target and if you like has a little “wriggle” room.

House Prices

Extraordinary monetary policy is often accompanied by a rise in asset prices of which house prices are an example so let us examine today’s data.

Real estate prices for one- or two-dwelling buildings increased by almost 1 percent in the fourth quarter 2016, compared with the third quarter. Prices increased by almost 10 percent on an annual basis during the fourth quarter of 2016, compared with the same period last year.

A driving force in this is the availability of mortgage credit which of course is one of the objectives of the Riksbank. Central bankers love to “pump it up”.

The downturn was mainly due to housing loans, with an annual growth rate of 7.8 percent in November, which was a decrease of 0.1 percentage points compared with October.

It is revealing that an annual growth rate of 7.8% is a downturn isn’t it? If you want it in monetary terms here it is.

Housing loans amounted to SEK 2 882 billion in November, which is an increase of SEK 17 billion compared with the previous month and SEK 209 billion compared with the same month last year.

Also you may note as we have observed before that you can push the cost of mortgage credit lower but it then appears to find something of a floor. After all we cannot harm the “precious” can we?

The average interest rate for housing loans for new agreements was 1.57 percent in November, which means that it dropped compared with October, when it was 1.59 percent.

Comment

There is much to consider here but first let me give you a clear example of the alternative universe which is inhabited by central bankers and their ilk.

Another positive in November was food prices continuing to rise and surprise on the upside.

The only group that should be welcoming this is farmers! Everyone else will be disappointed in the rise of a commodity so essential that it is called “non-core” by central bankers.

If we move to monetary policy then there are echoes of the situation in the Czech Republic that I analysed on Tuesday as we see another country where inflation had a strong December. Oh and I did mention the Riksbank’s poor Forward Guidance performance didn’t I?

Inflation therefore continues to surprise on the downside,

Now they are in danger of being wrong-footed as they continue with negative interest-rates and more QE designed to push inflation higher just as it approaches its target. In my opinion they are rather like Julius Caesar when he crossed the Rubicon as not only is inflation rising but economic growth looks solid.

A growth rate of 3.4 per cent is expected this year, a tenth higher than in the October forecast. Growth for 2017 has been revised upwards by 0.4 percentage points to 2.4 per cent.

Also they expect that the performance of the Krona in 2016 will further boost inflation.

The impact of the exchange rate on inflation has also been analysed. The Swedish krona has recently been unexpectedly weak.

Thus we find ourselves arriving at one of my earliest topics which was and is how central banks will reverse the extraordinary monetary policies they have implemented or more simply what is their exit strategy? So far Life’s Been Good for Sweden and the Riksbank but Joe Walsh also has a warning.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door

 

 

The UK economy is doing pretty well but inflation is on the cards

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures

Production

These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.

Trade

We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.

Construction

Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.

Comment

So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

The currency problems of the Czech Republic mount

Today I wish to take a journey to central Europe to take a look at a place which was described by British Prime Minister Neville Chamberlain in September 1938 like this.

“How horrible, fantastic, incredible it is that we should be digging trenches and trying on gas-masks here because of a quarrel in a far-away country between people of whom we know nothing.”

Of course there are some geo-political issues of that time which are recurring but as we note that the country of back then was spilt into two as we now have Slovakia and the Czech Republic there is something else to interest us. This is the exchange-rate policy of the Czech National Bank (CNB).

The CNB therefore decided in November 2013, in accordance with its statutory mandate to maintain price stability and in line with its previous communications, to start using the exchange rate of the koruna as an additional monetary policy instrument.

A slightly curious description as in preceding paragraphs they told us that what we would now call Forward Guidance on the subject had been working.

caused the Czech koruna to weaken in late 2012/early 2013

We are of course familiar with central bankers struggling with reality and Forward Guidance being a particular problem on this front with up regularly being the new down. However in spite of the claimed improvement we find ourselves noting that yet again what is described these days as “Moar” was required.

The CNB undertook to intervene in the foreign exchange market to weaken the koruna so as to maintain the exchange rate close to CZK 27 to the euro. This exchange rate commitment is asymmetric, i.e. the CNB will stop the koruna appreciating below CZK 27 to the euro but will leave any further depreciation above CZK 27 entirely in the hands of supply and demand on the foreign exchange market.

What is the significance of this?

The first is simply geography and I mean by this proximity to the Euro which has caused problems for a raft of countries around it most notably Denmark and Switzerland with their negative interest-rates. Also the Swiss National Bank has become an enormous hedge fund via its currency interventions and recycling policy. Right now with equity markets on highs that looks a cunning plan but of course trying to realise it on any scale could switch that to the sort of cunning plan espoused by Baldrick in the television series Blackadder.

Next comes the issue that the more you fix the exchange-rate the less you can do about internal monetary policy. As the Swiss have found above the money supply and other matters cannot now be controlled. There is a Swiss like element to the policy.

The CNB can use infinite amounts of koruna to purchase foreign currency, as it itself issues the Czech currency in both paper and electronic form. The CNB is resolved to intervene in such volumes and for such duration as needed to maintain the chosen exchange rate level.

Be careful what you promise! Anyway the Koruna went above the 27 level until late summer 2015 since when if you are willing to ignore minor moves a fixed exchange-rate at 27. The price of this is that it needed to intervene starting at just over 1 billion Euros worth in July 2015 and peaking at just under 4 billion last October. The small-scale is probably simply the fact that for many of the main currency players and investors it is too small a market to bother with and that is for those who know it exists! Sometimes small is indeed beautiful.

What happens next?

Well on the 22nd of December this was decided.

The Bank Board therefore states again that the CNB will not discontinue the use of the exchange rate as a monetary policy instrument before 2017 Q2. The Bank Board still considers it likely that the commitment will be discontinued in mid-2017.

I guess worries immediately arise about any Forward Guidance from a central bank as we note that exit strategies if we are being polite have proved to be somewhat problematic. This morning’s update from the Czech Statistical Office has brought this into focus.

Consumer prices in December increased compared with November by 0.3%…….. The year-on-year growth of consumer prices amounted to 2.0%, i.e. 0.5 percentage points up on November. It is the highest year-on-year price growth since December 2012.

This is a bit like the point where a train or aircraft announces that you have arrived at your destination! What caused this?

The month-on-month rise in consumer prices in ‘food and non-alcoholic beverages’ came primarily from the increase in prices of vegetables by 10.6%, of which prices of vegetables cultivated for their fruit rose by 40.8%.

Are “vegetables cultivated for their fruit” tomatoes? Anyway the Czechs are seeing an outbreak of food inflation which of course hits the poorest the most.

Prices of rolls and baguettes were higher by 10.4% (1.5% in November), eggs by 13.7% (10.3% in November), fresh butter by 20.7% (16.6% in November). Prices of vegetables cultivated for their fruit were higher by 41.5% (a drop by 10.1% in November).

It looks like there are effects here which may unwind a bit but as we go into 2017 we can expect more of this if we look at the price of crude oil.

In ‘transport’, prices of automotive fuel turned from a drop in November by 0.3% to a growth by 4.3%.

Actually if we were to use the Euro area standard which has some logic if you are shadowing it as a currency then we are above the inflation target already albeit marginally.

the HICP in the Czech Republic in December went up by 0.3%, month-on-month, and by 2.1%, year-on-year.

Oh and there is a be afraid, be very afraid moment in the further detail.

So far, imputed rentals have been excluded from the HICP

If this from fastFT is any guide then the word control needs to go into my financial lexicon for these times.

Policymakers have maintained a hard upper limit on the koruna at CZK27 against the euro since 2013 in a bid to control inflation

What about unemployment?

Whilst the CNB has trouble ahead there is one area where things look pretty good and I mentioned it in passing yesterday as we looked at Germany.

the lowest unemployment rates in November 2016 were recorded in the Czech Republic (3.7%) and Germany (4.1%).

If we look more generally economic growth had disappointed a bit according to the CNB.

Industrial production growth slowed considerably, mainly reflecting an unexpected downturn in exports in October. The long-running decline in construction output, caused mainly by a drop in public investment, slowed only marginally in October. Retail sales growth remains at solid levels.

Since then we have discovered that industrial production rose by 1.3% in November on the month before making the numbers in that area look better.

More German than the Germans

If I give you a couple of snapshots you will understand what I mean.

The general government balance expressed as a percentage of GDP reached a high surplus of 2.16 percent in the third quarter of 2016…….General government consolidated gross debt decreased annually by 1.92 p.p. to 38.73 percent of GDP.

No doubt there is a (long) word in German for this but that is way beyond my language skills. Also whilst we are in a Germanic style surplus zone there is this.

In January−November 2016, trade surplus in national concept reached CZK 189.9 bn which represented a y−o−y increase of CZK 57.8 bn.

Comment

So far I have avoided the phrase competitive devaluation but this is what we have seen from the Czech Republic. To put it another way it can be labelled as “exporting deflation” as it has kept its exchange rate lower than otherwise to gain a competitive gain which means that someone else has lost via a competitive disadvantage. Not too friendly and this has been added to via the fact it has shadowed the Euro which itself has fallen. If we were looking for a concrete example of this then perhaps Reuters have shown us one earlier today.

Skoda Auto, the Czech unit of carmaker Volkswagen (DE:VOWG_p), raised global deliveries by 6.8 percent to a record 1.13 million cars in 2016, lifted by rising sales in Europe and China, the company said on Tuesday.

This leaves us with two issues. The first is that the economies trying to lower their currency are a large group if we start with the main group of the Euro area, China and Japan with the UK of course also recently depreciating. Secondly looking forwards the CNB faces the issue of how it exits if inflation picks up quickly or whether it follows the central banker philosophy of shouting both “temporary” and “counterfactual” whilst looking the other way.