The return of the unreliable boyfriend causes carnage for the Pound £

Yesterday was not one of the better days for the Bank of England. To explain why let us take the advice of Kylie Minogue and step back in time. We go back to its house journal or the economics editor of the Financial Times Chris Giles on the 22nd of March.

The Bank of England has set the stage for an interest rate rise at its meeting in May, saying that pay growth was picking up and inflation was expected to remain above its 2 per cent target.

For Chris this was an example of deja vu and another success on its way for Forward Guidance.

Michael Saunders and Ian McCafferty broke ranks and voted for an immediate increase in interest rates, in a replay of events last September, when their dissenting views foreshadowed the MPC’s policy tightening announced in November.

The hits kept coming for the rise in May and go away camp.

The remaining seven MPC members argued that while nothing had changed significantly enough since the February meeting to justify an immediate move, they still believed rates would have to rise faster than markets had expected at the last meeting.

So the view advanced that an interest-rate rise in May was pretty much a done deal and markets moved towards suggesting a 90% chance of it. This was further reinforced by a speech given by Gertjan Vlieghe which I have mentioned before. From April 6th.

But last month Gertjan Vlieghe, an external MPC member, broke ranks with his colleagues on the nine-member committee when he said that rates could rise above 2 per cent over the same period.

So the stage was set and if there was a warning from the FT it was heavily coded and looked at something else.

The Riksbank has had some difficulties with its predictions. Until last year, it had been persistently over-optimistic about its ability to raise interest rates, always expecting rates to start rising soon

A bit like the England batsman James Vince who plays some flashy eye-catching shots but then gets out in the same familiar fashion.

Yesterday

Unfortunately for Governor Carney all his troubles were not so far away and it looked as though they were about to stay. He gave an interview to the BBC.

The governor of the Bank of England has said that an interest rate rise is “likely” this year, but any increases will be gradual.
Mark Carney said major decisions had to be taken on Brexit, including on the detail of the implementation period and the shape of a final deal.

There would also be a parliamentary vote on the future relationship between Britain and rest of the EU.

All those events would weigh on how fast interest rates rises would occur.

This poses more than a few problems. Firstly there is the issue of Brexit about which of course there are opposite views. But whichever side of the fence you are on the truth is that the water has been much less choppy recently so the Governor is flying a false flag. This adds to the problem he has in this area because he has been consistently too pessimistic on this subject, From the Guardian in May 2016.

That would leave the Bank with a difficult balancing act as it decides whether to cut, hold or raise interest rates to counter opposing forces, Carney added.

Of course the difficult balancing act suddenly became cut as fast as he could with a promise of a further cut that November which was later abandoned. This contrasts in polar fashion with the pace at which interest-rate increases arrive as we are still waiting for the one promised back in the summer of 2014. From the Wall Street Journal.

Bank of England Gov. Mark Carney said Thursday that interest rates in the U.K. could rise sooner than investors expect, sending the clearest signal yet that Britain’s central bank is inching closer to calling time on five years of record-low borrowing costs.

Well not that clear as it turned out to be comfortably numb.

A distant ship, smoke on the horizon
You are only coming through in waves

This was something which created quite a disturbance in the markets as they scrambled to move interest-rate and bond futures. It is easy to forget now but the words of Governor Carney caused quite a bit of damage as the move eventually reversed. Also there was this.

And he warned the BOE intends to be vigilant over any risks to the recovery emanating from the housing market, where rising prices are stoking fears that Britons could become too indebted.

Indeed

Term Funding Scheme. Our Term Funding Scheme (TFS) provides funding to banks and building societies at rates close to Bank Rate. It is designed to encourage them to reflect cuts in Bank Rate in the interest rates faced by households and businesses.

Oh sorry not that £127 billion one nor the extra £60 billion of QE Gilt purchases. anyway as there is nothing to see here let;s move along.

How fast?

This issue is something which just gets ever more breathtaking so let me take you to the Bank of England Minutes.

All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

The problem here is that whilst this is repeated by the media like a mantra nobody points out that we have had years of such hints and promises now with us remaining at the “emergency” Bank Rate of 0.5%. We did of course get a panic cut in the summer of 2016 followed after what was considered to be a suitable delay to avoid embarrassment an overdue reversal but no increases at all.I am reminded of the explanation of what minutes mean by the apochryphal civil servant Sir Humphrey Appleby which was along the lines of “Whatever you want” from Status Quo, But feel that this from June 2014 was more accurate.

Part of that normalisation would be a rise in Bank
Rate at some point

The some point has never arrived but of course the hot air rhetoric carries on regardless. From Bloomberg.

Bank of England Governor Mark Carney says the U.K. should prepare for a few interest-rate increases over the next few years.

Perhaps he means after June 2019 when he leaves.

Comment

We find ourselves looking at a familiar theme which is the woeful forecasting record of the Bank of England. In this instance we see that it has changed its mid again about pay growth and inflation if we look through the Brexit inspired smokescreen. This matters because the present Governor Mark Carney has placed enormous emphasis on so-called Forward Guidance which of course has turned out to be anything but. It is a feature of his tenure that he is a dedicated follower of fashion but in his private moments he must regret following that particular central banking one. His forward guidance on climate change also has its troubles.

Carney said in the comments, made on the sidelines of the International Monetary Fund meetings in Washington.

This morning another member of the Bank of England Michael Saunders has demonstrated what a land of confusion they live in.

because the economy’s response to
changes in interest rates, especially rises, is more uncertain than usual.

Is it? Maybe one day we will find out! Also there is this rather bizarre statement and the emphasis is mine.

He also discusses why any further tightening is likely to be at a gradual pace and to a limited extent.

So there you have it. As to the decision well the Bank of England has led itself and the markets up the garden path and now is having second thoughts. The real problem is not the current view which is more realistic but why it keeps being wrong?

A new Governor?

An ability not to see anything inconvenient seems a good start and of course the ability to deny almost anything would be of great help. Some have suggested he has gone because he wants to be in Europe next season but personally I think we should remember the positive influence he brought to English football in the early days. A big change to the drinking and eating cultures for a start.

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We have good news as the Bank of England gets an inflation headache

As our attention moves today to inflation in the UK there is something we have cause to be grateful for. Let me hand you over to the Independent.

The pound hit its highest level against the dollar since the Brexit vote in June 2016, rising to $1.4364 by mid-morning………….

It has fallen back to US $1.43 since that but the principle that we have seen a considerable recovery since we fell below US $1.20 holds. If we look back to a year ago then we were just below US $1.28 and this matters for inflation trends because so many basic materials and commodities in particular are priced in US Dollars. We have not done so well against the Euro as we are around 2% lower than a year ago here which used to be considered as a dream ticket but as ever when we get what we want we either ignore it or forget we wanted it. The Euro has been strong which we can observe by looking at it versus the Swiss Franc where it has nearly regained the famous 1.20 threshold which caused so much trouble in January 2015.  But overall for us currency driven inflation has become currency driven disinflationary pressure.

Oil

On the other side of the coin we are seeing some commodity price pressure from crude oil and those who follow trading will be worried by this development.

DG closes long USDJPY position (Short of 3 units of yen vs the dollar). Opens short WTI & Brent (one unit of each) ( @RANsquawk )

You have reached a certain level of fame or infamy in this case when you are known by your initials but Dennis Gartman has achieved this with claims like the oil price will not exceed US $44 again in his lifetime. So we fear for developments after finding out he has gone short and if we look back we see that the price has been rising. The rally started around midsummer day last year when it was just below US $45 per barrel for Brent crude as opposed to the US $72 as I type this. More specifically it was at US $53  a year ago.

If we look wider at commodity prices we see that there has been much less pressure here as the CRB Index was 423 a year ago as opposed to the 441 of now. What there has been seems to have been in the metals section which has risen from 894 to 968. We can add to that the recent Russia sanctions driven rise in the Aluminium price as it is not included in the index.

Shrinkflation

This is on my mind because as many of you will recall we were told that products were shrinking because of the lower level of the UK Pound £. Last July the Office for National Statistics told us this.

No, you’re not imagining it – some of your favourite sweets really are shrinking. In November 2016, Toblerone chocolate bars reduced in size by about 10%, provoking outrage online. And Maltesers, M&Ms and Minstrelshave gone the same way.

It’s a phenomenon known as “shrinkflation” – where manufacturers reduce the package size of household goods while keeping the price the same.

I just wondered if any of you have seen signs of prices going back down or more specifically pack sizes growing? If we move to the price of ingredients which was blamed I note that sugar prices are lower over the past year from above US $17 to below US $12 and whilst cocoa prices have risen this year they are still below where they were in early 2016.

Even if the picture for chocoholics is a little mixed there were plenty of products which rose in price which we were told was due to the lower Pound £, have any of these fallen back now it is higher? I can tell you that the new running shoes I have just received were at the new higher £65 rather than the previous £55. I also recall Apple raising prices did they come back down?

Moving back to a more literal shrinkflation there was this a week ago. From City AM

According to new research from LABC Warranty, average house sizes have shrunk by over 12 square metres over the last 50 years.

The study looked at 10,000 houses built between 1930 and the present day, using open data from property sites Rightmove and Zoopla. The analysis concluded that house sizes are smaller than they were in the 1930s, after reaching a peak in the 1970s.

How does that work with the obesity crisis?

Today’s data

There was more of the welcome news we have been expecting on here although I note that the Financial Times has called it “disappointing.”

The all items CPI annual rate is 2.5%, down from 2.7% in February.

We do get a hint that the rally in the UK Pound £ has helped from this part of the detail.

The CPI all goods index annual rate is 2.4%, down from 3.0% last month.

Good prices were pushed up by the previous fall in the currency but now inflation in this area is rather similar to that in the services sector ( 2.5%) so after the recent drops we may see a plateau of sorts. As to the factors at play this month as I have noted several times in the past couple of years it is time to say thank you ladies.

Large downward effect…….. Prices overall rose this year by less than a year ago, with the main downward contributions coming from women’s dresses, jumpers, cardigans and coats, and boys’ T-shirts.

The good news carried on with the Retail Prices Index although of course with a higher number albeit less of a gap than we have got used to.

The all items RPI annual rate is 3.3%, down from 3.6% last month.

Producer Prices

These give us an idea of what is “coming up that hill” as Kate Bush would put it. Here we see some better news at the start.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.4% on the year to March 2018, down from 2.6% in February 2018.

However we do see the beginnings of the influence of the higher oil price further in the distance.

Prices for materials and fuels (input prices) rose 4.2% on the year to March 2018, up from 3.8% in February 2018.

House Prices

We even had better news on this front.

Average house prices in the UK have increased by 4.4% in the year to February 2018 (down from 4.7% in January 2018). The annual growth rate has slowed since mid-2016 but has remained generally under 5% throughout 2017 and into 2018. Average house prices in the UK decreased by 0.1% on the month.

Of course if we look at all the different measures we seem to be bouncing between 0% and 5% but that in itself is better and the 5% upper barrier looks like it might be set to fall.

Comment

Just in time for the sunny spring weather the UK economy has produced two days of good data. Yesterday’s employment data has been followed by a fall in nearly all our inflation measures which of course sprinkles a few rays of sunshine on the prospects for real wages. These numbers will take time to filter into the other data such as consumption and GDP ( from the autumn perhaps) but the worm has now turned in this respect albeit not in time for the first quarter of this year.

Meanwhile there are two pockets of trouble and they are centred within our establishment. Firstly Bank of England Governor Carney has apparently had a headache and asked for some ibuprofen as he mulls how an inflation targeting central banker can raise interest-rates into falling inflation having ignored its rise?

Also the Office of National Statistics has argued itself into an increasingly lonely corner with this.

The all items CPIH annual rate is 2.3%, down from 2.5% in February.

Why has it become the economics version of “Johnny no mates”? Because nobody believes this version of property inflation.

The OOH component annual rate is 1.2%, unchanged from last month

If you have to make up a number my tip is to make at least some effort at credibility.

 

 

 

The Nine Elms problem is one of over supply

Partly because it is back in the news ( did it ever really go away?) and partly due to the nicer weather I cycled past Battersea dogs and cats home yesterday heading up to Vauxhall which gave me a cyclists eye view of the Nine Elms and Battersea Power Station developments. One simple measure is that it takes more than a few minutes to do this which gives an initial idea of scale. Another is my crane count which has now reached 32 as opposed to the 24 or 25 of the past. So activity is rising which of course is in the opposite direction to the official UK construction series but of course for me there is a type of locality bias here. Also if you cycle through the development as I did a couple of months ago you find that adding depth to height and length adds even more to the scale.

The Financial Times has been on the case too.

Battersea luxury homes scheme powers on despite oversupply fears

Frankly I am not sure what choice there is now but let us look deeper.

Now surrounded by hoardings and scaffolding, it lies at the heart of one of the most ambitious redevelopment schemes in Britain’s capital, with nearly 40 sites, owned by domestic and overseas developers, clustered in the surrounding 561 acres known as Nine Elms.

So nearly 3 Battersea Parks and there was an effort to pinch some of the park as well back in the day which fortunately was rebuffed. This has led to this.

It is four years since the prime property market peaked in London, but estate agency group JLL estimates that 3,323 upmarket homes are under construction and another 6,332 in the pipeline across the wider Nine Elms area. The volume of homes planned for the area has prompted fears of an oversupply of luxury properties that most Londoners cannot afford. According to JLL, properties in Nine Elms command £1,400 per sq ft on average, while landlords investing in one-bedroom flats can expect to command £450 a week rent.

This takes me back to February 7th when I noted this from the Guardian.

More than half of the 1,900 ultra-luxury apartments built in London last year failed to sell, raising fears that the capital will be left with dozens of “posh ghost towers”………The total number of unsold luxury new-build homes, which are rarely advertised at less than £1m, has now hit a record high of 3,000 units.

I guess ghost towers are a special(s) case of a ghost town.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Prices?

Back in February the FT was telling us this.

Prices per square foot in prime London have fallen 5 per cent since their 2014 peak while in the most expensive “prime central” areas they are down 11 per cent.

Whereas now it is giving us examples of larger falls.

A glance at property listings online reveals hefty discounts being offered as owners cut overblown prices. A one-bedroom flat in Aykon London One, a 50-story tower planned by Dubai-based developer Damac Properties, is being offered at £1.1m — a 36 per cent discount to its initial £1.7m price in November…………
Elsewhere, a five-bedroom penthouse is available for £11m — it was listed at close to £14m six months ago. Property agents say many vendors will be investors who bought off-plan early and no longer wish to complete.

What we do not know is how realistic these asking prices were in the first place? Also if you had bought off-plan as it is called then rather than take a 36% loss if that is what it is then you would presumably simply abandon your 10% deposit.

Number Crunching

There is the issue of value which of course is in this instance a little like asking how long is a piece of string? However a reply to the FT article from B gives it a go.

Work out the numbers with stamp duty, Agent fees, maintenance costs etc and the yield works out to 1.5% per annum for a cash buyer in an oversupplied market with limited prospect of capital gains at least for some years.

Assuming the FT data is correct then applying my rule of thumb for such matters means that the price needs to halve. Of course central London runs down a different road but this from Vanessa Warwick in January provides some perspective looking at a house in Newcastle.

*Trending* Is this 3 bed terrace for £39K with £550 pcm rental income a deal?

Actually if you look into it the start price seems to have been more like £55k but on that basis our Nine Elms yield just gets worse. It would also appear from the comments that the area might be what has become called a “sh*thole” by President Trump but then of course according to him Nine Elms is an “off location”.

If City-AM was right last week perhaps someone will be along.

The number of buy-to-let investors in the UK has hit an all-time high of 2.5m in the latest tax year. According to research from real estate agency Ludlow Thompson, the number of buy-to-let investors has increased five per cent in the last year, and 27 per cent over the last five years.

Mind you with rents in London falling I am not so sure about this bit.

Rising numbers of landlords shows the enduring appeal of buy-to-let, particularly in London,” said Stephen Ludlow, chairman at Ludlow Thompson. “The long-term picture for the buy-to-let market remains strong.”

Notice the use of “long-term” which in this instance appears to mean strong in spite of falling prices and rents. Mind you for some in central London his long-term may have come true. From Acadata this morning.

This is, however, almost entirely due to a massive 30.7% annual increase in the average price in Kensington and Chelsea,
London’s most expensive borough – and that largely the result of just seven high value property sales

lucky number 7?

Mortgages

It is hard not to think of the famous quote by Karl Marx after the news from the weekend.

History repeats itself, first as tragedy, second as farce.

From This Is Money.

The Post Office has launched a mortgage designed to help first-time buyers get onto the property ladder without the need for a deposit.

The deal – known as the family link mortgage – works by giving the first-time buyer a 90 per cent loan-to-value mortgage secured against the property they’re buying plus an interest-free five-year loan secured on a close relative or parent’s home.

There’s a catch – the parental home needs to be mortgage-free for the buyer to be eligible.

But unlike alternative family mortgages, this one costs the parents nothing so long as the buyer repays the loan on time.

This may not be of enormous use at Nine Elms due to the maximum size being £500,000.

Comment

There is a fair bit to consider here although some seem to have made up their mind before it even began. The perhaps aptly named Tony Islington in the FT comments.

Stuck in the wastelands of South London…..

Perhaps he drives a London black cab but whilst some parts of the area have stunning views over the Thames there are also some like this.

You have different developers putting up “luxury” towers and blocks cheek-by-jowl.  As a resident. your view would be either that of a neighbouring development or a set of railway tracks leading into the busiest railway station in the country.   Virtually all residents have on the ground is a giant supermarket. ( Nguba )

If anybody spots the giant supermarket please let me know. In the end the project will be reliant on foreign buyers as there are so few in the UK who can buy at these prices. But there is a flow of businesses to the area as this from the Wandsworth Guardian points out.

Dorling Kindersley (DK), the world leading illustrated reference publisher will move to One Embassy Gardens in Nine Elms from their 80 Strand Office by 2020……..DK have chosen to join colleagues from its sister company, Penguin Random House UK, whose move was announced in December 2017. The move is in line with a general shift in the media and publishing industries, with Apple to soon unveil London headquarters within the Nine Elm’s district.

But for now it looks like a classic case of over-supply.

R Lee Emery

The drill instructor who was so terrifying in Full Metal Jacket has sadly passed away. Let me leave you with this from him.

Here, you are ALL equally useless!

 

 

 

UK production and manufacturing have seen a lost decade

Today brings us what is called a theme day by the UK Office for National Statistics as we get data on production, manufacturing and trade. This comes at a time when the data will be especially prodded and poked at. This is mainly driven by the fact that there have been hints of an economic slow down both in the UK and in the Euro area. Added to that we have seen rising tensions around Syria and the Middle East which have pushed the price of a barrel of Brent Crude Oil above US $70 which if sustained will give us another nudge higher in terms of cost push or if you prefer commodity price inflation. If we return to yesterday’s topic of Bank of England policy we see the potential for it to find itself between a rock and a hard place as a slowing economy could be combined with some oil price driven inflation.

Production

This opened with a worrying note although of course the issue is familiar to us.

In the three months to February 2018, the Index of Production decreased by 0.1% compared with the three months to November 2017, due to a fall of 8.6% in mining and quarrying, caused mainly by the shutdown of the Forties oil pipeline within December 2017.

If we move to the February data we see that it rose but essentially only because of the cold weather that caused trouble for services and construction.

In February 2018, total production was estimated to have increased by 0.1% compared with January 2018; energy supply provided the largest upward contribution, increasing by 3.7%.

If we look into the detail we see that the colder weather raised production by 0.43% meaning that there were weaknesses elsewhere. Some of it came from the oil and gas sector where in addition to some planned maintenance there was a one-day shut down for the rather accident prone seeming Forties field. But there was also something which will attract attention.

Manufacturing output decreased by 0.2%, the first fall in this sector since March 2017, when it fell by 0.4%. Within this sector 7 of the 13 sub-sectors decreased on the month; led by machinery and equipment not elsewhere classified, which fell by 3.9%, the first fall since June 2017, when it decreased by 4.9%.

This has been a strength of the UK economy in recent times and concerns about a possible slow down were only added to by this.

 It should be noted that the growth in this sector of 0.1% during January 2018 and published last month, has been revised this month to 0.0%, further supporting evidence provided in the January 2018 bulletin of a slow-down in manufacturing output.

Although our statisticians found no supporting evidence for this there remains the possibility that the bad weather played a role in this. Otherwise we are left with an impression of a manufacturing slow down which does fit with the purchasing managers indices we have seen. The annual comparison however remains good just not as good as it was.

 in February 2018 compared with February 2017, manufacturing increased by 2.5%.

Also there were hopes that we might regain the previous peak for manufacturing output which was 106.8 in February 2008 where 2015 = 100 but we scaled to 105.4 in January and have now dipped back to 105.2. The situation in production is somewhat worse as we are still quite some distance from the previous peak which on the same basis was at 111.1 in February 2008 and this February was at 104.8. The issue is complicated by the decline of North Sea Oil and Gas but overall those are numbers which look like a depression to me especially after all this time which one might now call a lost decade.

Trade

We traditionally advance on these numbers with some trepidation after years and indeed decades of deficits on this particular front. So let us gather some cheer with some better news.

Comparing the 12 months to February 2018 with the same period in 2017, the total trade deficit narrowed by £12.9 billion to £27.5 billion; the services surplus widened by £11.1 billion to £108.3 billion and the goods deficit narrowed by £1.8 billion to £135.8 billion.

Tucked away in this was some good news and for once a triumph for economics 101.

Total exports rose by 10.4% (£59.4 billion) to £627.6 billion compared with total imports, which increased by 7.6% (£46.5 billion) to £655.1 billion.

In true Alice In Wonderland terms our exports have to do this to make any dent in our deficit because the volume of imports is larger.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

Both goods and services imports have responded well to the lower value of the UK Pound £ as well as being influenced by the favourable world economic environment.

 Goods exports rose by 11.3% (£34.9 billion) to £345.0 billion ……..Services exports rose by 9.5% (£24.5 billion) to £282.6 billion

We rarely give ourselves the credit for being a strong exporting nation because it gets submerged in our apparent lust for imports.

As to the more recent pattern I will let you decide if the change below means something as it is well within the likely errors for such data.

The total UK trade deficit (goods and services) widened by £0.4 billion to £6.4 billion in the three months to February 2018

A little wry humour is provided by the fact that in terms of good exports our annual improvement was due to exports to the European Union. However the humour fades a little as I note our official statisticians have no real detail at all on our services exports which is a great shame as they are a strength of our economy.

Construction

After the cold spell in February this was always going to be a difficult month.

Construction output continued its recent decline in the three-month on three-month series, falling by 0.8% in February 2018………Construction output also decreased in the month-on-month series, contracting by 1.6% in February 2018, stemming from a 9.4% decrease in infrastructure new work.

In the circumstances I thought this was not too bad although this may have left me in a class of two.

You see the past is better than we thought it was which also confirms some of the doubts I have expressed about the reliability of this data.

The annual growth in 2017 of 5.7% is revised upwards from the 5.1% growth reported.

So it is not in a depression but has entered a recession.

Comment

There is a fair bit to consider as we note that any continuation of the recent falls will see manufacturing continue its own lost decade as we note that overall production seems trapped in one with little hope of  what might be called “escape velocity”. That means that the Bank of England faces a scenario where the picture for this particular 14% of the economy has seen the grey clouds darken. By contrast construction went from a really good phase into a recession which  the bad weather has made worse. I would expect the weather effect to unwind fairly quickly but that returns us to a situation which looked weak,

This leaves the expressed policy of the “unreliable boyfriend” in something of a mess as his forward guidance radar seems to have looked backwards again. Perhaps his new private secretary James Benford will help although I note his profile has been so low Bloomberg had to look him up on LinkedIn, I hope they got the right person. Also life can be complex as for example Russians in the UK might be thinking as they go from threats of financial punishment to seeing the UK Pound £ rally by 2% today and by over 10% in the past week to around 91 versus the R(o)uble .

Let me remain in the sphere of the serially uncorrelated error term by congratulating Roma on a stunning win last night.

 

 

What will the Bank of England claim next?

This morning has seen Reuters publish the details of an interview with one of the Bank of England’s policymakers Ian McCafferty. So let us take a look at what he said.

The Bank of England should not delay raising interest rates again, one of its top policymakers said, pointing to the possibility of faster pay rises and the recent strong pick-up in the world economy.

This is already a little awkward for our self-proclaimed inflation warrior. This is because the Bank of England has been forecasting faster pay rises for several years now usually due to output gap theory.

Speaking in his office in the BoE on Monday, adorned with books on the economy and a framed page of The Times newspaper with a headline about inflation, McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labor market.

The slack issue has been a problem for him and his colleagues for some time as this from a speech of his four years ago illustrates.

That is why, in the second phase of forward guidance that came into effect this month as the unemployment
rate passed 7%, the MPC expanded the range of indicators of labour market slack that we are formally
monitoring.

The first phase of Forward Guidance lasted around 6 months and it is hard not to have a wry smile as we have left both the unemployment level originally indicated and the other measure suggested by Ian well behind.

At present, these indicators suggest that the current level of slack in the economy, as reported in the
February Inflation Report, is in the region of 1-1½% of GDP, suggesting that there remains some room for
demand to recover further without exerting upward pressure on inflation.

Even if we are generous that had gone by the end of the year and yet Bank Rate is where it was then having followed the strategy of the Grand Old Duke of York when it did move. Oh and did I mention problems with forecasting a wages boom?

So the pickup in January settlements reported by a number of data providers certainly suggests that nominal pay is finally on the rise.

That is because it is from 2014 but pretty much same rhetoric has been used by the Bank of England this year. Actually Ian was embarrassingly wrong back then was average earnings fell sharply in that April meaning that the rolling three-month measure was at -0.3% in July.

What is the current wages evidence?

Ian gives us yet another regurgitation of the output gap or slack style analysis that has worked so badly for him over the past four years.

Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure.

The official data does not give much of a backing for this as the three monthly average at 2.8% in January is higher than last year but by 0.6%. Also if you look back then this measure was around 3% in the late spring and summer of 2015 so it is a case of back to the future. If we move to the latest quarterly report of the Agents of the Bank of England we get what sounds like the same old scene.

Growth in total labour costs had remained modest, although average pay settlements this year were a little higher than in 2017 for many contacts (Chart 6). Most settlements were between 2½%–3½%, driven by a combination of improved profitability among exporters, the annual NLW increase and higher consumer price inflation.

As consumer inflation is set to fade there is an issue there and I will leave you to mull how government policy via the National Living Wage can lead to the Bank of England raising Bank Rate! Oh and many would regard exporters raising pay in response to higher profitability as a good thing.

There is more backing for the higher wages in prospect view from private-sector surveys such as this from this morning on Bloomberg.

U.K. firms facing a shortage of workers are pushing up starting salaries, according to IHS Markit and the Recruitment and Employment Confederation.

Pay for temporary or contract staff rose at the quickest pace in six months in March, as the supply of job candidates fell sharply, they said in a report on Tuesday. Vacancies grew across all categories, with engineers and IT workers the most sought after for permanent roles, and hotel and catering employees in highest demand for temporary jobs.

However City-AM has spotted something which Bloomberg seems to have overlooked.

However, signs of increasing pay pressure for staff in permanent roles have diminished since hitting an almost three-year high in January.

A Space Oddity

This is somewhere between confused and simply wrong and the emphasis is mine.

The BoE raised rates for the first time in more than a decade in November, saying that Britain, while growing more slowly than other rich countries because of the impact of the 2016 Brexit vote, was more prone to inflation than in the past.

If we look back to the past we have seen plenty of examples where inflation has been much higher. Ian should know this as I worked with him during one of them. But if we look more recently there are two reasons for using less not more. Firstly there has so far been no sign that the inflation caused by the fall in the UK Pound £ has had secondly and tertiary effects and rolled through the system like it used to. On the evidence so far it hit and then faded. Secondly inflation has not even gone as high as it did in the autumn of 2010.

The World Economy

This is an example of a type of space oddity.

the boost from the world economy’s strong recovery

This is an example of steering monetary policy via the rear window when you are supposed to be looking ahead via the front window. To set monetary policy correctly you would have needed to raise interest-rates around a year before this in fact you could argue somewhere around the time they cut them.

Andy Haldane

There is a clear problem in you being judge and jury on your own actions as Andy as attempted in Melbourne Australia today.

A detailed, disaggregated analysis of household balance sheets suggests the material loosening in UK
monetary policy after the financial crisis did not have significant adverse distributional consequences.

These days it only takes a couple of minutes for him to be challenged about reality which is very different to the lauding he used to get.

 

Personally I am disappointed that having invited Billy Bragg to give a talk at the Bank of England Andy has not produced one of these for him.

Some illustrative and tentative examples of these personal “monetary policy scorecards” have been shown.

Oh and I owe the Bank of England an apology as I though their version of sending Andy to Coventry was complete when they sent him to the Outer Hebrides whereas I now note he is giving speeches in Australia. Will he be the first man on Mars?

Also let me help him out on a subject which he has confessed to not understanding which is pensions. By my calculations his is worth at least £3.4 million will he be producing a personal scorecard?

Comment

There are two fundamental problems here. The first is the error made by the Bank of England back in August 2016 when it confused cut with raise something from which it has never fully recovered. It now has figured out that interest-rates are too low but in terms of timing would be raising in the face of falling inflation and signs of a weakening economic outlook.

Next is the issue of telling everyone it has made them better off. Apart from the obvious moral hazard involved if it was true then why does it need to keep telling us? Moving to a more technical issue it is difficult for a man who does not understand one of the biggest sources of wealth (pensions) to lecture us about it. Sweet summed it up back in the day.

Does anyone know the way, did we hear someone say?
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way?
To Block Buster!

 

 

 

 

How quickly is the economy of Germany slowing?

Until last week the consensus about the German economy was that is was the main engine of what had become called the Euro boom. Some were thinking that it might even pick up the pace on this.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

This was driven by the PMI or Purchasing Managers Index business surveys from Markit which as I pointed out on the 3rd of January were extremely upbeat.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

This was followed by the overall or Composite PMI rising to 59 in January which suggested this.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

Actually that was for the overall Euro area which had a reading of 58,8. The catch has been that even this series has been dipping since as we now see this being reported.

The pace of growth in Germany’s private sector cooled at the end of the first quarter, with the services PMI retreating further from January’s recent peak to signal a loss of momentum in line with that seen in manufacturing.

This led to this being suggested.

it still promises to be a strong 2018 for the German economy – with IHS Markit forecasting GDP growth to pick up to 2.8%

Still upbeat but considerably more sanguine than the heady days of January. Then there was this to add into the mix.

However, unusually cold weather in March combined with continuing payback from January’s jump in activity has led to the construction PMI falling into contraction territory for the first time in over three years

Official Data on Production and Trade

The official data posted something of a warning last week.

In February 2018, production in industry was down by 1.6% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)…….In February 2018, production in industry excluding energy and construction was down by 2.0%. Within industry, the production of capital goods decreased by 3.1% and the production of consumer goods by 1.5%. The production of intermediate goods showed a decrease by 0.7%. Energy production was up by 4.0% in February 2018 and the production in construction decreased by 2.2%.

As you can see the monthly fall was pretty widespread and only offset by a colder winter. Whilst this did show an annual increase of 2.6% that was a long way below the 6.3% that had been reported for January and December. So on this occasion the PMI surveys decline seems to have been backed by the official numbers as we await for the March numbers which if the relationship holds will show a further slowing on an annual basis.

Thrown into this mix is concern that the decline is related to fear over the rise in protectionism and possible trade wars.

If we move to this morning’s trade data it starts well but then hits trouble.

Germany exported goods to the value of 104.7 billion euros and imported goods to the value of 86.3 billion euros in February 2018. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 2.4% and imports by 4.7% in February 2018 year on year. After calendar and seasonal adjustment, exports fell by 3.2% and imports by 1.3% compared with January 2018.

This may well be an issue going forwards if it is repeated as last year net exports boosted the German economy and added 0.8% to GDP ( Gross Domestic Product) growth.

On a monthly basis we saw this.

Exports-3.2% on the previous month (calendar and seasonally adjusted). Imports –1.3% on the previous month (calendar and seasonally adjusted).

Of course monthly trade figures are unreliable but this time around they do fit with the production data. The export figures look like they peaked at the end of 2017 from an adjusted ( seasonally and calendar) 111.5 billion Euros to 107.5 billion on that basis in February.

What are the monetary trends?

If we look at the Euro area in general then there are signs of a reduced rate of growth.

The annual growth rate of the narrower aggregate M1, which includes currency in circulation
and overnight deposits, decreased to 8.4% in February, from 8.8% in January.

The accompanying chart shows that this series peaked at just under 10% per annum last autumn. So that surge may have brought the recorded peaks in economic activity around the turn of the year but is not heading south. If we move to the broader measure we see this.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.2% in February 2018, from
4.5% in January, averaging 4.4% in the three months up to February.

This had been over 5% last autumn and like its narrower counterpart has drifted lower. If you apply a broad money rule then one would expect a combination of lower inflation and growth which is awkward for a central bank trying to push inflation higher.  If we move to credit then the impulse is fading for households and businesses.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation
and notional cash pooling) decreased to 3.0% in February, compared with 3.3% in January.

This is more of a lagging than leading indicator of circumstances.

These are of course Euro area statistics rather than Germany but they do give us an idea of the overall state of play. A possible signal of issues closer to home are the ongoing travails of Deutsche Bank. There has been a bounce in the share price today in response to the new Chief Executive Officer or CEO as Sewing replaces Cryan but 11.8 Euros compares to over 17 Euros last May. Yet in the meantime the economy has been seeing a boom and added to that as I looked at late last month house price growth will have been boosting the asset book of the bank yet the underlying theme seems to come from Coldplay.

Oh no, what’s this?
A spider web and I’m caught in the middle
So I turned to run
And thought of all the stupid things I’d done

Comment

The heady days of the opening of 2018 have gone and in truth the business surveys did seem rather over excited as I pointed out on January 3rd.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth.

We can bring that more up to date.

 In February 2018, roughly 44.3 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with February 2017, the number of persons in employment increased by 1.4% (+621,000 people).

Thus we see that it continues to suggest steady if not spectacular growth and bypasses the excitement at the turn of the year. Looking forwards we see that the monetary impulse is slowing which is consistent with the reduction in monthly QE to 30 billion Euros a month from the ECB. We then face the issue of how Germany will follow a good first quarter? At the moment a growth slow down seems likely just in time for the ECB to end QE! So it may well be a case of watch this space…..

 

 

 

 

Individual measures of GDP and household income show weak UK growth since 2008

Today has opened with not so good news for a sector of the UK economy that has been troubling us for the last year or so. From the SMMT or Society of Motor Manufacturers and Traders.

The UK new car market declined in March, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT), with registrations falling -15.7% compared with the same month last year. March 2017 was the biggest month ever for new car registrations, as buyers seized the chance to purchase cars before new Vehicle Excise Duty (VED) rates came into force in April last year. However registrations are still running at a historically high level and last month’s market was the fourth biggest March on record.

As you can see they are in a rush with explanations but we do get some more perspective from this.

New car registrations have fallen for the 12th consecutive month, with year-to-date performance down -12.4%.

The domestic car market has been contracting for a while now and sadly we have to review a scenario that involves government meddling as we note this.

Continuing the recent trend, diesel registrations declined in March, down -37.2%

So far this year diesel sales are down a third from 361,000 in 2017 to 241,000 this year as people wait to see what government policy will be in this area. After the Volkswagen scandal people are much less likely to believe the industry that the new diesels are clean and of course that adds to people like me who were pushed into clean diesels by government company car tax policy back in the previous decade only to discover that by clean they meant poisoning myself and other Londoners.

Whilst sales of hybrid cars are doing better I wonder if more and more buyers are wondering how green they really are?

 In the first quarter of this year 146,614 of these vehicles hit British roads, an increase of 2.7%, as the inclement weather appeared to lead to a boost in registrations.

There are two issues with the green agenda here in my view. Firstly the resources cost of a new car regularly gets ignored and secondly the technology uses some relatively rare elements.

Returning to diesels this is also a problem much wider than for the UK. From Reuters.

Volkswagen AG (VOWG_p.DE) has paid more than $7.4 billion to buy back about 350,000 U.S. diesel vehicles through mid-February, a recent court filing shows. The German automaker has been storing hundreds of thousands of vehicles around the United States for months.

Volkswagen has 37 secure storage facilities around the United States housing nearly 300,000 vehicles, the filing from the program’s independent administrator said.

Should these now be subtracted from German exports, production and GDP figures?

Economic impact

The SMMT tells us this.

 Some 200,000 people are employed in new car retail alone, while UK-based car finance firms employ over 45,000 more, with an annual £12.5 billion economic contribution. On the road, the vehicle fuel industry supports 40,000 jobs, and a further 347,000 are employed in vehicle servicing and repair.

The fall in sales will impact on production but not as much as you might think as we mostly export what we make and some of these numbers are good as this from the 29th of March highlights.

More than a quarter of a million engines produced by British factories in February.Exports jump 16.1% in the month as 157,880 units head overseas – 62.0% of all output. Engine manufacturing up 10.3% so far this year as strong start to 2018 continues.

The future

There was some positive news from Vauxhall yesterday.

PSA, which last year acquired Opel/Vauxhall from General Motors (GM.N), will build Peugeot and Citroen models as well as the next Vauxhall Vivaro van in Luton, north of London. Production will rise to 100,000 vehicles from 60,000 in 2017. ( Reuters).

The banks

There is an interrelation here in addition to the obvious as we note that via the growth of car financing the car companies now effectively have banking subsidiaries. From Bloomberg.

Moody’s cut Barclays’ long-term issuer and senior unsecured debt ratings to Baa3, or one step above junk, from Baa2. The bond grader assigned a stable outlook to the ratings for Barclays. Rival Deutsche Bank AG is currently rated one notch higher.

However, the ratings agency gave the British lender a stable outlook and highlighted its “strong franchises in U.K. retail, business banking and global credit cards.”

Things are not so hot when you are a notch below my old employer Deutsche Bank. But I note that the credit agencies suggest times are good in domestic credit as when have they told us that before?

Purchasing Managers Indices

This morning Markit have completed their sequence of surveys and have told us this.

March data signalled a slowdown in business
activity growth across the UK service sector, with
the latest expansion the weakest for over one-and a-half
years. However, survey respondents noted
that snow disruption and unusually bad weather
conditions in March had been a key factor holding
back business activity growth.

The poor old weather always gets the blame for bad news! Some areas will have benefited ( energy suppliers ) but they are invariably silent. I am sure there was some impact via not being able to get to work but more deeply I wonder if this reflects the fact that some output for construction comes under services. We have noted this before when a large company was shifted from services to construction a few years back. Records and statistics seem to be rather malleable.

Moving onto the wider impact we were told this.

“The UK economy iced up in March……..The PMI surveys collectively
signal a quarterly GDP growth rate of just under
0.3%, down from 0.4% in the fourth quarter, albeit
with the rate of growth sliding to just 0.15% in
March alone.”

We will have to see as the last time they told us the UK economy had lurched lower post the EU leave vote Markit ended up with a lot of egg on its face. If we look back to weather related issues it reversed quickly back in 2010.

Encouragingly, in January 2010 and
December 2010, the PMI fell sharply due to heavy
snow but in both cases the decline was more than
reversed in the following month.

Comment

There is a fair bit to consider here. UK manufacturing seems to be still doing okay in spite of the woes of the domestic car market ( partly because we import so many cars) and engine production is strong perhaps because of petrol engine shortages in Europe. Construction was hit by the weather and whilst this seemed to miss manufacturing it did hit services. So we seem likely to see lower first quarter GDP numbers which after a panic will probably then bounce back.

However if we look at some official statistics also released today at the individual level economic growth has been less than the aggregate.

Gross domestic product (GDP) per head grew by 0.8% in real terms in Quarter 4 (Oct to Dec) 2017 compared with the same quarter a year ago.

On this metric we have only grown by 3% since 2008 and if we continue and shift to income we see this.

Real household disposable income (RHDI) per head increased by 1.0%;  ( on a year before)

Slightly odd if we look at wages and inflation until we note it was this.

Furthermore, net property income (in nominal terms) contributed 1.0 percentage point to RHDI per head, leading to an overall positive position. Property income is not (as might be suggested by the name) the income generated by the ownership of buildings (rental). It is in fact, made up of interest, the distributed income of corporations (dividends, repatriated profits and so on) and rent on land.

Overall it is up 4.1% since 2008. So now we shift from wondering about a slow down to mulling how little we have grown at all.

Me on Core Finance TV

http://www.corelondon.tv/financial-asset-valuations-stretched-shaun-richards-notayesmaneconomics/