Central bankers are warming us up for more inflation again

A feature of the credit crunch era is the repetition of various suggestions from governments and central banks. One example of this has been the issue of Eurobonds which invariably has a lifespan until the nearest German official spots it. Another has been the concept of central banks overshooting their inflation target for a while. It is something that is usually supported by those especially keen on ( even more) interest-rate cuts and monetary easing so let us take a look.

Last Wednesday European Central Bank President Mario Draghi appeared to join the fray and the emphasis is mine.

Well, on your second question I will answer saying exactly the same thing. We don’t tolerate too low inflation; we remain fully committed to using all necessary instruments to return inflation to 2% without undue delay. Likewise, our inflation aim doesn’t imply a ceiling of 2%. Inflation can deviate from our objective in both directions, so long as the path of inflation converges towards our medium-term objective. I believe I must have said something close to this, or something to this extent a few other times in the past few years.

Nice try Mario but not all pf us had our senses completely dulled by what was otherwise a going through the motions press conference. As what he said at the press conference last September was really rather different.

In relation to that: shouldn’t the ECB be aiming for an overshoot on inflation rather than an undershoot given that it’s been below target for so long?

Second point: our objective is an inflation rate which is below, but close to 2% over the medium term; we stay with that, that’s our objective.

As you can see back then he was clearly sign posting an inflation targeting system aiming for inflation below 2%. That was in line with the valedictory speech given by his predecessor Jean-Claude Trichet which gave us a pretty exact definition by the way he was so pleased with it averaging 1.97% per annum in his term. So we have seen a shift which leads to the question, why?

The actual situation

What makes the switch look rather odd is the actual inflation situation in the Euro area. Back to Mario at the ECB press conference on Wednesday.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4% in March 2019, after 1.5% in February, reflecting mainly a decline in food, services and non-energy industrial goods price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months.

So we find that inflation is below target and expected to fall further in 2019. This was a subject which was probed by one of the questions.

 It’s quite clear that the sliding of the five-year-to-five-year inflation expectations corresponds to a deterioration of the economic outlook. It’s also quite clear that as the economic outlook, especially the economic activity slows down, also markets expect less pressure in the labour market, but we haven’t seen that yet.

The issue of markets for inflation expectations is often misunderstood as the truth is we know so little about what inflation will be then. But such as it is again  the trend may well be lower so why have we been guided towards higher inflation being permitted.

It might have been a slip of the tongue but Mario Draghi is usually quite careful with his language. This leaves us with another thought, which is that if he is warming us up for an attitude change he is doing soon behalf of his successor as he departs to his retirement villa at the end of October.

The US

Minneapolis Fed President Neel Kashkari suggested this in his #AskNeel exercise on Twitter.

Well we officially have a symmetric target and actual inflation has averaged around 1.7%, below our 2% target, for the past several years. So if we were at 2.3% for several years that shouldn’t be concerning.

Also he reminded those observing the debate on Twitter that the US inflation target is symmetric and thus unlike the ECB.

Yes, i think we should really live the symmetric target and not tap the brakes prematurely. This is why I’ve been arguing for more accommodative monetary policy. But we are undertaking a year long review of various approaches so I am keeping an open mind.

As you can see with views like that the Donald is likely to be describing Neel Kashkari as “one of the best people”.  If we move to the detail there are various issues and my initial one is that inflation tends to feed on itself and be self-fulfilling so the idea that we can be just over the target at say 2.3% is far from telling the full picture. Usually iy would then go higher. Also if your wages were not growing or only growing at 1% you would be concerned about even that seemingly low-level of inflation.

If we consider the review the US Fed is undertaken we see from last week’s speech by Vice Chair Clarida a denial that it has any plans to change its 2% per annum target and we know what to do with those! Especially as he later points out this.

In part because of that concern, some economists have advocated “makeup” strategies under which policymakers seek to undo, in part or in whole, past inflation deviations from target. Such strategies include targeting average inflation over a multiyear period and price-level targeting, in which policymakers seek to stabilize the price level around a constant growth path.

As the credit crunch era has seen inflation generally be below target this would be quite a shift as it would allow for quite a catch-up. Which of course is exactly the point!

Comment

Central bankers fear that they are approaching something of a nexus point. They have deployed monetary policy on a scale that would not have been believed before the credit crunch hit us. Yet in spite of the negative interest-rates, QE style bond purchases and in some cases equity and property buys we see that there has been an economic slow down and inflation is generally below target. Also the country that has deployed monetary policy the most in terms of scale Japan has virtually no inflation at all ( 0.2% in February).

At each point in the crisis where central bankers face such issues they have found a way to ease policy again. We have seen various attempts at this and below is an example from Charles Evans the President of the Chicago Fed from back in March 2012.

My preferred inflation threshold is a forecast of 3 percent over the medium term.

We have seen others look for 4% per annum. What we are seeing now is another way of trying to get the same effect but this time looking backwards rather than forwards.

There are plenty of problems with this. Whilst a higher inflation target might make life easier for central bankers the ordinary worker and consumer faces what economists call “sticky” wages. Or in simple terms prices go up but wages may not and if the credit crunch is any guide will not. My country the UK suffered from that in 2010/11 when the Bank of England “looked through” consumer inflation which went above 5% with the consequence of real wages taking a sharp hit from which they have still to recover.

Next comes the issue that in the modern era 2% per annum may be too high as a target anyway. In spite of all the effort it has been mostly undershot and as 2% in itself has no reason for existence why not cut it? Then we might make progress in real wage terms or more realistically reduce the falls. That is before we get to the issue of inflation measures lacking credibility in the real world as things get more expensive but inflation is officially recorded as low.

Meanwhile central bankers sing along to Marvin Gaye.

‘Cause baby there ain’t no mountain high enough

Podcast

 

 

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Are world equity markets front-running expected central bank buying?

Sometimes we get an opportunity to both take some perspective and also to observe what is considered by some to be cutting edge. So let us open with the perspective of the general manager of the Bank for International Settlements.

Growth cannot depend on monetary policy, Agustín Carstens tells CNBC.

I am sure that many of you are thinking that it is a bit late ( like a decade or so) to tell us now.. Interestingly if you watch the video he says in reference to the Euro area that monetary policy “cannot be the only solution for growth”. This reminds me of the statement by ECB President Mario Draghi that it QE was responsible for the better Euro area growth phrase in 2016 to 17. It also brings me to my first official denial of the day.

Some analysts said a tiered rate would make room for the ECB to cut its deposit rate farther — a prospect that one source said was nowhere near being discussed. ( Reuters )

You know what usually happens next….

Asset Markets

This is an area that central banks have increasing moved into with sovereign and corporate bond buying. But in the same Reuters article I spotted something that looked rather familiar.

TLTRO III, a new series of cheap two-year loans aimed at banks, was unveiled in March as a tool to help lenders finance themselves, particularly in countries such as Italy and Portugal. But policymakers now increasingly see it as a stimulus tool for a weakening economy, the sources said.

With the growth outlook fading faster than feared, even hawkish policymakers have given up pricing the loans at the private market rate. Some are even discussing offering the TLTROs at minus 0.4 percent, which is currently the ECB’s deposit rate, the sources said.

That looks rather like the Funding for Lending Scheme which I mentioned yesterday as the way the Bank of England fired up the UK housing market from 2012 onwards. Essentially if you give banks plenty of cheap funding you get a lot of rhetoric about lending to business ( small ones in particular) but the UK experience was that it declined and mortgage lending rose. This was because mortgage rates fell quite quickly by around 1% and according to the Bank of England the total impact rose as high as 2%.

Thus in my opinion the ECB is considering singing along to the “More,more,more” of Andrea True Connection in relation to this.

House prices, as measured by the House Price Index, rose by 4.2% in both the euro area and the EU in the fourth
quarter of 2018 compared with the same quarter of the previous year.

This is one area where the ECB has managed to create some inflation and may even think that the lack of growth in Italy ( -0.6%) is a sign of its economic malaise. Although you do not have to know much history to mull the 6.7% in Spain and 7.2% in Ireland.

Equities

Regular readers will be aware that the Swiss National Bank and the Bank of Japan started buying equities some time ago now. There are differences in that the SNB is doing so to diversify its foreign exchange reserves which became so large they were influencing the bond markets ( mostly European) they were investing in. So it has bought foreign equities of which the most publicly noted it the holding in Apple because if you invest passively then the larger the company the larger the holding. If we note the Apple Watch this must provide food for thought for the Swiss watchmaking industry.

Japan has taken a different route in two respects in that it buys funds ( Exchange Traded Funds or ETFs) rather than individual equities and that it buys Japanese ones. Also it is still regularly buying as it  bought  70.500,000,000 Yen’s worth on Tuesday, Wednesday and Thursday this week. Whereas buying by the SNB in future will be more ad hoc should it feel the need to intervene to weaken the Swiss Franc again.

Now let us move to Federal Reserve policymaker Neel Kashkari

So an official denial! Also you may note that he has left some weasel room as he has not rejected the Japanese route of indirectly buying them. This is common amongst central bankers as they leave themselves an out and if they fear they might need to introduce a policy that will attract criticism they first deny they intend to do it to give the impression they have been somehow forced.

For a lighter touch @QTRResearch translated it into Trumpese so that the man who many think is really running the US Federal Reserve gets the picture.

Kashkari: We’re not buying stocks, who said anything about buying stocks, we’re definitely not buying stocks, we’d never buy stocks.

It was,of course, only last week that ended with the CIO of BlackRock suggesting that the ECB should purchase equities and no doubt he had a list ready! I suppose it would sort of solve this problem.

ECB will ask Deutsche Bank to raise fresh funds for merger: source ( Reuters)

Although of course that would not open just one can of worms but a whole cupboard full of them. But when faced with a problem the ECB regularly finds itself singing along with Donald Fagen.

Let’s pretend that it’s the real thing
And stay together all night long
And when I really get to know you
We’ll open up the doors and climb into the dawn
Confess your passion your secret fear
Prepare to meet the challenge of the new frontier

Comment

Now let us switch to markets as we remind ourselves that they have developed a habit of front-running or anticipating central bank action. Sometimes by thinking ahead but sometimes sadly via private briefings ( I hope the ECB has stopped them). However you spin it @Sunchartist made me think with this.

*Softbank Group Prices Japan’s Biggest Ever Yen Corporate Bond ¥500 Billion 1.64%

Aramco, Softbank, LYFT, Pinterest, Uber

The gravy train.

Or as Hipster on Twitter put it.

So Uber and Lyft will have a combined market cap of ~$150BN with a combined net loss of ~$3BN

Next there is the issue of something that is really rather uncomfortable.

It’s official: This is an all-time record year for corporate stock buybacks.

Announced buybacks for 2018 are now at $1.1 trillion. And companies are using their authorizations. About $800 billion of stock has already been bought back, leaving about $300 billion yet to be purchased. We’ve seen buyback announcements recently from Lowes’s. Pfizer, and Facebook, but in the last few days, as stocks have moved to new lows, companies are picking up the pace of activity. ( CNBC)

This makes me uncomfortable on several counts. It is the job of a board of directors to run a business not to be punters in its shares. This is especially uncomfortable if their bonuses depend on the share price. Frankly I would look to make that illegal. As to them knowing the future how has that worked out for Boeing? To be fair to CNBC they did highlight a problem.

So the critics of corporate buybacks and dividend raises are correct. It is a form of financial engineering that does not do anything to improve business operations or fundamentals………. obsessing over ways to boost stock prices helps the investing class but not the average American.

Perhaps nothing has been done about this because it suits the establishment after all think of the wealth effects. But that brings inequality and the 0.01% back into focus.

 

What is happening with US house prices and its economy?

Sometimes it helps to look back so let us dip into Yahoo Finance from the 17th of December last year.

Home price growth has slowed for six consecutive months since April, according to the S&P CoreLogic Case-Shiller national home price index. And for the first time in a year, annual price growth fell below 6%, dropping to 5.7% and 5.5%, in August and September, respectively. October home price results will be released later this month.

So we see what has in many places become a familiar pattern as housing markets lose some of their growth. There was and indeed is a consequence of this.

“A couple of years of home prices running twice the rate of home income growth leads to affordability challenges,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “If you’re a buyer in 2019, you won’t see home price running away from you at the same speed in 2018.”

I think he means wages when he says “home income growth” but he is making a point which we have seen in many places where house price growth has soared and decoupled from wage growth. This has been oil by the way that central banks slashed official interest-rates which reduced mortgage-rates and then also indulged in large-scale bond buying which in the US included Mortgage-Backed Securities to further reduce mortgage-rates. This meant that affordability improved as long as you were willing to look away from higher debt burdens and the implication that should interest-rates rise the song “the heat is on” would start playing very quickly.

Or if you wish to consider that in chart form Yahoo Finance helped us out.

That is a chart to gladden a central bankers heart as it shows that the policy measures enacted turned house prices around and led to strong growth in them. The double-digit growth of late 2013 and early 2014 will have then scrambling up into their Ivory Towers to calculate the wealth effects. But the problem is that compared to wage growth they moved away at 8% per annum back then and the minimum since has been 2% per annum. That means that a supposed solution to house prices being too high and contributing to an economic crash has been to make them higher again especially relative to wages.

What about house price growth now?

Yesterday provided us with an update.

CoreLogic® (NYSE: CLGX), a leading global property information, analytics and data-enabled solutions provider, today released the CoreLogic Home Price Index (HPI) and HPI Forecast for February 2019, which shows home prices rose both year over year and month over month. Home prices increased nationally by 4 percent year over year from February 2018. On a month-over-month basis, prices increased by 0.7 percent in February 2019.

So there has been a slowing in the rate of growth which is reflected here.

“During the first two months of the year, home-price growth continued to decelerate,” said Dr. Frank Nothaft, chief economist for CoreLogic. “This is the opposite of what we saw the last two years when price growth accelerated early.

Looking ahead they do however expect something of a pick-up.

“With the Federal Reserve’s announcement to keep short-term interest rates where they are for the rest of the year, we expect mortgage rates to remain low and be a boost for the spring buying season. A strong buying season could lead to a pickup in home-price growth later this year.”

That gives us another perspective on the change of policy from the US Federal Reserve. So far its U-Turn has mostly been locked at through the prism of equity prices partly due to the way that President Trump focuses on them. But another way of looking at it is in response to slower house price growth which was being influenced by higher mortgage rates as the Federal Reserve raised interest-rates and reduced its bond holdings. This saw the 30-year mortgage-rate rise from just under 4% to a bit over 4.9% in November, no doubt providing its own brake on proceedings.

What about now?

If we look at monetary policy we see that perhaps something of a Powell Put Option is in place as at the end of last week the 30-year mortgage rate was 4.06%. Now bond yields have picked up this week so lets round it back up to say 4.15%. Even so that is quite a drop from the peak last year.

There is also some real wage growth according to the Bureau of Labor Statistics.

Real average hourly earnings for all employees increased 1.9 percent, seasonally adjusted, from February 2018 to February 2019. The change in real average hourly earnings, combined with a 0.3-percent decrease in the average workweek, resulted in a 1.6-percent increase in real average weekly earnings over this 12-month period.

In terms of hourly earnings the situation has been improving since last summer whereas the weekly figures were made more complex by the drop in hours worked meaning we particularly await Friday’s update for them.

Moving to the economy then recent figures have been a little more upbeat than when we looked at the US back on the 22nd of February but not by much.

The New York Fed Staff Nowcast stands at 1.3% for 2019:Q1 and 1.6% for 2019:Q2..News from this week’s data releases left the nowcast for 2019:Q1 unchanged and decreased the nowcast for 2019:Q2 by 0.1 percentage point.

Of the main data so far this week we did not learn an enormous amount from the retail sales numbers from the Census Bureau.

Advance estimates of U.S. retail and food services sales for February 2019, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes, were $506.0 billion, a decrease of 0.2
percent (±0.5 percent)* from the previous month, but 2.2 percent (±0.7 percent) above February 2018.

As these are effectively turnover rather than real growth figures a monthly fall is especially troubling but January had been revised higher.

Comment

We are observing concurrent contradictory waves at the moment. The effect from 2018 was of a slowing economy combined with monetary tightening in terms of higher mortgage-rates. More recently after the policy shift we have seen mortgage-rates fall pretty sharply and since last summer a pick-up in wage growth. So we can expect some growth and maybe we might even see a phase where wage growth exceeds house price growth. But it would appear that the US Federal Reserve has shifted policy to keep asset (house and equity) prices as high as it can so it may move again,

As to the overall picture this from Corelogic troubles me.

According to the CoreLogic Market Condition Indicators (MCI), an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 35 percent of metropolitan areas have an overvalued housing market as of February 2019. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income).

Only 35% overvalued? Look again at the gap between house price rises and wage rises in the Yahoo chart above. So if we look backwards very few places must have been overvalued just before the crash. Also times are hard for younger people.

Frank Martell, president and CEO of CoreLogic. “Our research tells us that about 74 percent of millennials, the single largest cohort of homebuyers, now report having to cut back on other categories of spending to afford their housing costs.”

I am not sure that goes with the previous research. Also if the stereotype has any validity times for millennials in the US are grim or should that be toast?

The price for Hass avocados from Michoacán, Mexico’s main avocado producing region, increased 34 percent on Tuesday amid President Trump’s calls to shut down the U.S.-Mexico border ( The Hill).

Let me end with a reminder from CoreLogic that averages do not tell us the full story.

Annual change by state ranged from a 10.2 percent high in Idaho to a -1.7 percent low in North Dakota

 

 

 

 

In the future will everybody be paid to issue debt?

This morning has brought a couple of developments on a road I have both expected and feared for some time. This road to nowhere became a theme as I questioned how central banks would respond to the next slow down? We have two examples of that this morning as we see industrial profits in China fall 14% year on year after quality adjustment or 27% without ( h/t @Trinhnomics). Also we have some clear hints – much more useful than so-called Forward Guidance – from ECB President Mario Draghi. So let me jump to a clear consequence of this.

The stockpile of global bonds with below-zero yields just hit $10 trillion — intensifying the conundrum for investors hungry for returns while fretting the brewing economic slowdown.

A Bloomberg index tracking negative-yielding debt has reached the highest level since September 2017………

This latest move if you look at their chart has taken the amount of negative yielding debt from less than US $6 trillion last September to US $10 trillion now as we observe what a tear it has been on. So if you buy and hold to maturity of these bonds you guarantee you will make a loss. So why might you do it?

While negative yields on paper suggest that investors lose money just by holding the obligations, bond buyers could also be looking at price gains if growth stalls and inflation stays low. But along the way, risk assets may be entering the danger zone.

So one argument is the “greater fool” one. In the hope of price gains someone else may be willing to risk a negative yield and an ultimate loss should they hold the bond to maturity.

However there always ways a nuance to that which was that of a foreign investor. He or she may not be too bothered by the risk of a bond market loss if they expect to make more in the currency. This has played out in the German and Swiss bond markets and never went away in the latter and is back in the former. Also investors pile into those two markets in times of fear where a small loss seems acceptable. This has its dangers as those who invested in negative yielding bonds in Italy have discovered over the past year or two.

The more modern nuance is that you buy a bond at a negative yield expecting the central bank to buy it off you at a higher price and therefore more negative yield. Let me give you an example from my country the UK yesterday afternoon. The Bank of England paid 144 for a UK Gilt maturing in 2034 which will mature at 100. This does not in this instance create a negative yield but it does bring a much lower one as a Gilt issue with a 4.5% coupon finds its yield reduced to 1.32%. There was a time the thought that a UK Gilt would be priced at 144 would only raise loud laughs. I also recall that the Sledgehammer QE of the summer of 2016 did create negative yields in the UK albeit only briefly. Of course in real terms ( allowing for inflation) that made the yield heavily negative.

The Euro area

The activities of the European Central Bank under Mario Draghi and in particular the QE based bond buyer have added to the negative yielding bond total. This morning he is clearly pointing us to the danger of larger negative interest-rates and yields as he focuses on what to him is “the precious”.

We will continue monitoring how banks can maintain healthy earning conditions while net interest margins are compressed. And, if necessary, we need to reflect on possible measures that can preserve the favourable implications of negative rates for the economy, while mitigating the side effects, if any. That said, low bank profitability is not an inevitable consequence of negative rates.

This matters because so far banks have found it difficult to offer depositors less than 0%. There have been some examples of it but in general not so . Thus should the ECB offer a deposit rate even lower than the current -0.4% the banks would be hit and for a central banker this is very concerning. This is made worse in the Euro area by the parlous state of some of the banks. Mario is also pointing us towards the ” favourable implications of negative rates for the economy” which has led Daniel Lacalle to suggest this.

Spain: Mortgage lending rises 16% in the middle of a slowdown with 80% of leading indicators in negative territory.

There is an attempt by Mario to blame Johnny Foreigner for the Euro area slow down.

The last year has seen a loss of growth momentum in the euro area, which has extended into 2019. This has been predominantly driven by pervasive uncertainty in the global economy that has spilled over into the external sector. So far, the domestic economy has remained relatively resilient and the drivers of the current expansion remain in place. However, the risks to the outlook remain tilted to the downside.

Those involved in the domestic economy might be worried by the use of the word “resilient” as that is usually reserved for banks in danger of collapse and we know what invariably happens next. But no doubt you have noted that in spite of the rhetoric we are pointed towards the economy heading south.

Then we get the central banking mic-drop as we wonder if this is the new “Whatever it takes ( to save the Euro)”.

We are not short of instruments to deliver on our mandate.

That also qualifies as an official denial especially as the actual detail shows that things from Mario’s point of view are not going well.

The weakening growth picture has naturally affected the inflation outlook as well. Our projections for headline inflation this year have been revised downwards and we now see inflation at 1.6% in 2021. Slower growth will also lead to a more muted recovery in underlying inflation than we had previously expected.

Comment

We have seen today that not only are there more people finding that debt pays in a literal sense but we have arrived in a zone where more of this is in prospect. I have explained above how this morning has brought a suggestion that there will be more of it in the Euro area and by implication around Europe as it again acts as a supermassive black hole. But let me now introduce the possibility of a new front.

Back in the 1980s the superb BBC television series Yes Prime Minister had an episode where Sir Humphrey Appleby suggests to Prime Minister Jim Hacker.

Why don’t you announce a cut in interest-rates?

Hacker responds by saying the Bank of England will not do it to which Sir Humphrey replies by suggesting a Governor who would ( and then does…). Now in a modern era of independent central banks that cannot possibly happen can it?

 He said the Fed should immediately reverse course and cut rates by half a percentage point.

Those are the words of the likely US Federal Reserve nominee Stephen Moore as spoken to the New York Times. Just in case you think that this is why he is on his way to being appointed I would for reasons of balance like to put the official denial on record.

And he promised he would demonstrate independence from Mr. Trump, whose agenda Mr. Moore has helped shape and frequently praised.

Returning directly to my theme of the day this in itself would not take US yields negative but a drop in the official interest-rate from 2.5% to 2% would bring many other ones towards it. For a start it would make us wonder how many interest-rate cuts might follow? Some of these thoughts are already in play as the US Treasury Note ten-year yield which I pointed out was 2.5% on Friday is 2.39% as I type this, In the UK the ten-year Gilt yield has fallen below 1% following the £2.3 billion of Operation Twist style QE as it refills its coffers on its way back to £435 billion.

 

How long before the ECB and Federal Reserve ease monetary policy again?

Yesterday brought something of a change to the financial landscape and it is something that we both expected and to some extent feared. Let me illustrate by combining some tweets from Lisa Abramowicz of Bloomberg.

Biggest one-day drop in 10-year yields in almost a year…..Futures traders are now pricing in a 47% chance of a rate cut by January 2020, up from a 36% chance ahead of today’s 2pm Fed release……….More steepening on the long end of the U.S. yield curve as investors price in more inflation in decades to come, thanks to a dovish Fed. The gap between 30-year & 10-year U.S. yields is now the widest since late 2017.

I will come to the cause of this in a moment but if we stick with the event we see that the ten-year US Treasury Note now yields 2.5%. The Trump tax cuts were supposed to drive this higher as we note that it was 3.24% in early November last year. So this has turned into something of a debacle for the “bond vigilantes” who are supposed to drive bond markets lower and yields higher in fiscal expansions. They have been neutered yet again and it has happened like this if I had you over to the US Federal Reserve and its new apochryphal Chair one Donald Trump.

US Federal Reserve

First we got this on Wednesday night.

The Federal Reserve decided Wednesday to hold interest rates steady and indicated that no more hikes will be coming this year. ( CNBC)

No-one here would have been surprised by the puff of smoke that eliminated two interest-rate increases. Nor by the next bit.

The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019. The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. ( Federal Reserve).

So as you can see what has become called Qualitative Tightening is on its way to fulfilling this description from Taylor Swift.

But we are never ever, ever, ever getting back together
Like, ever

More specifically it is being tapered in May and ended in September as we mull how soon we might see a return of what will no doubt be called QE4.

If we switch to the economic impact of this then the first is that it makes issuing debt cheaper for the US economy as the prices will be higher and yields lower. As President Trump is a fiscal expansionist that suits him. Also companies will be able to borrow more cheaply and mortgage rates will fall especially the fixed-rate ones. Here is Reuters illustrating my point.

Thirty-year mortgage rates averaged 4.28 percent in the week ended March 21, the lowest since 4.22 percent in the week of Feb. 1, 2018. This was below the 4.31 percent a week earlier, the mortgage finance agency said.

The average interest rate on 15-year mortgages fell 0.05 percentage point to 3.71 percent, the lowest since the Feb. 1, 2018 week.

Next week should be lower still.

Euro area

This morning has brought news which has caused a bit of a shock although not to regular readers here who recall this from the 27th of February.

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous.

The money supply numbers have worked really well as a leading indicator and better still are mostly ignored. Perhaps that is why so many were expecting a rebound this morning and instead saw this. From the Markit PMI business survey.

“The downturn in Germany’s manufacturing sector
has become more entrenched, with March’s flash
data showing accelerated declines in output, new
orders and exports……….the performance of the
manufacturing sector, which is now registering the
steepest rate of contraction since 2012.

The reading of 44.7 indicates a severe contraction in March and meant that overall we were told this.

Flash Germany PMI Composite Output Index at 51.5 (52.8 in Feb). 69-month low.

There is a problem with their numbers as we know the German economy shrank in the third quarter of last year and barely grew in the fourth, meaning that there should have been PMI readings below 50, but we do have a clear direction of travel.

If we combine this with a 48.7 Composite PMI from France then you get this.

The IHS Markit Eurozone Composite PMI® fell from
51.9 in February to 51.3 in March, according to the
preliminary ‘flash’ estimate. The March reading was
the third-lowest since November 2014, running only
marginally above the recent lows seen in December
and January.

Or if you prefer it expressed in terms of expected GDP growth.

The survey indicates that GDP likely rose by a modest 0.2% in the opening quarter, with a decline in manufacturing
output in the region of 0.5% being offset by an
expansion of service sector output of approximately
0.3%.

So they have finally caught up with what we have been expecting for a while now. Some care is needed here as the PMI surveys had a good start to the credit crunch era but more recent times have shown problems. The misfire in the UK in July 2016 and the Irish pharmaceutical cliff for example. However, central bankers do not think that and have much more faith in them so we can expect this morning’s release to have rather detonated at the Frankfurt tower of the ECB. It seems financial markets are already rushing to front-run their expected response from @fastFT.

German 10-year bond yield slips below zero for first time since 2016.

In itself a nudge below 0% is no different to any other other basis point drop mathematically but it is symbolic as the rise into positive territory was accompanied by the Euro area economic recovery. Indeed the bond market has rallied since that yield was 0.6% last May meaning that it has been much more on the case than mainstream economists which also warms the cockles of one former bond market trader.

More conceptually we are left wonder is the return to something last seen in October 2016 was sung about by Muse.

And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole

If we now switch to ECB policy it is fairly plain that the announcement of more liquidity for the banks ( LTTRO) will be followed by other easing. But what? The problem with lowering interest-rates is that the Deposit-Rate is already at -0.4%. Some central bankers think that moving different interest-rates by 0.1% or 0.2% would help which conveniently ignores the reality that vastly larger ones overall ( 4%-5%) have not worked.

So that leaves more bond buying or QE and beyond that perhaps purchases of equities and commercial property like in Japan.

Comment

I have been wondering for a while when we would see the return of monetary easing as a flow and this week is starting to look a candidate for the nexus point. It poses all sorts of questions especially for the many countries ( Denmark, Euro area, Japan, Sweden. and Switzerland) which arrive here with interest-rates already negative. It also leaves Mark Carney and the Bank of England in danger of another hand brake turn like in August 2016.

The Committee continues to judge that, were the economy to develop broadly in line with those projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Although of course it could be worse as the Norges Bank of Norway may have had a false start.

Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.0 percent:

But the real problem is that posed by Talking Heads because after the slashing of interest-rates and all the QE well let me hand you over to David Byrne.

And you may ask yourself, well
How did I get here?

 

It is a case of harder times for the US economy

A feature of the current world economic slowdown has been that the United States has been outperforming its peers. Some of that has been genuine and some simply because the news flow was slowed by the time Federal workers were unpaid. However the chill winds are now being recorded and reported. From the Atlanta Fed.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2019 is 0.4 percent on March 13, up from 0.2 percent on March 11. After reports on durable manufacturing and construction spending were released by the U.S. Census Bureau this morning, the nowcast of first-quarter real gross private domestic investment growth increased from -2.9 percent to -2.4 percent, and the nowcast of first-quarter real government expenditures growth increased from 1.7 percent to 2.5 percent.

As you can see the latest data nudge things a little higher but only to the giddy heights of 0.1% per quarter as we record GDP growth. It is noticeable that investment growth is is still solidly negative whilst we are seeing the Trump fiscal expansion in play perhaps also. Whilst one may disagree with the details of it the plan is turning out to be anti-cyclical as fiscal policy is supposed to be as opposed to the pro cyclical effort that we observed so devastating the Greek economy only yesterday.

Stuck like glue

However the head of the Atlanta Fed Ralph Bostic wants us to focus on other matters.

The U.S. economy, by most standard metrics, is doing pretty good,” he said. “We’ve been in a growth trajectory for 10 years now coming out of the Great Recession. Unemployment is at historic lows, 3.8 or 3.9 percent — rates we have not seen since the 1960s. Job creation is happening somewhere around 200,000 to 250,000 jobs a month. And we’re not seeing signs of accelerating inflation.

So classic deflection territory as whilst that was true when he made the speech on the 5th by the 8th we had a rather different view on job creation.

Total nonfarm payroll employment changed little in February (+20,000)

That seemed rather extreme so let us look for some perspective.

After revisions, job gains have averaged 186,000
per month over the last 3 months.

So our tentative view is that a slowing economy is now feeding into lower employment growth. Yesterday we saw that this is also beginning to impact on the unemployment situation.

Initial jobless claims data came out worse than expected. Last week it grew from 223K to 229. Continued claims stood at 1776K against 1758K one week earlier. ( fxpro)

So whilst these numbers are much lower than we saw a decade ago we are now facing a situation where the falls in unemployment and the unemployment rate are about to be replaced by rises. Perhaps Ralph meant that with this but it is hard to say as you can see.

 because there are a lot of things going on.

So Ralph as Marvin Gaye would say “What’s going on?”

The Federal Reserve

If we widen the analysis to the chair of the Federal Reserve he has been shifting his position.

 Because interest rates around the world have steadily declined for several decades, rates in normal times now tend to be much closer to zero than in the past. Thus, when a recession comes, the Fed is likely to have less capacity to cut interest rates to stimulate the economy than in the past, suggesting that trips to the ELB may be more frequent.

Odd if a recession is not feared by Jerome Powell why he is so bothered about it isn’t it? Also the question is begged as to why all the interest-rate cuts and the QE below seem to have us more afraid of recessions?

Between December 2008 and October 2014, the Federal Reserve purchased $3.7 trillion in longer-term Treasury and agency securities.

As to the programme to reduce the balance sheet or Quantitative Tightening then as I pointed out on the 12th of February that seems set to be put away in a cupboard and maybe to the back of it.

Current estimates suggest, however, that something in the ballpark of the 2019:Q4 projected values may be the new normal. The normalized balance sheet may be smaller or larger than that estimate and will grow gradually over time as demand for currency rises with the economy. In all plausible cases, the balance sheet will be considerably larger than before the crisis.

Tucked way in there is a potential rationale for the QE to infinity I discussed back on the 12th of February as well. If we switch to Chair Powell a few days later we get a hint of what he is really aiming at. The emphasis is mine.

Low- and moderate-income homeowners saw their wealth stripped away as home values dropped during the financial crisis and have not recovered as quickly or completely as others. Because home equity has been the main source of wealth among low- and moderate-income people, the crisis dealt a particularly severe blow to these households. Most Americans rely on home equity to send their children to college, invest in their own education and training, or start or grow a business. These aspirations are the basis upon which a strong economy is built. 

Also Chair Powell continues to apparently deliberately ignore the countries which have negative interest-rates of which Japan comes to mind today as it has just reconfirmed its -0.1% official rate.

Just over 10 years ago, the Federal Open Market Committee (FOMC, or the Committee) lowered the federal funds rate close to zero, which we refer to as the effective lower bound, or ELB. Unable to lower rates further.

If like in the UK they felt unable to lower interest-rates further due to problems with “the precious” ( the banks) they should say so as otherwise it is simply untrue.

Money Supply

Here the news looks better because the growth rate of the narrow M1 measure has picked up. It has grown at an annual rate of 4.6% in the most recent quarter up to the 4th of this month as opposed to 4.1% over six months and 3.2% over the preceding year. Whilst there has been a rise in checkable deposits the main move has been in money or cold hard cash. Yes the same money we are supposed to neither want nor need! Although of course the US banking system is somewhat backward in electronic developments.

So in the latter half of 2018 the US economy may well see a beginning of a pick-up in economic growth. The only caveat here is that the 2018 numbers were revised lower which flatters the recent growth numbers as we mull whether they might also be revised lower?

Comment

The official data is finally telling us the scale of the US slow down as the Atlanta Fed now cast gives us a running score. We now know it is close to flatlining like so many others although it id fair to point out that as Ralph Bostic hinted out its recovery has been stronger than elsewhere and let me add it was growing more strongly in 2018. Ironically that means it has slowed the most as economics lives up to its reputation of being the dismal science.

The latter part of 2019 may see a bounce but it does not look that strong so we may be in for a period of stagflation of sorts. The of sorts part is that inflation is historically low but then wage growth is no great shakes either if we look at the weekly pattern. This is because whilst hourly wages rose by 3.4% in the latest employment report hours worked fell back by 0.1 so weekly wages rose by less.

So let us end with some lyrics inspired by Ralph Bostic..

Well if you’re stuck for a while consider our child
How can it be happy without its ma and pa
Let’s stick together
Come on, come on, let’s stick together ( Roxy Music)

Money Supply data suggest it will be a weak start to 2019 for the US economy

We have an opportunity to take a look in detail at the US economy which stands out at the moment at a time of slowing economies elsewhere. Partly of course that is due to the shut down of government offices which means that we do not have economic growth or GDP data for the last quarter of 2018, but also because it had a better trajectory anyway that Europe or Japan. We get some clues from the Minutes of the January meeting of the US Federal Reserve and let me open with some old friends that rarely get a mention these days.

Standing dollar liquidity swap arrangements with
the following foreign central banks: Standing foreign currency liquidity swap arrangements with the following foreign central banks:

Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank

That sets the background as although we are supposedly out of crisis the measures enacted in response to the credit crunch never seem to go away. Another powerful point was the way that if you read between the lines the existence of a Powell Put Option for equity markets is confirmed.

Early in the new year, market sentiment improved following communications by Federal Reserve officials emphasizing that the Committee could be “patient” in considering further adjustments to the stance of policy and
that it would be flexible in managing the reduction of
securities holdings in the SOMA. On balance, stock
prices finished the period up almost 5 percent while corporate risk spreads narrowed….

This is in many ways more significant than the rhetoric about possible future interest-rate increases which seem set to fade away. Also whilst this does not actually say that QT or Quantitative Tightening is toast it gives us that impression.

Almost all participants thought that it would be desirable
to announce before too long a plan to stop reducing the
Federal Reserve’s asset holdings later this year.

Whilst it has it faults as a website sometimes Zerohedge is on the money.

Dear is there a direct line for “market participants” to complain when stocks perform not as expected?

There is also the issue of the apparent way that the Federal Reserve capitulated under pressure from President Trump who only a day earlier had made his views clear yet again.

Had the opposition party (no, not the Media) won the election, the Stock Market would be down at least 10,000 points by now. We are heading up, up, up!

His favourite song must be that one by Yazz.

Monetary Developments

Sadly the Minutes ignore this issue although they do look at credit issues.

Staff continued to monitor developments in the leveraged loan market given the sharp rise in spreads and slowdown in issuance late last year. The build-up in overall nonfinancial business debt to levels close to historical highs relative to GDP was viewed as a factor that could amplify adverse shocks to the business sector.

We can do better than them on two counts firstly by looking at the narrow money data as a leading indicator and also we have the January and some February data which they did not. Doing so shows us that M0 growth is running at an annual rate of 2% over the past three months, 3.3% over the past 6 months and 2.3% over the year. As you can see it picked up for a bit but has fallen back.

If we look for perspective we see that it was over 15% in 2011 and 12 and in more recent years was between 7% and 8%. So we can expect a slowing economic effect from it as we note that some of the decline will be due to the QT programme. Looking into the detail of the narrow money numbers we see that the amount of cash in circulation is rising (6% in the year to January) and it is demand deposits (-2.5% over the past year) which have been the main factor in the rate of growth of narrow money falling,

So we move on with noting that a monetary brake for say the first half of 2019 has been applied to the economy.

Switching to broad money gives a different picture as we recall that it applies some two years or so ahead. That is because it has picked up in the last three months to an annual rate of 6% whereas over the past twelve months the annual rate of M2 growth was 4.3%. So assuming it works and the lags are variable the US economy should see either some growth or some inflation in a couple of years time. Also Americans have been saving and as an aside as I cannot recall a mention of them for some time they also have some US $1.7 billion of what they would call travellers checks.

Consumer Credit

Earlier this month we were told this.

In 2018, consumer credit increased 5 percent, with revolving and nonrevolving credit increasing 2-3/4 percent and 5-1/2 percent, respectively. Consumer credit increased at a seasonally adjusted annual rate of 6-1/2 percent in the fourth quarter and at a rate of 5 percent in December.

As you can see that is greater than economic growth but much less exposed than my own country the UK as not only is the rate of expansion lower but the rate of economic growth which was confirmed at an annualised 3.4% for the third quarter yesterday is higher.

However if we look into the detail we can note signs of trouble in the car loans sector which has grown to US $1.155 trillion. The growth rate has roughly halved in terms of annual dollar increases from the 75-80 billion it was in 2014-16 to 37 and 41 billion in the last two years respectively. We know that the industry has done its best to halt the decline with measures such as the “extend and pretend” methodology as some car loans last 8 years. So there are signs of the market signing along with Lyndsey Buckingham.

I think I’m in trouble,
I think I’m in trouble.

On that subject let me add get well soon to Lyndsey.

Comment

Whilst we do not have the numbers for the fourth quarter due to the government shut down we do have this from the Atlanta Federal Reserve.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2018 is 1.4 percent on February 21, down from 1.5 percent on February 14. After this morning’s advance durable manufacturing report from the U.S. Census Bureau, the nowcast of fourth-quarter real nonresidential equipment investment growth declined from 4.5 percent to 3.9 percent.

As you can see that would be quite a lowing from what we saw earlier in 2018 and if we switch to the New York Fed its tracker for first quarter data released so far has US GDP growing at 1.1%. Putting all this another way this brings me back to my article on the 12th of this month as I mulled how the super massive black hole of QE to infinity seemed to be sucking us all in as we approach the event horizon. For us to avoid it we will need this from the Stranglers.

Something’s happening and it’s happening right now
You’re too blind to see it
Something’s happening and it’s happening right now
Ain’t got time to wait
I said something better change
I said something better change
I said something better change
I said something better change