The rally of the UK Pound from the lows matches a 1.25% Bank Rate rise

Yesterday was a day where we discovered a few things. For example we learned that  Prime Minister Theresa may was not going to be the new Dr. Who nor the new manager of Arsenal football club as we discovered that she was in fact trying to launch a General Election. I say trying because she needs to hurdle the requirements of the Fixed Term Parliament Act later today although if she does I presume it will fade into the recycle bin of history. Let us take a look at the economic situation.

The outlook

Rather intriguingly the International Monetary Fund or IMF published its latest economic outlook. There was good news for the world economy as a whole.

With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade, world growth is projected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018.

There was particular good news for the UK economy.

Growth in the United Kingdom is projected to be 2.0 percent in 2017, before declining to 1.5 percent in 2018. The 0.9 percentage point upward revision to the 2017 forecast and the 0.2 percentage point downward revision to the 2018 forecast reflect the stronger-than-expected performance of the U.K. economy since the June Brexit vote,

However this was problematic to say the least for Christine Lagarde who after the advent of Donald Trump is now the female orange one.

. Asset prices in the UK (and, to a lesser degree, the rest of the EU) would likely fall in the aftermath of a vote for exit…..In the limited scenario, GDP growth dips to 1.4 percent in 2017, and GDP is almost fully at its new long-run level of 1.5 percent below the baseline by 2019. GDP growth falls to -0.8 percent in 2017 in the adverse scenario,

There was more.

On this basis, the effects of uncertainty seem to be universally negative, and potentially quite strong and persistent, even if ultimately temporary.

In fact asset prices rose and the uncertainty had no effect at all. Of course the long-term remains uncertain and ironically the IMF after being too pessimistic has no become more optimistic just as the factor which is likely to affect us is around, that is of course higher inflation. Oh and the UK consumer spent more and not less.

If we stick with the higher inflation theme there is this from Ann Pettifor today.

UK govt promotes usury: interest on student debt rises later this year from 4.6% to 6.1% = RPI + 3%.

That is the same UK establishment which so regularly tells us that CPIH ( H= Housing Costs via Imputed Rents) is the most “comprehensive” measure of inflation so is it not used? Also if we look other UK interest-rates we see Bank Rate is 0.25% and the ten-year Gilt yield is 1.02% so why should student pay 5/6% more please? Even worse much of that debt will never be repaid so it is as Earth Wind & Fire put it.

Take a ride in the sky
On our ship, fantasize

So can anybody guess the first rule of IMF Fight Club?

UK Pound £

There was an immediate effect here and as so often it was completely the wrong one as the UK Pound £ dropped like a stone. Well done to anyone who bought down there as it then engaged some rocket engines and shot higher and at one point touched US $1.29. For those unfamiliar with financial market behaviour this was a classic case of stop losses being triggered as so many organisations had advised selling the UK Pound that the trade was very over crowded. My old employer Deutsche Bank was involved in this as it has been cheerleading for a lower Pound £ at US $1.21, Ooops.

So we only learn from yesterday’s move that the rumours a lot of organisations had sold the UK Pound £ were true. As they looked to cover their positions the momentum built and we saw a type of reverse flash crash.

If we take stock we see the following which is that the UK Pound £ is now some 10.1% lower than a year ago against the US Dollar at US $1.282. As it sits just below 1.20 versus the Euro it is now only down some 5% on where it was a year ago. If we move to the effective or trade-weighted exchange-rate we see that at 79.1 it is some 6.7% lower than the 84.8 it was at a year ago. What a difference a day makes? Of course what we never have is an idea of what the permanent exchange rate will be or frankly if there is any such thing outside the economic theories of the Ivory Towers but if we stay here the outlook will see some ch-ch-changes. For example a little of the prospective inflation and likely economic slow down will be offset.

If we stay with inflation then there are other influences which are chipping bits off the oncoming iceberg. I have previously discussed the lower price for cocoa which offers hope for chocoholics and maybe even a returning Toblerone triangle well there is also this from Mining.com.

The Northern China import price of 62% Fe content ore plunged 5% on Tuesday to a six-month low of $61.50 per dry metric tonne according to data supplied by The Steel Index. The price of the steelmaking raw material is now down by more than a third over just the last month.

Shares and bonds

The UK Gilt market is extraordinarily high as we mull the false market which the £435 billion of QE purchases by the Bank of England has helped create. As someone who has followed this market for 30 years it still makes an impact typing that the ten-year Gilt yield is as low as 1.04%. This benefits various groups such as the government and mortgage borrowers but hurts savers and as I noted earlier does nothing for student debt.

The UK FTSE 100 fell over 2% but that was from near record levels. I do not know if this is an attempt at humour but the Financial Times put it like this.

The surging pound has pushed Britain’s FTSE 100 negative for the year

So a lower Pound £ is bad as is a higher £? Anyway they used to be keen on the FTSE 250 because they told us it is a better guide to the UK domestic economy which has done this.

So more heat than light really here because if we take a broad sweep the changes yesterday were minor compared to the exchange-rate move

House prices

Perhaps the likeliest impact here is a continuation of low volumes in the market as people wait to see what happens next. It seems likely that foreign buyers may wait and see as after all it is not a lot more than a month, so we could see an impact on Central London in particular.

In a proper adult campaign issues such as money laundering and the related issue of unaffordable house prices would be discussed. But unless you want to go blue in the face I would not suggest holding your breath.

Comment

The real change yesterday was the movement in the UK Pound £ which will have been noted by the Bank of England. I wrote only recently that some of it members would not require much to vote for more monetary easing such as Bank Rate cuts and of course should the UK Pound £ move to a higher trajectory that gives them a potential excuse. I do not wish to put ideas in their heads but since the low the rise in the UK Pound £ is equivalent to five 0.25% Bank Rate rises according to the old rule of thumb.

By the time you read this most of you will know the British and Irish Lions touring squad and as a rugby fan I look forwards to today’s announcement of the squad and even more to the tour itself. However just like economic statistics there seems have been an early wire about the captain.

By contrast the General Election announcement came much more out of the blue.

The 0% problem of Japan’s economy

Today I intend to look east to the land of the rising sun or Nihon where the ongoing economic struggles have been a forerunner to what is now happening to western economies. Also of course Japan is intimately tied up with the ongoing issue and indeed problem that is North Korea. And its navy or rather maritime self-defence force is being reinforced as this from Reuters only last month points out.

Japan’s second big helicopter carrier, the Kaga, entered service on Wednesday, giving the nation’s military greater ability to deploy beyond its shores………..Japan’s two biggest warships since World War Two are potent symbols of Prime Minister Shinzo Abe’s push to give the military a bigger international role. They are designated as helicopter destroyers to keep within the bounds of a war-renouncing constitution that forbids possession of offensive weapons.

We cannot be to critical of the name misrepresentation as of course the Royal Navy badged its previous aircraft carriers as through deck cruisers! There are of course issues though with Japan possessing such ships as the name alone indicates as the last one was involved in the attack on Pearl Habour before being sunk at Midway.

Demographics

This is a crucial issue as this from Bloomberg today indicates.

Japan Needs More People

The crux of the problem will be familiar to regular readers of my work.

Japanese companies already report they can’t find people to hire, and the future isn’t likely to get better — government researchers expect the country’s population to fall by nearly a third by 2065, at which point nearly 40 percent will be senior citizens. There’ll be 1.3 workers for every person over the age of 65, compared to 2.3 in 2015.

So the population is both ageing and shrinking which of course are interrelated issues. The solution proposed by Bloomberg is rather familiar.

It’s plain, however, that he needs to try harder still, especially when it comes to immigration……..Researchers say that to maintain the current population, Japan would have to let in more than half a million immigrants a year. (It took in 72,000 in 2015.)……..He now needs to persuade Japan that substantially higher immigration is a vital necessity.

There are various issues here as for example the Bloomberg theme that the policies of  Prime Minister Abe are working seems not to be applying to population. But as they admit below such a change is the equivalent of asking fans of Arsenal football club to support Tottenham Hotspur.

In a society as insular and homogeneous as Japan, any such increase would be a very tall order.

The question always begged in this is if the new immigrants boost the Japanese economy surely there must be a negative effect on the countries they leave?

The 0% Problem in Japan

I thought today I would look at the economy in different ways and partly as a reflection of the culture and partly due to the effect above a lot of economic and financial market indicators are near to 0%. This is something which upsets both establishments and central bankers.

Real Wages

Let me start with an issue I have been writing about for some years from Japan Macro Advisers.

The real wage growth, after offsetting the inflation in the consumer price, was 0% YoY in February.

The official real wage data has gone 0%,0%,0.1%, -0.1% and now 0% so in essence 0% and is appears on a road to nowhere. This is very different to what you may have read in places like Bloomberg and the Financial Times which have regularly trumpeted real wage growth in their headlines. There is a reason why this is even more significant than you might think because let me skip to a genuine example of economic success in Japan.

Given the prevalent labor shortage situation in Japan, there should be an economic force encouraging wages to rise. At 2.8%, the current unemployment rate is the lowest since 1993. (Japan Macro Advisers )

Actually in another rebuttal to Ivory Tower economics we see that unemployment is above what was “full employment”.

One could argue it is a matter of time, but it has already been 2.5 years since the unemployment rate reached 3.5%, the level economists considered as full-employment equivalent. (Japan Macro Advisers )

Inflation

The latest official data hammers out an increasingly familiar beat.

The consumer price index for Japan in February 2017 was 99.8 (2015=100), up 0.3% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

If you compare 99.8 now with 100 in 2015 you see that inflation has been in essence 0%. This is quite a reverse for the policy of Abenomics where the “Three Arrows” were supposed to lead to inflation rising at 2% per annum. An enormous amount of financial market Quantitative Easing has achieved what exactly? Here is an idea of the scale comparing Japan to the US and Euro area.

As we stand this has been a colossal failure in achieving its objective as for example inflation is effectively 0% and the Japanese Yen has been reinforcing this by strengthening recently into the 108s versus the US Dollar. it has however achieved something according to The Japan Times.

Tokyo’s skyline is set to welcome 45 new skyscrapers by the time the city hosts the Olympics in 2020, as a surge of buildings planned in the early years of Abenomics near completion.

Although in something of an irony this seems to cut inflation prospects.

“This could heat up competition for tenants in other areas of the city”

A cultural issue

From The Japan Times.

Naruhito Nogami, a 37-year-old systems engineer in Tokyo, drives to discount stores on weekends to buy cheap groceries in bulk, even though he earns enough to make ends meet and the prospects for Japan’s economic recovery are brighter.

“I do have money, but I’m frugal anyway. Everyone is like that. That’s just the way it is,” he says.

Jaoanese businesses have responded in a way that will be sending shudders through the office of Bank of Japan Governor Kuroda.

Top retailer Aeon Co. is cutting prices for over 250 grocery items this month to lure cost-savvy shoppers, and Seiyu, operated by Wal-Mart Stores, cut prices on more than 200 products in February.

More of the same?

It would seem that some doubling down is about to take place.

The Abe government on Tuesday nominated banker Hitoshi Suzuki and economist Goshi Kataoka to the Bank of Japan Policy Board to replace two members who have frequently dissented against the direction set by Gov. Haruhiko Kuroda. ( Bloomberg)

Also Japan seems ever more committed to a type of centrally planned economic culture.

Japanese government-backed fund eyes Toshiba’s chip unit (Financial Times )

With the Bank of Japan buying so many Japanese shares it has been named the Tokyo Whale there more questions than answers here.

Comment

There is much to consider here but let me propose something regularly ignored. Why does Japan simply not embrace its strengths of for example full employment and relatively good economic growth per capita figures and abandon the collective growth and inflation chasing? After all lower prices can provide better living-standards and as  wages seem unable to rise even with very low unemployment may be a road forwards.

The catch is the fact that Japan continues to not only have a high national debt to GDP (Gross Domestic Product) ratio of 231% according to Bank of Japan data but is borrowing ever more each year. It is in effect reflating but not getting inflation and on a collective level not getting much economic growth either. Let is hope that Japan follows the lead of many of its citizens and avoids what happened last time after a period of economic troubles.

For us however we are left to mull the words of the band The Vapors.

Turning Japanese
I think I’m turning Japanese
I really think so

Let me finish with one clear difference we in the UK have much more of an inflation culture than Japan.

The ongoing UK problem with pensions

Today has brought a piece of news that is another element in an ongoing saga. It also brings into play some economic developments that are interrelated to it. Oh and a past manipulation of the UK public finances. From Reuters.

Royal Mail said on Thursday it would close its defined benefit pension scheme at end-March 2018 after a review found it would need to more than double annual contributions to over 1 billion pounds to keep the plan running.

Royal Mail, the British postal service privatised in 2013, said it was one of only a few major companies that still had employees in a defined benefits scheme, a type of pension that pays out according to final salary and length of service.

The company, which pays around 400 million pounds a year into the scheme, said it was currently in surplus, but it expected the surplus to run out in 2018.

There are various initial consequences such as threats of strike action from the postal union and something to cheer central bankers everywhere. From the Financial Times.

Investors were more positive about the plan, however. Shares in Royal Mail rose 1.6 per cent after the announcement to their highest level since January. JPMorgan Cazenove analysts estimated last month that markets have already priced in a £100m a year step-up in pension charges, and investors have welcomed signs of an end to questions over the scheme’s future.

UK Public Finances

Those who recall my analysis from 2013 will remember that this is another version of the Royal Mail pension scheme that was originally booked in the UK National Accounts for a £28 billion profit! How can you have a profit on acquiring something which is unaffordable? Later the methodology was quietly changed.

This reflects the shortfall between the £28 billion of assets transferred from the RMPP and the £38 billion of future pension liabilities that were consequently assumed by Government…….. Furthermore, the transfer of the assets no longer reduces borrowing as it did under ESA95.

To be fair to our statisticians and indeed Eurostat they did catch up with this manipulation eventually but of course by then the public’s attention had moved elsewhere.

Why are these pension schemes now so unaffordable?

The latest report from HM Parliament describes the problems and issues.

poor investment returns, associated with low underlying interest rates and loose monetary policy following the 2008–09 financial crisis and associated recession;8

 

rises in longevity that have been faster than was widely anticipated;

 

sponsor behaviour, including many employers taking contribution holidays when schemes were in surplus.

Only actuaries and economists can make rising longevity seem a bad thing! But if we move to the effect of low interest-rates there is this evidence from Deputy Governor Ben Broadbent to HM Parliament on this and the emphasis is mine.

First, I don’t think it damages the value of their assets; it pushes up the price of their liabilities. That is what happens when bond yields fall. The price of that bond and the present value of the liabilities go up. But it also pushes up the assets.

Even with such analysis Dr.Ben was forced to admit that schemes in deficit were net losers. But I find the overall idea that they lose on the swings but gain on the roundabouts simply extraordinary! Another example of Ivory Tower thinking. You see they have present gains although of course they will be across many markets but the real issue is that they have to pay for future liabilities and the answer misses of the fact that pension funds have going forwards to buy assets such as bonds which are much more expensive. Indeed in an odd but true development pushing up the price of ordinary UK Gilts via QE has in some ways had more of an effect on index-linked Gilts which are not bought! This matters because most defined benefit schemes have inflation based liabilities to pensioners.

The odd case of index-linked Gilts

Because ordinary Gilts offer so little interest these days and index-linked Gilts offer annual coupons based on the Retail Price Index ( 3.1%) if you need income then linkers look more attractive. Of course the price adjusted to this but this means that the Index-Linked Gilt market is in quite a bubble right now. It also means that it is in a way not fit for purpose as it is being priced on annual cash returns rather than inflation prospects as we see yet another market which has been turned into a false one by the central planners.

I have written before about how you could lose money by being right about UK inflation and this is why. So how do pension funds now hedge inflation risk?

The UK Gilt market

This has been on something of a surge recently or perhaps I should say another surge. Let me put an apology in with that because that has wrong-footed my stated view on here as I expected it to fall as inflation prospects deteriorated.  But  the ten-year Gilt yield is quite near to 1% and the two-year yield is 0.1% which is insane in terms of real yield with inflation heading to 3/4% depending on the measure used. Pension funds look a long way ahead so if we look at the thirty-year yield we see it has fallen to 1.63%.

Thus if we switch to prices we see that any investment now is at an extraordinarily expensive level. What could go wrong?

Actually according to HM Parliament defined benefit schemes tend to value themselves versus the higher quality end of the Corporate Bond market.

scheme funding statistics show that discount rates used by DB pension schemes for calculating liabilities since 2005 have consistently been around 1 per cent above gilt yields.

Can anybody spot a flaw in the Bank of England buying £10 billion of these ( £9.1 billion so far) to raise the price and reduce the yield?

Pre pack problems

Another issue was raised by Josephine Cuombo in the Financial Times.

Companies in the UK have used a controversial insolvency procedure to offload £3.8bn of pension liabilities, often as part of a sale to existing directors or owners, a Financial Times investigation has found…….

The FT investigation found that two in three pre-pack schemes entering the PPF involved sales to existing owners or directors. A string of prominent cases that used pre-pack arrangements, but where companies are still trading, include the turkey producer Bernard Matthews, the bed company Silentnight and the textile group Bonas.

In essence the schemes have found their way into the Pension Protection Fund which is backed by the industry thus raising costs for other schemes and pensioners get reduced benefits.

Comment

When the Bank of England looks at pensions it is hard to avoid the thought that views are influenced by their own more than comfortable position. For example in its latest accounts Ben Broadbent had received pension benefits valued at £104,586 in the preceding year. It is also hard to forget that just as it was telling everyone inflation was going lower back in 2009 the Bank of England piled into index-linked Gilts in its own scheme! But for everyone else involved there are no shortage of sharks in the water.

As to the befuddled and bemused Ben Broadbent he has views which question why we pay him at all!

One thing I want to get across today is not to confuse the low level of interest rates with monetary policy…….

Even though we are that last link and even though it is the MPC that sets interest rates, it is not a realistic question—I do not think it is a realistic premise to say low interest rates are because of monetary policy.

Until of course he can claim gains from his policies….

Let me sign off for a few days by wishing you all a very Happy Easter.

 

 

 

UK employment improves and so does underemployment

As we look at the UK labour market today let us start with something which in one way is good news and in another poses questions. From Reuters last week.

Manchester United winger Jesse Lingard has signed a new contract that will keep him at Old Trafford until 2021, the Premier League club said in a statement on Thursday.

Lingard, who will earn up to 100,000 pounds a week according to British media reports, has an option to extend the deal by a further year.

Firstly congratulations to Jesse and for once it is nice to see an English player benefit from the largesse of the Premier League these days. There is invariably hype in the exact numbers but he seems to have approximately trebled his wages which will do there bit for the average wages series in the future. However those who watched an outstanding display by Juventus last night in the Champions League as they put Barcelona to the sword have been mulling the concept of relativity. From @Football_Tweet

– Paulo Dybala earns €3M a season at Juventus. – Jesse Lingard earns €6M a season at Man Utd.

we return to a familiar question which is how much of the wages growth is in effect a type of inflation?

The impact of Robots

If we look ahead on a more general level then we can expect to see not only more robots in our economy but more advanced ones appear. Not quite as advanced as the ones in the Foundation saga of Isaac Asimov that I am currently reading again but considerable advances are being made. According to Bloomberg such improvements are likely to have an impact on labour markets and wages especially.

Robots have long been maligned for job-snatching. Now you can add depressing wages and promoting inequality to your list of automation-related grievances.

Industrial robots cut into employment and pay for workers, based on an new analysis of local data stretching from 1990 and 2007. The change had the biggest impact on the lower half of the wage distribution, so it probably worsened America’s wage gap.

The exact results are as follows.

One additional robot per thousand workers reduces the employment-to-population ratio by 0.18 percentage points to 0.34 percentage points and slashes wages by 0.25 percent to 0.5 percent, based on their analysis.

Food for thought as we look forwards in years and decades and of course ground which many of the best science fiction writing has warned about.

Today’s data

The quantity data remains pretty strong as you can see.

There were 31.84 million people in work, 39,000 more than for September to November 2016 and 312,000 more than for a year earlier.

There was an additional kicker to this as we got a glimpse into a potentially improving situation regarding underemployment as well.

with an increase in full-time employment (positive 146,000) partly offset by a fall in part-time employment (negative 107,000)………….strong demand for labour is translating into a shift from part-time to full-time employment, and an increase in the average hours worked per week by both full time and part-time employees.

Here is the analysis of hours worked.

Average hours worked per week increased from 32.0 to 32.4 in the 3 months to February 2017, the highest since July to September 2002, largely due to more hours being worked over the Christmas and New Year period compared with recent years.

Fewer part-time workers are looking for full-time work.

Data released today (12 April 2017) show that this measure continued to contract with the proportion falling to 12.6%, down from 14.2% a year ago (and down from a peak of 18.4% in 2013). This proportion is now at its lowest since March to May 2009, but still well above its pre-crisis average of 8.3%.

So it looks as though the situation regarding underemployment has improved as well although the data is only partial and let us finish this section with the unemployment numbers.

There were 1.56 million unemployed people (people not in work but seeking and available to work), 45,000 fewer than for September to November 2016 and 141,000 fewer than for a year earlier.

What about wages?

These were the same as last month in terms of growth.

Between the three months to February 2016 and the three months to February 2017, in nominal terms, total pay increased by 2.3%, the same as between the three months to January 2016 and the three months to January 2017.

Actually there was a rise in the month of February by 2.9% on the year before so maybe a hopeful hint of a pick-up! We will find out as we go through the bonus months of March and April. One thing we do know is that both Sky News and the Financial Times ( “UK wages have grown at their weakest pace in seven months,”) have not checked this.

The official numbers on real wages are below.

adjusted for inflation, average weekly earnings grew by 0.2% including bonuses and by 0.1% excluding bonuses, over the year, the slowest rate of growth since 2014.

So we have something of a discontinuity as we had some real wage growth in February it would appear. Let us cross our fingers that it continues but sadly it seems unlikely ( the comparison is flattered by bonuses falling last year). Of course even if we use the figures for February alone then real wage growth was negative if we compare it to the Retail Price Index.

Also the exclusion of the self-employed from the wages data gets ever more shameful.

self-employed people increased by 114,000 to 4.78 million (15.0% of all people in work).

Can we increase tax on income from wages?

After the debacle of the U-Turn on higher National Insurance contributions from the self-employed there have been arguments that the UK is unable to ever raise more taxes from income. It was interesting therefore to see some international comparisons from the OECD today.

The average single worker in Belgium faced a tax wedge of 54.0% in 2016 compared with the OECD average of 36.0%…..Belgium had the 4th highest tax wedge in the OECD for an average married worker with two children at 38.6% in 2016, which compares with the OECD average of 26.6%.

Not the best place to be single and childless it would appear! But now the UK.

The average single worker in the United Kingdom faced a tax wedge of 30.8% in 2016……..The United Kingdom had the 22nd lowest tax wedge in the OECD for an average married worker with two children at 25.8% in 2016,

So in theory we could if we wished to reach the peak that is Belgium. The Anglosphere ( US, Australia and Canada) if I can put it like that has similar numbers to the UK although the Kiwis stand out at only 17.9% for a single person. The lowest is Chile at 7%.

Interestingly with its debt and deficit problems income in Japan is slightly more taxed than here.

Comment

I would like to take a step back and consider the last couple of years. Remember the number of economists and media analysts who warned about what they called “deflation” and sometimes they shouted it so loud it was “DEFLATION”? Well it morphed into this.

By late-2014, an increase in nominal wage growth and low CPIH inflation, led to average real earnings increasing by 1.7% in the 18 months to mid-2016. ( Office for National Statistics).

This of course boosted the economy mostly via the retail sales boom but also in other ways as I pointed out on the 29th of January 2015.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

If there was a musical theme to the deflation paranoia then it was “clowns to the left of me, jokers to the right” from Stealers Wheel. Please do not misunderstand me I am talking about the so-called experts here not those influenced by them. Sadly we seem to be heading into a period where something they wanted ( higher inflation) will slow the economy down. I wonder how the inflationistas will spin that?

 

 

 

 

 

UK Inflation is hitting the poorest hardest

As we advance on a raft of UK inflation data there has already been a reminder of one of the themes of this website which is that the UK is an “inflation nation” where the institutional bias is invariably one way. From the BBC.

Drivers saw their car insurance premiums rise by an average of £110 in the last year, a comparison site says.

More expensive repairs and recent government changes to injury payouts pushed up annual insurance costs by 16%, according to Confused.com.

It found drivers paid on average £781 on comparison sites for a comprehensive policy in the year to March 2017.

Average premiums are set to rise to a record high and could pass £1,000 next year, it added.

Up,up and away! I guess those pushing for driverless cars will be happy with this but few others. Some of this is that cars are more complex and thereby more expensive to repair but little or nothing was done about the rise in “whiplash” claims and there has been something of a stealth tax campaign.

IPT went up from 6% to 9.5% in 2015, to 10% in 2016, and will rise to 12% in June 2017. ( IPT = Insurance Premium Tax)

Inflation outlook

We get much of this from commodity prices and in particular the price of crude oil. If we start with crude oil it has returned to where it has mostly been for the last few months which is around US $55/6 for a barrel of Brent Crude Oil where the OPEC production cuts seem to be met by the shale oil producers. However today’s data will be based on March where the oil price was around US $5 lower so this is for next month.

Speaking of the price of oil and noting yesterday’s topic of a rigged price ( Libor) there was this on Twitter.

In 2 years oil price/bbl gyrated from $80->$147->$35->$80 while physical demand for consumption varied by less than 3%……..I recommended to Treasury Select Committee in July 2008 a transatlantic commission of inquiry into the completely manipulated Brent market…..I blew the whistle on LIBOR-type oil futures market manipulation in 2000 & lost everything I had. Treasury/FSA were complicit in a whitewash

I have speculated before about banks manipulating the oil price but how about the oil price rise exacerbating the initial credit crunch effect?

One area of interest to chocoholics in particular is cocoa prices as I pointed out last week. If we look at them in detail we see that London Cocoa has fallen from 2546 last July to 1579 with 2% of that fall coming this morning. How many chocolate producers have raised prices claiming increasing costs over the past few months? Even allowing for a lower UK Pound £ costs have plainly fallen here as we wait to see if Toblerone will give us a triangle back! Or will we discover that the road is rather one-way……

We get little of a signal from Dr. Copper who has been mostly stable but Iron Ore prices have moved downwards. From Bloomberg.

Iron ore dropped into bear-market territory, with Barclays analysts pinning the blame on lower demand from China……Ore with 62 percent content in Qingdao fell 1 percent to $74.71 a dry ton on Monday, according to Metal Bulletin Ltd., following a 6.8 percent drop on Friday.

So as we wait to see what the price of crude oil does next some of the other pressure for higher inflation has abated for now. This was picked up on the forward radar for the official UK data today.

Input prices for producers increased at a slower rate in the 12 months to March compared to the beginning of 2017………PPI input price increased by 17.9% in 12 months to March 2017, down from 19.4% in February, as prices remained fairly flat on the month and prices increased in the previous year.

There was also a slight fading of output price inflation.

Factory gate prices (output prices) rose 3.6% on the year to March 2017, from 3.7% in February 2017, which is the ninth consecutive period of annual price growth.

Our official statisticians point us to higher food prices which has been a broad trend.

In the 12 months to February 2017, vegetable prices in the EU 28 countries increased by 12.4% and in Germany they increased by 22.5%.

However whilst this was true this may well be fading a little as well. We had the issues with broccoli from Spain earlier this year but more recently I note there are cheaper prices for strawberries from er Spain. So whilst there was an impact from the lower Pound £ we wait to see the next move.

CPIH 

This is the new headline measure of inflation for the UK although those who remember the official attacks on the Retail Price Index for being “not a National Statistic” will wonder how a measure which isn’t one either got promoted?! Or why it was done with such a rush?

Some may wonder if this news was a factor? From the London Evening Standard a few days ago.

In London, where rents are by far the most expensive in the country, prospective tenants saw prices fall 4.2 per cent year on year………The average cost of renting a home in the UK remained almost the same as at the start of 2016, rising just 1.8 per cent, compared to the 3.9 per cent annual growth recorded a year ago, thanks to a significant increase in the number of properties available.

It does make you wonder if they thought the buy-to let rush of early 2016 might depress rents? Anyway even the official numbers published today are seeing a fading.

Private rental prices paid by tenants in Great Britain rose by 2.0% in the 12 months to March 2017; this is down from 2.1% in February 2017………London private rental prices grew by 1.6% in the 12 months to March 2017, which is 0.4 percentage points below the Great Britain 12-month growth rate.

If London leads like it usually does…

Oh and Scotland is seeing rent disinflation albeit only marginal.

Scotland saw rental prices decrease (negative 0.1%) in the 12 months to March 2017.

So we see that rents are currently a downwards pull on the annual inflation rate.

The all items CPIH annual rate is 2.3%, unchanged from last month.

Whereas if we look at house prices we see this.

Average house prices in the UK have increased by 5.8% in the year to February 2017 (up from 5.3% in the year to January 2017).

The weasel words here are “owner occupied housing costs” which give the impression that house prices will be used without actually saying it. For newer readers this inflation measure assumes the home is rented out when it isn’t and then estimates the rent and uses that.

Comment

Whilst the headline number is unchanged there is a lot going on under the surface. For example the apparent fading of rents means that the new promoted measure called CPIH seems likely to drop below its predecessor or CPI in 2017. However under the surface there are different effects in different groups. Take a look at this from Asda.

The strongest decrease in spending power has been felt by the poorest households, whose weekly discretionary income in February was 18% lower than in the same month before, falling from -£20 to -£23. This implies that the basket of essential products and services is even less affordable than previous year for the bottom income group.

The clue here is the term essential products and services which of course is pretty much what central bankers look away from as for them essential means non core. You could not make it up! But what we are seeing here is the impact of higher fuel and food prices on the poorest of our society. Those economists who call for higher inflation should be sent to explain to these people how it is benefiting them as we wonder if there will be another of these moments?

I cannot eat an I-Pad!

Meanwhile the UK establishment continues its project to obfuscate over housing costs. The whole area is an utter mess as I note that @resi_analyst ( Neal Hudson) has been pointing out inconsistencies in the official price series for new houses. Back months are being quietly revised sometimes substantially.

A challenge to our statisticians

With the modern GDP methodology we see that the explosion in Airbnb activity has had a consequence.

Colin (not his real name) contacted the BBC when he discovered the flat he rents out on Airbnb had been turned into a pop-up brothel.

You see the ladies concerned were no doubt determined to make sure the UK does not go into recession.

Looking at both their ads, some of the rates were about £1,300 a night. So if they were fully booked for the two nights that’s £2,600 each – £5,200 in total.

But as we mull the issue and wonder how our statisticians measure this? There is a link to today’s topic as the inflation numbers ignore this. Meanwhile if there was evidence of drug use as well would they be regarded as a modern version of Stakhanovite workers by the Bank of England? As Coldplay so aptly put it.

Confusion never stops

 

 

The ethical problems of UK banking continue to pile up

On Friday Bank of England Governor Mark Carney was in full flow at Thomson Reuters headquarters in London. In particular he wanted to lecture us about the improvements in ethical standards at the Bank of England and in banking more generally.

The high road to a responsible, open financial system

Okay so what does that mean?

The financial system is fairer because of reforms that are ending the era of “too big to fail” banks and
addressing the root causes of a torrent of misconduct.

I am sure that many of you will be wondering about how he defines the word “fairer” or how the many mergers that were a feature of the UK response to the credit crunch helped end “too big to fail”? The creation of a mega bank by merger Lloyds with Halifax Bank of Scotland for example surely only made the situation more acute. As to addressing the root cause of misconduct we still actually await this happening in practice.

There was plenty of high-flying rhetoric to be found.

On one path, we can build a more effective,
resilient system on the new pillars of responsible financial globalisation.

The new buzz phrase is “efficient resilence” which if the previous buzz words and phrases are any guide ( temporary…… vigilant etc.) will mean anything but! Here is how Mark describes it.

Finally, efficient resilience is why the Bank of England, working with the Financial Conduct Authority, has
been at the forefront of efforts to increase individual accountability in financial services. While the UK’s
action plan to improve conduct includes stronger deterrents and reduced opportunities for bad behaviour, we
recognise that ex post penalties are only part of the solution.

Events other the weekend have brought the claims and boasts of the section below into focus.

To put greater emphasis on individual accountability, the UK has introduced new compensation rules that go
much further than other jurisdictions in aligning risk and reward. And we have put greater stress on the
importance of better governance and firm culture. …
Since codes are of little use if no one reads, follows or enforces them, the UK has instituted a unique Senior
Managers Regime to embed cultures of risk awareness, openness and ethical behaviour. Based on its early
successes, international authorities are now considering following the UK’s lead.

Barclays

Let us see if this is one of the early successes? It too has the rhetoric with its values of  Respect,  Integrity,  Service,  Excellence,  Stewardship or RISES program. ( https://www.home.barclays/about-barclays/barclays-values.html )

Barclays PLC and Barclays Bank PLC (Barclays) announce that the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have commenced investigations into:

·    Jes Staley, Group Chief Executive Officer of Barclays, as to his individual conduct and senior manager responsibilities relating to Barclays whistleblowing programme and an attempt by Mr Staley in 2016 to identify the author of a letter that was treated by Barclays Bank PLC as a whistleblow; and  

We are expected to believe apparently it was all just a misunderstanding.

The Board has concluded that Jes Staley, Group Chief Executive Officer, honestly, but mistakenly, believed that it was permissible to identify the author of the letter and has accepted his explanation that he was trying to protect a colleague who had experienced personal difficulties in the past from what he believed to be an unfair attack, and has accepted his apology

I would imagine that pretty much everyone reading this is aware of modern whistleblowing procedures so it seems strange that the CEO of Barclays was not. Actually even when he was told he had another go a month later.

There is a clear example of “back to the future” when we note that rather than being sacked we move into Yes Prime Minister land as he will receive one of the “strongly worded letters” so beloved of the apochryphal civil servant Sir Humphrey Appleby! We are told there will be this too “a very significant compensation adjustment will be made to Mr Staley’s variable compensation award.” But as it is “variable” how will we know?

The Bank of England

There is bad news in the offing tonight for the Bank of England as the BBC’s Panorama has looked again at its role in Libor ( London Interbank Offered Rate ) rigging.

A secret recording that implicates the Bank of England in Libor rigging has been uncovered by BBC Panorama.

The 2008 recording adds to evidence the central bank repeatedly pressured commercial banks during the financial crisis to push their Libor rates down.

Well done to Andy Verity for continuing to pursue this issue and along the way we meet some old “friends”

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England.

It is like a television series with a regular cast isn’t it? Also the BBC does not do Paul Tucker full justice as there was this from 2013.

Paul Tucker, who served as a deputy governor at the Bank of England, has been given a knighthood for services to central banking.

Some might think that a substantial salary and a pension which would current cost around £7 million to buy were rewards enough in themselves. Unless of course you believe that Paul Tucker got his “K” for covering things up.

Comment

There is much to consider here and in the individual case of Governor Carney the Libor or as it became named the Liebor issue predated his arrival. However he has his own problems. The most recent was the resignation of Charlotte Hogg who seemed as uninformed about monetary policy as she was about the consequences of her bother’s job. It was put well by Deborah Orr in the Guardian.

Clearly, people run the risk of feeling over-entitled. They believe strongly in rules, but develop a belief that they are the people who make the rules, not the people who follow them……..….Finally, of course, privileged people assume, often rightly, that no one is going to hold them to account.

Only on Thursday we looked at Gertjan Vlieghe and his problems understanding that once he was at the Bank of England he had to break his financial links with the hedge fund Brevan Howard. Hardly a brave new dawn is it?

Meanwhile if we look back to the effective bailout by the Qataris of Barclays back in the day we wonder how the court case into this will play out? It is all quite a mess is we throw in PPI miss selling and the way that small businesses were miss sold interest-rate swaps as well as those who became “mortgage prisoners”.

Meanwhile though in Mark Carney’s world it is all going rather well.

Being at the heart of the global financial system reinforces the ability of the rest of the UK economy, from
manufacturing to the creative industries, to compete globally. And it broadens the investment opportunities
for UK savers, giving them the potential to earn better risk-adjusted returns.

Do UK savers realise how good they apparently have it? Oh and was the Barclays story released today to help take the pressure off the Bank of England Liebor news?

 

 

UK economic growth is showing some signs of slowing

We advance on quite a bit of UK economic data today and in a link to yesterday’s article there is news to make  Gertjan Vlieghe of the Bank of England even more gloomy. It comes from the housing market.

House prices in the three months to March were 0.1% higher than in the previous quarter; the lowest quarterly rate of change since October 2016. The annual rate of growth fell further; to 3.8% from February’s 5.1%, the lowest rate since May 2013. ( Halifax).

The date given is significant as it is just before the Bank of England launched its initiative to ramp house prices called the Funding for Lending Scheme. Officially this was supposed to boost business lending whereas the reality was that mortgage rates fell quite quickly by over 1% and the total drop was around 2% according to the Bank of England. The UK house market responded in it usual manner to such stimulus. If we stay with the Bank of England it will no doubt be disappointed that its latest banking and house price subsidy scheme called the Term Funding Scheme has not worked in spite of the £55 billion provided.

By contrast I welcome this news which is being reported by more than one source and regular readers will be aware I was expecting it. Even the Halifax itself briefly joins in.

A lengthy period of rapid house price growth has made it increasingly difficult for many to purchase a home as income growth has failed to keep up, which appears to have curbed housing demand.

An extraordinary example of this is given from the London borough of Haringey when houses have “earnt” much faster than their owners salaries/wages.

House prices in the borough increased by an average of £139,803 over the last two years, exceeding average take-home earnings in the area of £48,353 over the same period – a difference of £91,450, equivalent to £3,810 per month.

What could go wrong?

February was not a good month for the UK economy

This morning’s data releases show that we were not at our best this February.

In February 2017, total production decreased by 0.7% compared with January 2017 with falls in all four main sectors, with electricity and gas providing the largest downward contribution, decreasing by 3.4%.

It is with a wry smile that I note that like the poor numbers for Spain also released this morning a familiar scapegoat takes the rap.

The monthly decrease in electricity and gas was largely due to falls in both electricity generation and in the supply and distribution of gas and gaseous fuels; this was largely attributable to the temperature in February 2017 being 1.6 degrees Celsius warmer than average.

Manufacturing output also fell by 0.1% as the Pharmaceutical industry continued its erratic pattern and drove the numbers yet again.

The deficit on trade in goods and services widened to £3.7 billion in February 2017 from a revised deficit of £3.0 billion in January 2017, predominantly due to an increase in imports of erratic goods;

This was added to by this.

The largest revision was to exports, with a downward revision of £1.3 billion in January 2017. This was mainly due to a revision to the exports of erratic commodities (down by £1.0 billion).

Some of the problem is the ongoing issue of how the UK’s gold trade is measured. Frankly the efforts are not going so well. Better news came from this revision as we see that we both exported and imported more.

Since the last UK trade release, there have been upward revisions across both exports and imports of trade in services throughout the 4 quarters of 2016.

Whilst I continue to have little confidence in the numbers the official construction series had a weak month as well.

output fell by 1.7% in February 2017 in comparison to January 2017……infrastructure provided one of the main downward pressures on output in February, decreasing by 7.3%.

Taking some perspective

Underneath this some of the recent trends remain good. For example if we look at manufacturing.

In the 3 months to February 2017, manufacturing increased by 2.1% (unchanged from the 3 months to January 2017), continuing its strongest growth since May 2010……. ( and on a year ago) manufacturing providing the largest contribution, increasing by 3.3%.

This has been driven by a combination of the transport industry, textiles, machinery and computer equipment.

Within this sub-sector, the manufacture of motor vehicles, trailers and semi-trailers rose by 14.4% compared with February 2016.

This drove production higher so that it is 2.8% higher than a year ago although North Sea Oil & Gas pulled it lower.

If we move to the trade picture and look for some perspective we see this.

In the 3 months to February 2017, the deficit on trade in goods and services narrowed to £8.5 billion, reflecting a higher increase in exports than imports, mainly due to increases in exports of machinery and transport equipment, oil and chemicals;

So the by now oh so familiar deficit! But a little lower than before. We should remember that we had a relatively good end to 2016.

The current account deficit improved in Quarter 4 2016, mainly due to an improved primary balance and an improved trade in goods position.

However we now wait for the March data as another weak month would be the first turn down in the UK economy for a while. Should we see that then we will be even further away from regaining the pre credit crunch position.

both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.0% respectively in the 3 months to February 2017.

Productivity

This of course is one of the problem areas of the post credit crunch world and whilst we have some the problem is far from solved.

Productivity – as measured by output per hour worked – increased by 0.4% in Quarter 4 (Oct to Dec) 2016, following growth of 0.2%, 0.3% and 0.3% in the 3 preceding quarters. As a result, labour productivity was around 1.2% higher in Quarter 4 2016 than in the same period a year earlier and grew consistently over 2016.

Household Debt

I think the chart not only speaks for itself but is rather eloquent.

 

Comment

We have seen the first series of weak numbers from the UK economy since the EU leave vote. Production fell in January and that has now been repeated in February as even manufacturing saw a dip. If we look back the services sector had a disappointing January so the expectations for the NIESR GDP estimate later are likely to cluster around 0.4%. Of course the Bank of England will be watching all of this and perhaps especially the weaker house price data.

As ever the numbers are erratic and we have only part of the picture. On the optimistic front the business confidence figures for all out main sectors showed growth in March. In fact the services data was strong.

March data pointed to a rebound in UK service sector growth, with business activity and incoming new work both rising at the strongest rates so far in 2017. Survey respondents also remained optimistic about the year-ahead business outlook,

Fingers crossed!