Was that the bond market tantrum of 2019?

Sometimes economics and financial markets provoke a wry smile. This morning has already provided an example of that as Germany’s statistics office tells us Germany exported 4.6% more in September than a year ago, so booming. Yes the same statistics office that told us yesterday that production was down by 4.3% in September so busting if there is such a word. The last couple of months have given us another example of this do let me start by looking at one side of what has taken place.

QE expansion

We have seen two of the world’s major central banks take steps to expand their QE bond buying one explicitly and the other more implicitly. We looked at the European Central Bank or ECB only on Wednesday.

The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP)……….. at a monthly pace of €20 billion as from 1 November 2019.

More implicitly have been the actions of the US Federal Reserve as it continues to struggle with the Repo crisis.

Based on these considerations, last Friday the FOMC announced that the Fed will be purchasing U.S. Treasury bills at least into the second quarter of next year.7 Specifically, the Desk announced an initial monthly pace of purchases of $60 billion.

That was John Williams of the New York Fed who added this interesting bit.

These permanent purchases

Also there is this.

In concert with these purchases, the FOMC announced that the Desk will continue temporary overnight and term open market operations at least through January of next year.

Maybe a hint that they think dome of this is year end US Dollar demand. But we find that the daily operations continue and at US $80.14 billion as of yesterday they continue on a grand scale. So the Treasury Bill purchases and fortnightly Repo’s have achieved what exactly?

If we move from the official denials that this is QE to looking at the balance sheet we see that it is back above 4 trillions dollars and rising. In fact it was US $4.02 trillion at the end of last month or around US $250 billion higher in this phase.

Bond Markets

You might think and indeed economics 101 would predict that bond markets would be surging and yields falling right now. But we have learnt that things are much more complex than that. Let me illustrate with the US ten-year Treasury Note. You might expect some sort of boost from the expansion of the balance sheet and the purchases of Treasury Bills. But no, the futures contact which nearly made 132 early last month is at 128 and a half now. At one point yesterday the yield looked like it might make 2% as there was quite a rout but some calm returned and it is 1.91% as I type this.

As an aside this is another reminder of the relative impotence of interest-rate cuts these days as if anything a trigger for yields rising was the US interest-rate cut last week. The Ivory Towers will be lost in the clouds yest again.

The situation is even more pronounced in the Euro area where actual purchases have been ongoing for a week now. However in line with our buy the rumour and sell the fact theme we see that the German bond market has fallen a fair bit. In mid-August the benchmark ten-year yield went below -0.7% whereas now it is -0.26%. So Germany is still being paid to borrow at that maturity but considerably less. Indeed at the thirty-year maturity they do have to pay something albeit not very much ( 0.24%).

The UK

There have been a couple of consequences in the UK. The first I spotted in yesterday’s output from the Bank of England.

Mortgage rates and personal loan rates remain near
historical lows, with the rates on some fixed-rate mortgages continuing to fall over the past few months (Table 2.B).
Interest rates on credit cards have increased, although the effective rate paid by the average borrower has remained
stable, in part because of the past lengthening of interest-free periods.

Whilst this is true, if you are going to parade the knowledge of the absent-minded professor Ben Broadbent about foreign exchange options then you should be aware that as Todd Terry put it.

Something’s goin’ on

The five-year Gilt yield has risen from a nadir of 0.22% to 0.52% so the ultra-low period of mortgage rates is on its way out should we stay here.

If we move to the fiscal policy space in the UK then we see that the message that we can borrow cheaply has arrived in the general election campaign.

Although debt stocks are high in many developed countries, debt service ratios are very low. The UK gross debt stock has doubled from 42 per cent of GDP in 1985 to 84 per cent of GDP today, yet debt interest service has halved, from 4 per cent of GDP to below 2 per cent over the same period. It has rarely been lower. A rule using the debt stock would argue for fiscal consolidation, whereas a debt service metric suggests there is ample room for fiscal expansion. Especially as market interest rates are extraordinarily low. (  FT Alphaville)

https://ftalphaville.ft.com/2019/11/06/1573068343000/Is-it-time-for-a-shift-in-fiscal-rules–/

I have avoided the political promises which peak I think with the Greens suggestion of an extra £100 billion a year. But the Toby Nangle and Neville Hill proposal above has strengths and has similarities to what I have suggested here for some time. But I think it needs to come with some way of locking the debt costs in, so if you borrow more because it is cheap you borrow for fifty years and not five. It reinforces my suggestion of the 27th of June that the UK should issue some 100 year Gilts.

Comment

There is a fair bit to consider here and let me start with the borrow whilst it is still cheap theme. There are issues as highlighted by this from Francine Lacqua of Bloomberg.

London’s Elizabeth line has been delayed by a year, and will require extra funding, according to TfL

For those unaware this was called Crossrail ( renaming is often a warning sign) which will be a welcome addition to the London transport infrastructure combing elements of The Tube with the railways. But it gets ever later and more expensive.

There was also some irony as regards the Bank of England as in response to the sole decent question at its presser yesterday (from Joumanna Bercetche of CNBC) Governor Carney effectively suggested the next rate move would be down not up. Yet Gilt yields rose.

Next comes the issue of whether this is a sea-change or just part of the normal ebb and flow of financial markets? We will find out more this afternoon as we wait to see if there were more than just singed fingers in the German bond market for example or whether some were stopped out? After all reporting you had taken negative yield and a capital loss poses more than a few questions about your competence. Even the most credulous will now know it is not a one-way bet but on the other hand if you are expecting QE4 to come down the New York slipway then you can place your bets at much better levels than before.

What next for the Bank of England?

Today is what used to be called Super Thursday for the Bank of England. It was one of the “improvements” of the current Governor Mark Carney which have turned out to be anything but. However he is not finished yet.

Starting on 7 November, the Bank of England Inflation Report is to become the Monetary Policy Report. The Report is also to undergo some changes to its structure and content.

These changes are part of the Bank’s ongoing efforts to improve its communications and ensure that those outside the institution have the information they need in order to understand our policy decisions and to hold us to account.

Really why is this?

The very latest changes represent the next step in the evolution of our communications.

I suppose when you tell people you are going to raise interest-rates and then end up cutting them you communication does need to evolve!

Communication let me down,
And I’m left here
Communication let me down,
And I’m left here, I’m left here again! ( Spandau Ballet )

The London Whale

There was so news this morning to attract the attention of a hedge fund which holds some £435 billion of UK Gilt securities as well as a clear implication for its £10 billion of Corporate Bonds. From the Financial Times.

Pimco, one of the world’s largest bond investors, is giving UK government debt a wide berth, reflecting concerns that a post-election borrowing binge promised by all the major political parties could add to pressure on prices. Andrew Balls, Pimco’s chief investment officer for global fixed income, said the measly yields on offer from gilts already makes them one of Pimco’s “least favourite” markets. The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive, he said, forecasting that the cost of UK government borrowing would rise.

Yes Andrew Balls is the brother of Ed and he went further.

“Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight,” he told the Financial Times.

Actually pretty much every bond market looks like that at the moment. Also as I pointed out only yesterday bond markets have retraced a bit recently.

The cost of financing UK government debt has been rising over the past month. The 10-year gilt yield has reached 0.76 per cent, from 0.42 per cent in early October. That remains unattractive compared with the 1.84 per cent yield available on the equivalent US government bond, according to Mr Balls,

Mind you there is a double-play here which goes as follows. If you were a large holder of Gilts you might be pleased that Pimco are bearish because before one of the biggest rallies of all time they told us this.

Bond king Bill Gross has highlighted the countries investors should be wary of in 2010, singling out the UK in particular as a ‘must avoid’, with its gilts resting ‘on a bed of nitroglycerine.’ ( CityWire in 2010 ).

Also there is the fact that the biggest driver of UK Gilt yields is the Bank of England itself with prospects of future buying eclipsing even the impact of its current large holding.

House Prices

As the Bank of England under Mark Carney is the very model of a modern central banker a chill will have run down its spine this morning.

Average house prices continued to slow in October, with a modest rise of 0.9% over the past year. While
this is the lowest growth seen in 2019, it again extends the largely flat trend which has taken hold over
recent months ( Halifax)

Indeed I suggest that whoever has to tell Governor Carney this at the morning meeting has made sure his espresso is double-strength.

On a monthly basis, house prices fell by 0.1%

This is the new reformed Halifax price index as it was ploughing rather a lonely furrow before. We of course think that this is good news as it gives us another signal that wages are gaining ground relative to house prices whereas the Bank of England has a view similar to that of Donald Trump.

Stock Markets (all three) hit another ALL TIME & HISTORIC HIGH yesterday! You are sooo lucky to have me as your President (just kidding!). Spend your money well!

The Economy

This is an awkward one for the Bank of England as we are on the road to a General Election and the economy is only growing slowly. Indeed according to the Markit PMI business survey may not be growing at all.

The October reading is historically consistent with GDP
declining at a quarterly rate of 0.1%, similar to the pace
of contraction in GDP signalled by the surveys in the third
quarter

Although even Markit have had to face up to the fact that they have been missing the target in recent times.

While official data may indicate more robust growth
in the third quarter, the PMI warns that some of this could
merely reflect a pay-back from a steeper decline than
signalled by the surveys in the second quarter, and that the
underlying business trend remains one of stagnation at
best.

The actual data we have will be updated on Monday but for now we have this.

Rolling three-month growth was 0.3% in August 2019.

So we have some growth or did until August.

The international environment is far from inspiring as this just released by the European Commission highlights.

Euro area gross domestic product (GDP) is now forecast to expand by 1.1% in 2019 and by 1.2% in 2020 and 2021. Compared to the Summer 2019 Economic Forecast (published in July), the growth forecast has been downgraded by 0.1 percentage point in 2019 (from 1.2%) and 0.2 percentage points in 2020 (from 1.4%).

The idea that they can forecast to 0.1% is of course laughable so it is the direction of travel that is the main message here.

Comment

If we move on from the shuffling of deckchairs at the Bank of England we see that its Forward Guidance remains a mess. From the September Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

Does anybody actually believe they will raise interest-rates? If we move to investors so from talk to action we see that in spite of the recent fall in the Gilt market the five-year yield is 0.53% so it continues to suggest a cut not a rise.

More specifically there was a road to a Bank of England rate cut today as this from the 28th of September from Michael Saunders highlights and the emphasis is minr.

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further.

He was an and maybe the only advocate for higher interest-rates so now is a categorised as a flip-flopper. But it suggested a turn in the view of the Bank in general such that this was suggested yesterday by @CNBCJou.

Looking forward to the BOE tomorrow where the new MONETARY POLICY REPORT will be presented (not to be confused with the now defunct INFLATION REPORT). A giant leap for central banking. * pro tip: watch out for dovish dissenters (Saunders, Vlieghe?) $GBP

The election is of course what has stymied the road to a return to the emergency Bank Rate of 0.5% as we wait to see how the Bank of England twists and turns today. Dire Straits anyone

I’m a twisting fool
Just twisting, yeah, twisting
Twisting by the pool

The Investing Channel

 

 

Why Minouche Shafik would be a bad choice as Bank of England Governor

The appointment of the next Governor of the Bank of England has become quite a merry-go-round. It reminds me rather of the Grand National at Aintree where we see many horses take the lead in the race but very few survive. This morning’s suggestion was even by these standards something of a surprise so let me hand you over to Simon Jack of the BBC.

NEW: told that Minouche Shafik is THIS govt’s preferred candidate for next Bank of England Governor. No announcement this side of election – cos it would be “politically messy” but if (a big if) this government secures majority – Egyptian born Minouche is current favourite.

For newer readers the surprise element comes from her past track record on the Monetary Policy Committee but two other issues are raised so let me address them. The first I have done so already on Twitter.

Just so I am not misunderstood having a woman as Bank of England Governor is a good idea but sticking to past policymakers the competent and intelligent Kristin Forbes would be much better than the incompetent Shafik,

Next is the issue of her nationality as the Bank of England has developed a habit of only employing women from abroad for such roles. This is an issue I raised when she was first appointed to the MPC as I found myself being criticised by @ToryTreasury which described her as British. They went rather quiet though when I quoted her describing herself as Egyptian and asked if they thought she knew better than they did? But both Kristin Forbes and the present Silvano Tenreryo were and are from abroad. I have no issue with appointing some from abroad but the occasional British woman would not go amiss! Also should they appoint a British woman perhaps they could look a little wider than they did last time. From Wiki.

The Hon Charlotte Hogg was born on 26 August 1970 in London, England. Both her parents hold peerages in their own right: her father is the 3rd Viscount Hailsham, a former Member of Parliament and hereditary peer as well as being a life peer, and her mother is the Baroness Hogg, a life peer . She was brought up on the family estate of Kettlethorpe Hall in Kettlethorpe, Lincolnshire.

Monetary Policy

If we step back in time to the 28th of September 2016 Minouche Shafik gave a speech at Bloomberg.

the process of adjustment can sometimes be painful. That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.

As I pointed out the next day this was a case of toeing the Governor Carney line. As I  had pointed out 2 weekend’s  before on BBC Radio 4’s Money Box the simple fact was that the fall in the UK Pound £ was a much bigger factor for the UK economy than the Bank of England moves. As of the latest update on our effective or trade weighted exchange rate back then we had received the equivalent of a 2.5% cut in Bank Rate or as I put it on the radio a “Bazooka” compared to the “peashooter” she and her colleagues deployed with a 0.25% cut. The £60 billion of QE was pretty much been offset by a rise in pension fund deficits and the Corporate Bond QE seems to be as much for foreign firms as UK ones.

She in fact highlighted the problem herself but rather oddly chose to ignore it with her policy prescription above.

For example, Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.

So thing’s are better but the prescription is the same! Even worse she was unable to grasp that the situation she described was ( and still is ) part of the problem.

What is unusual about this particular loosening relative to previous cycles is its starting point. Despite many real economic variables having returned to around normal levels following the financial crisis the absence of any signs of overheating or inflationary pressure meant that at the time of the referendum Bank Rate was already at an all-time low of 0.5% and we held a stock of £375bn gilts on our balance sheet.

As to “any signs of overheating” she missed this as I pointed out.

UK broad money, M4ex, is defined as M4 excluding intermediate other financial corporations (OFCs)……The three-month annualised and twelve-month growth rates were 10.9% and 7.3% respectively.

Oh and something else was red-lining too.

Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

In fact in spite of the fact that the estimates for GDP growth had been revised up Minouche could nor resist this.

Asked by Bloomberg Editor-in-Chief John Micklethwait if there was any positive impact from Brexit, Shafik paused. Her offering? The sunny summer enjoyed by Britain.

“The weather’s been really good since the referendum,” she told the audience at the Bloomberg Markets Most Influential Summit in London.

Time passes and it is easy to forget. But this was part of warming the UK up or giving Forward Guidance for a further Bank Rate cut to 0.1% and yet more QE in November. This did not happen because by then it was obvious even to those trying to turn a blind eye to it that the economic situation has been completely misread by the Bank of England. Those policy moves went into the recycling bin.

In an unusual development if we read between the lines it looks as though even the Financial Times agrees with me. This below from economics editor Chris Giles is some distance from the “rock star central banker” that Mark Carney was welcomed with.

With today’s perfectly reasonable BBC speculation that Minouche Shafik is a front runner for ⁦@bankofengland

⁩ governor, I am reminded how difficult it was to extract a clear view from her in an interview when deputy governor.

The latter sentence evokes memories of how Yes Prime Minister described such matters.

Doesn’t it surprise you? – Not with Sir Desmond Glazebrook as chairman.

– How on earth did he become chairman? He never has any original ideas, never takes a stand on principle.

As he doesn’t understand anything, he agrees with everybody and so people think he’s sound.

Is that why I’ve been invited to consult him about this governorship?

 

Comment

The situation is that we have had something of a litany of front-runners. This government is supposed to have favoured Gerard Lyons and Dame Helena Morrisey and Andrew Bailey was supposed to be a shoe-in before that. So the Shafik Surprise may quickly fade in the way she was moved out of the MPC to my alma mater the LSE. For these purposes I have ignored the rubbish she spoke about QE because pretty much everyone at the Bank of England quotes that and back in September 2016 she did perhaps inadvertently get something right.

BOE SHAFIKQE UNWIND DOES LOOK A VERY LONG WAY AWAY

Ever further away as we mull whether we will get weekly, then daily then hourly extensions of the term of Governor Carney?

 

What are the economic consequences of Brexit?

After all the uncertainty in the UK we will have some sort of progress in that we will have an election putting the voters at least briefly in charge. Whether that will solve things is open to debate but let us take a look at what the economic situation will be should the UK start to actually Brexit from the European Union. The NIESR has looked at it and the BBC has put it in dramatic terms.

Boris Johnson’s Brexit deal will leave the UK £70bn worse off than if it had remained in the EU, a study by the National Institute of Economic and Social Research (NIESR) has found.

That is a rather grand statement which fades a little if we read the actual report which starts like this.

The economic outlook is clouded by significant economic and political uncertainty and depends critically on the United Kingdom’s trading relationships after Brexit. Domestic economic weakness is further amplified by slowing global demand.

The latter is somewhere between very little and nothing to do with Brexit. We are in a situation where the 0.3% quarterly GDP growth declared by France this morning looks good in the circumstances.

This brings us to the first problem which is that the NIESR is predicting that sort of growth for the UK.

On the assumption that chronic uncertainty persists but the terms of EU trade remain unchanged, we forecast economic growth of under 1½ per cent in 2019 and 2020, though the forecast is subject to significant uncertainty.

So where is the loss? As it happens they have predicted 1.4% economic growth which is as fast as the economy supposedly can grow these days according to the Bank of England.

We think our economy can only grow at a new, lower speed limit of around one-and-a-half per cent a year. We also currently think actual demand is growing close to this speed limit. This means demand can’t grow faster than at its current pace without causing prices to start rising too quickly.

I am no great fan of this type of analysis but remember we are in the Ivory Tower Twilight Zone here. Now let us factor in the problems the Ivory Towers tell us about business investment.

Prior to the EU referendum, UK business investment growth was growing in line with average growth across the rest of the G7. Since then, it has risen by just 1% in the UK, compared to an average of 12% elsewhere……..DMP Survey data suggest that the level of nominal investment may be between 6%–14% lower than it would have been in the absence of Brexit uncertainties. ( Bank of England August Inflation Report)

So there is potentially quite a bit of business investment growth in the offing. How much? I do not know but it could quite easily be a sizeable swing. That view rather collides with the statement below from the NIESR.

We would not expect economic activity to be boosted by the approval of the government’s proposed Brexit deal. We estimate that, in the long run, the economy would be 3½ per cent smaller with the deal compared to continued EU membership.

So the business investment was not held back but lost forever?

They do however seem to have a rather extraordinary faith in the power of a 0.25% interest-rate cut.

In our main-case forecast scenario, economic conditions are set to continue roughly as they are, with output close to capacity but underlying growth remaining weak and well under its historic trend. Real wage growth is supporting consumer spending, but weak productivity growth means that the current pace of expansion may not be sustainable. Rising domestic cost pressures are offset to some extent by slower import price growth and CPI inflation is forecast to remain close to target. In line with our previous forecasts, fiscal policy is being loosened. This, together with an expected cut in Bank Rate next year, is supporting economic growth in the near term.

Odd that because surely we would not be here if interest-rate cuts had that sort of effect. Looser fiscal policy does seem to be on the cards whatever government we get next and the rising real wages point is interesting as it means they are not expecting a fall on the value of the UK Pound £.

Also there is very little there which is anything to do with Brexit at all. I note that they have no idea what inflation will do so they simply say it will be in line with its target. Indeed

underlying growth remaining weak and well under its historic trend.

is where we are these days and economic growth being supported by fiscal policy makes us sound the same as France which last time I checked is not Brexiting at all.

Finally we do get to a proposed loss.

Compared to our main-case forecast, uncertainty would be lifted but customs and regulatory barriers would hinder goods and services trade with the continent, leaving all regions of the United Kingdom worse off than they would be if the UK stayed in the EU.

Now we have it! There is of course an element of truth here as there are gains from being in the Single Market. But the reality is that we do not yet know what out future relationship will be and even more importantly how economic agents will respond to it.

Bank of England

There were some extraordinary reports last night emanating from ITV’s Robert Peston. I think that Robert is desperate for attention but as the son of a Labour Peer he is extremely well connected to say the least. So let us note this.

I’ve been aware for some time that the prime minister and chancellor have a preferred candidate to be next governor of the Bank of England – and it is none of the five who were interviewed a few weeks ago (Cunliffe, Bailey, Broadbent, Vadera, Shafik) and passed the the competence threshold.

If the competence threshold was one passed by Nemat Shafik then even the world’s best limbo dancer must be unable to get under it. For newer readers she was made a Dame and put in charge of the LSE to cover up her early exit from the Bank of England which happened because she was out of her depth. Indeed is she is in play then this suggestion would at least give us a laugh.

It’s….Rebekah Vardy.

Actually matters got more complex as the issue of whether it was appropriate now was raised and the issue of any likely international candidate (Raghuram Rajan )was raised. Then there were the possible political style appointments which Robert ignored presumably on the grounds that it was fine when the current incumbent espoused views with Robert himself might have made but might be something rather inconvenient looking forwards.

Comment

We find as so often that what is presented as fact has strong elements of opinion attached to it. In economics that is driven by the assumptions made in any economic modelling which are usually more powerful than actual events. An example of this was provided by the UK Office for Budget Responsibility back in 2010. It predicted we would now have Gilt yields of 5% and would have seen wage growth at the same level for some time. In reality we have a 50 year yield o just over 1.1% and wage growth has maybe made 4% for a bit after years of way under-performance. On that road 3.5% GDP growth starts to look more like a rounding error. So will there be an effect? Yes as we adjust, but after that it will be swamped by other developments.

Returning to the role of Bank of England Governor then perhaps Mark Carney just like QE and low/negative interest-rates may be to infinity and beyond! Perhaps a daily extension this time around?

 

 

 

 

 

A decade after the credit crunch hit UK banks have made so little progress

This week has opened with an outbreak of cognitive dissonance in my home country the UK. It opens with a worthy enough spirit and principle from the Treasury Select Committee of HM Parliament.

Regulators must act to reduce unacceptable number of IT failures in financial services sector, warns Treasury Committee.

There is an obvious flaw in the “Regulators must act” opening as we so often see examples of them being fast asleep although of course the official term for this is “vigilance.” Indeed I note that in the comments section last week the issue of regulatory capture had arisen again which for newer readers is where an industry infiltrates and takes control of its regulator. It does not have to be an industry as we see how HM Treasury alumni are every single Deputy Governor at the Bank of England which is officially “independent” of er the Treasury…..

Moving back to the issue at hand the TSC summarised it here.

The Treasury Committee launched its IT failures in the financial services sector inquiry on 23 November 2018. It followed a series of high-profile service disruptions within the financial services sector, most notably the TSB IT migration in 2018. Issues following the migration caused significant disruption to customers for a prolonged period of time, and we have an ongoing inquiry into Service Disruption at TSB1. There have also been many
other incidents, including those at Visa and Barclays.

They do not say it but the prolonged failure at TSB was especially embarrassing as it was supposed to be a new bank but in reality was a bureaucratic exercise exhuming it out of the bloated Lloyds Banking Group. So it turned out to have all the same and maybe worse problems than the other banks as its IT meltdown showed.

It was far from just being the TSB though.

IT failures, or incidents (used interchangeably), within the financial services sector appear to be becoming more common. Over the past 18 months there have been major
incidents at TSB and Visa, along with a litany of incidents at other firms. This increasing trend is recognised by the FCA, which stated in 2018 that “outages in the financial services sector are becoming more frequent and publicised” and that “the number of incidents reported to the FCA has increased by 187 per cent in the past year”.

This matters more these days as we switch to banking online.

Research by UK Finance found that 71 per cent of UK adults used online banking in 2017, and that this trend has been increasing. At the same time, the number of high-street
bank branches has been falling, with a 17 per cent reduction in the number of branches between 2012 and 2018.

The Problem

The real issue here is the fact that the UK establishment have been happy to use taxpayer’s money and the policies of the Bank of England to provide a put option for banks and their management. The subsequent zombified banking sector has no great incentive to improve its IT which was so bad when the credit crunch hit that the Bank of England felt it could not cut interest-rates below 0.5%. This was because the creaking IT infrastructure could not handle 0% let alone negative interest-rates. When this did happen at the Cheltenham and Gloucester which was part of Lloyds Banking Group the work around was that the capital owed was reduced to save a 2001 A Space Odyssey HAL 9000 style moment from happening.

Next comes the idea of the Regulator acting quickly and decisively as Citywire points out.

Calls for the Financial Conduct Authority to offer ‘stronger and faster intervention’ are at least partially ‘justified’ the regulator’s chief executive Andrew Bailey has admitted.

There was this issue.

At the beginning of the year mini-bond manufacturer London Capital & Finance went bust after the FCA ordered it to freeze its accounts, following what appeared to be many years or warnings about the business.

Which led to this bit.

It remains unclear how the firm was able to promote unregulated mini-bonds via regulated Sipp and ISA wrappers for many years.

Sometimes it is so bad it is funny.

It also faced much ridicule after banning former Co-operative Bank chair and church minister Paul Flowers in 2018, five years after the organisation collapsed and the tabloids dubbed him  the crystal Methodist due to his drug use.

More recently this has hit the headlines.

The shuttering last week of Woodford Investment Management after a series of big bets went sour and put it in breach of FCA rules on liquidity limits will be freshest in the mind.

Also in a rather familiar fashion the regulator seems to have overlooked this.

Former star fund manager Neil Woodford and his business partner reaped close to £20m in dividends in the last financial year amid a crisis at their investment house, according to an FT analysis ( Financial Times )

HSBC

The story here was supposed to be an HSBC boom driven by its involvement in the Far East. You may well recall its regular hints of its head office leaving the UK when it wants to put pressure on the UK government. Of course being a major bank in Hong Kong is not quite what it was so let me hand you over to the South China Morning Post.

HSBC, one of three lenders authorised to issue currency in Hong Kong, said on Monday that its third-quarter profit fell 24 per cent as it reported weaker results in its retail banking and global markets businesses.

The bank said its business in the city remained “resilient” despite a weakened business climate in its largest market, as months of protests and civil unrest have sent the city’s economy into a “technical recession”.

“Resilient” eh? I did not realise that things were quite that bad! The share price is down over 4% today at £5.90 and whilst HSBC has done better than other banks until now the future does not look quite as bright.

Barclays and RBS

From CNBC.

The British lender posted £292 million in net loss attributable to shareholders for the three-month period ending Sept 30. Data from Reuters’ Eikon predicted a loss of a £19.2 million for the quarter. Barclays had posted a £1 billion net profit in the same period last year.

The shares have risen due to rising Brexit hopes recently but £1.70 is still very poor.

From City-AM.

RBS reports an operating loss of £8m for the nine months to the end of September 2019, falling from £961m in the same period last year.

A challenging quarter in the NatWest Markets division, where total income plunged by £419m to £150m in the wake of flattening yield curves, also dragged down the bank.

This leads to this response.

The mis-selling and other charges overshadowed underlying progress at the bank

Oh no sorry. That was from November 2nd 2012 on here!

Metro Bank

I hardly know where to start with this one, so let me point out that the £8 share price of this summer has been replaced by one of £2

Comment

The fundamental issue here is that we are now more than a decade away from the credit crunch. The major flaw in bailing out the banks was that they then had no incentive to change. Even worse that we would repeat the mistakes of Japan and end up with a zombified banking structure. If we look at the world of IT we see the Bank of England confirming it here.

The TFS was designed to reinforce pass-through of a cut in Bank Rate from 0.5% to 0.25% and in doing so
reduce the effective lower bound in the UK…….The existence of the TFS meant that the MPC reduced its estimate of the effective lower bound from 0.5% to
close to, but a little above, 0%. ( Governor Carney June 18th )

So in spite of a sweetener of £116.7 billion the banks still cannot cope with 0% interest-rates. Ironically they may be doing us a favour of course.

Next comes the way that PPI has been a type of Helicopter Money QE for the UK economy and here we get on a rather dark road. That a quid pro quo for the banking scandals and bonuses as well as the put option for bank survival is that they put some of the money in the hands of the UK consumer.

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The UK has opened the fiscal taps and started a fiscal stimulus

The credit crunch era has seen some extraordinary changes in the establishment view of monetary policy. The latest is this from the Peterson Institute from earlier this month.

On October 1, Prime Minister Shinzo Abe’s government raised the consumption tax from 8 percent to 10 percent. Our preference would have been that he not do it. We believe that, given the current Japanese economic situation, there is a strong case for continuing to run potentially large budget deficits, even if this implies, for the time being, little or no reduction in the ratio of debt to GDP.

Indeed they move on to make a point that we have been making for a year or two now.

Very low interest rates, current and prospective, imply that both the fiscal and economic costs of debt are low.

The authors then go further.

When the interest rate is lower than the growth rate—the situation in Japan since 2013—this conclusion no longer follows. Primary deficits do not need to be offset by primary surpluses later, and the government can run primary deficits forever while still keeping the debt-to-GDP ratio constant.

As they mean the nominal rate of growth of GDP that logic also applies to the UK as I have just checked the 50 year Gilt yield. Whilst UK yields are higher than Japan we also have (much) higher inflation rates and in general we face the same situation. As it happens the UK 50 year Gilt yield is not far off the annual rate of growth of real GDP at 1.17%.

They also repeat my infrastructure point.

To the extent that higher public spending is needed to sustain demand in the short run, it should be used to strengthen the supply side in the long run.

However there are problems with this as it comes from people who told us that monetary policy would save us.

Monetary policy has done everything it could, from QE to negative rates, but it turns out it is not enough.

Actually in some areas it has made things worse.One issue I think is that the Ivory Towers love phrases like “supply side” but in practice it does not always turn out to be like that. Also there is a problem with below as otherwise Japan would have been doing better than it is.

And the benefits of public deficits, namely higher activity, are high…….The benefits of budget deficits, both in sustaining demand in the short run and improving supply in the long run are substantial.

Are they? There are arguments against this as otherwise we would not be where we are. In addition it would be remiss of me not to point out that one of the authors is Olivier Blanchard who got his fiscal multipliers so dreadfully wrong in the Greek crisis.

UK Policy

If we look at the latest data for the UK we see that in the last fiscal year the UK was not applying the logic above. Here is the Maastricht friendly version.

In the financial year ending March 2019, the UK general government deficit was £41.5 billion, equivalent to 1.9% of gross domestic product (GDP) ; this is the lowest since the financial year ending March 2002 when it was 0.4%. This represents a decrease of £14.7 billion compared with the financial year ending March 2018.

In fact we were applying the reverse.

Fiscal Rules

The Resolution Foundation seems to have developed something of an obsession with fiscal rules which leads to a laugh out loud moment in the bit I emphasise below.

Some of the strengths of the UK’s approach have been the coverage of the entire public sector, the use of established statistical definitions, clear targets, a medium term outlook, and a supportive institutional framework. But persistent weaknesses remain, including the disregard for the value of public sector assets, reliance on rules which are too backward or forward looking, setting aside too little headroom to cope with forecast errors and economic shocks, and spending too little time building a broad social consensus for the rules.

Actually the “clear targets” bit is weak too as we see them manipulated and bent. But my biggest critique of their obsession is that they do not acknowledge the enormous change by the fall in UK Gilt yields which make it so much cheaper to borrow.

Today’s Data

That was then but this is now is the new theme.

Borrowing (public sector net borrowing excluding public sector banks) in September 2019 was £9.4 billion, £0.6 billion more than in September 2018; this is the first September year-on-year borrowing increase for five years.

Actually there was rather a lot going on as you can see from the detail below.

Central government receipts in September 2019 increased by £4.0 billion (or 6.9%) to £61.2 billion, compared with September 2018, while total central government expenditure increased by £4.3 billion (or 6.8%) to £67.6 billion.

As to the additional expenditure we find out more here.

In the same period, departmental expenditure on goods and services increased by £2.6 billion, compared with September 2018, including a £0.9 billion increase in expenditure on staff costs and a £1.6 billion increase in the purchase of goods and services.

The numbers were rounded out by a £1.6 billion increase in net investment which shows the government seems to have an infrastructure plan as well.

It is noticeable too that the tax receipt numbers were strong too as we saw this take place.

Income-related revenue increased by £1.7 billion, with self-assessed Income Tax and National Insurance contributions increasing by £1.1 billion and £0.6 billion respectively, compared with September 2018.

VAT receipts were solid too being up £500 million or 4%. But the numbers were also flattered by this.

Over the same period, interest and dividends receipts increased by £1.6 billion, largely as a result of a £1.1 billion dividend payment from the Royal Bank of Scotland (RBS).

Stamp Duty

We get an insight into the UK housing market from the Stamp Duty position. September was slightly better than last year at £1.1 billion. But in the fiscal year so far ( since March) receipts are £200 million lower at £6.3 billion.

Comment

We find signs that of UK economic strength and extra government spending in September. They are unlikely to be related as the extra government spending will more likely be picked up in future months. If we step back for some perspective we see that the concept of the fiscal taps being released remains.

Over the same period, central government spent £392.4 billion, an increase of 4.5%.

The main shift has been in the goods and services section which has risen by £11.6 billion to £145.7 billion. Of this some £3.5 billion is extra staff costs. Some of this will no doubt be extra Brexit spending but we do not get a breakdown.

As to economic growth well the theme does continue but it also fades a bit.

In the latest financial year-to-date, central government received £366.5 billion in receipts, including £270.0 billion in taxes. This was 2.8% more than in the same period last year.

How strong you think that is depends on the inflation measure you use. It is curious that growth picked up in September. As to the total impact of the fiscal stimulus the Bank of England estimate is below.

The Government has announced a significant increase in departmental spending for 2020-21, which could raise GDP by around 0.4% over the MPC’s forecast period, all else equal.

If we move to accounting for the activities of the Bank of England then things get messy.

If we were to exclude the Bank of England from our calculation of PSND ex, it would reduce by £179.8 billion, from £1,790.9 billion to £1,611.1 billion, or from 80.3% of GDP to 72.2%.

Also it is time for a reminder that my £2 billion challenge to the impact of QE on the UK Public Finances in July has yet to be answered by the Office for National Statistics. Apparently other things are more of a priority.

 

 

Where next for UK house prices?

Today has brought a flurry of information on the state of play in the UK housing market as we wait to see how the slow sown in house price growth is developing. We start by noting that according to the official series things may have changed a little.

Average house prices in the UK increased by 1.3% in the year to August 2019, up from 0.8% in July 2019 (Figure 1) but remain below the increases seen this time last year. Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

As someone who welcomes the fact that UK wage growth is now well above house price growth it is a shame that house price growth picked up. But we do at least have wages growth around 2% higher than house prices. That will take quite some time to fix the imbalances bit at least they are not still growing.Indeed the place where things are worst on the affordability front is improving faster than that.

he lowest annual growth was in London, where prices fell by 1.4% over the year to August 2019, followed by the South East where prices fell by 0.6% over the year.

This weekend has seen a swing in both directions from the Financial Times. First there is a switch to Paris.

Why London’s bankers cannot resist Paris property

Then er perhaps not.

David Livingstone, the new head of Citigroup in Europe, said the City of London will remain the region’s top financial centre regardless of the outcome of Brexit.

For balance here is the other side of the coin.

House price growth in Wales increased by 4.5% in the year to August 2019, up from 3.8% in July 2019, with the average house price at £168,000.

Rightmove

They have joined the fray this morning via Reuters.

Asking prices for British houses put on sale in October showed the smallest seasonal increase since the financial crisis, as all but the most determined sellers waited for greater certainty over Brexit, industry figures showed on Monday.

Rightmove said that the average asking price for homes sold via its website was 0.6% higher in October than in September, well below the average 1.6% rise seen for the time of year and the smallest increase since October 2008.

Reuters seemed a little less keen on this bit.

Average asking prices in October were 0.2% lower than in October 2018, compared with an annual rise of 0.2% in September.

Views differ on the 2016 referendum but personally I welcome this consequence.

Britain’s housing market has slowed since June 2016’s referendum on leaving the European Union, and official data last week – based on completed sales – showed annual house price growth of 1.3% in the year to August, up from a near seven-year low of 0.8% in July.

LSL Acadata

LSL operate rather a different system to the asking price driven Rightmove and in fact Rightmove’s methodology seems to have taken a further downgrade according to Henry Pryor.

“..average asking price for UK homes sold..” I think it’s for homes listed, it includes the 50% of homes that don’t sell.

LSL however use this.

The LSL/Acadata house price index provides the “average of all prices paid for houses”, including those made
with cash.

As to the detail there is this.

Although average house prices in England and Wales climbed by a marginal £113 in the month of September, this was not a sufficiently large increase to avert a further decline in prices over the last twelve months, with the average annual price over this period falling by some -£1,100, or -0.4%. This was the eighth month in this calendar year in which the annual rate of growth has been negative.

In terms of a trend their accompanying chart shows that UK house price growth was of the order of 9% as 2016 began and has been heading lower ever since. So it was heading lower before the Brexit vote partly because if I recall correctly some tax changes for landlords which inflated things then deflated them.

As to the situation regarding real movements I am afraid that LSL then dig a hole for themselves. You can ( and I often do..) argue that the imputed rent driven CPIH is a woeful measure anyway but surely one should use wage growth here.

if we exclude London and the South East from our national statistics, price growth in England & Wales has remained positive over the last twelve months, albeit at a diminishing rate, such that by the end of September the rate of growth was a flat 0.0%……..It is currently only Wales where house price growth is ahead of CPIH. So we have marginal nominal gains alongside real terms falls, although of course the picture varies by type and area.

They have a go are torturing the numbers in a way that makes me wonder if they want a career at the Bank of England but they end up with all areas seeing real wage gains. Even Wales has some real wage growth relative to house prices.

London

As a Londoner I have to confess I am intrigued by the intra-London swings although the explanation below is a worrying one for the methodology used by LSL.

Unsurprisingly, it is East London where the largest rise in average prices in August for both the month itself and the
previous twelve months has been recorded, with Hackney up by 5.1% and 13.4% respectively. The reason for this gain
in prices is the launch of a new-build apartment block, known as the Atlas Building, comprising some 302 flats at 145 City Road, Hackney, close to Old Street Station. 67 of these apartments have been recorded by the Land Registry as having been sold in June and July to date, with prices ranging from £500k to £1.7 million. Given that this project
involves 302 new-build flats, we can anticipate that Hackney will continue to be at the top of the price-growth tables for several more months to come.

I would have hoped to have some quality measure or at least some form of allowing for the fact the new build sales are different to sales of existing houses or flats. Those selling an existing property in Hackney seem set to get a shock if they base their calculations on the LSL series.

Meanwhile on the other side of the coin.

At the other end of the scale, the borough with the largest fall in average values over the last twelve months is the
City of London, at -28.6%, but because few transactions take place there, its price movements are always quite
volatile, especially when expressed in percentage terms.

Also whilst we are looking at methodology we see that the average price overall has just dipped below £300k as opposed to the £235k of the official series.

Comment

It is easy to forget that there is much in the UK economy that is still house price growth friendly. For example mortgage rates remain very low driven by a 0.75% Bank Rate and a 0.53% five-year UK Gilt yield helping to keep fixed-rate mortgages at a low level. It seems the TSB wanted to join the party as of Friday.

TSB has made a series of changes to its mortgage range, featuring cuts of up to 1.30 per cent.

The biggest cuts can be found in the lender’s remortgage 10-year fix suite, with the 85 – 90 per cent LTV rate being chopped from 4.29 per cent to 2.99 per cent. This also asks for no fees and comes with free legals. ( Mortgage Strategy )

To this we can add the positive situation regarding real wages we noted above.

Foreign buyers may have been dipping into the market to take advantage of the lower value of the UK Pound. However things have changed there recently as 141 Yen and 1.28 versus the Swiss Franc replace the levels I noted on the 27th of August.

For example as markets opened yesterday the Yen went to higher levels than the “flash rally” ones I noted on the 3rd of January and at 130 Yen London property looks a fair bit cheaper. You could say the same about 1.20 versus the Swiss Franc.

Help To Buy shared ownership is still in play and has helped one of my friends and conveyancing delays permitting is about to help another.

The problem for house price bulls is that the measures above ( with the exception of real wage growth) were what was required to get UK house prices up to these levels, not to drive them higher. Real wage growth will take another year or two to have a significant impact. So unless we see a new move by the Bank of England or the UK government we seem set for real falls in house prices ( versus wages) and maybe nominal ones too.

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