Negative Interest-Rates cannot stop negative household credit growth in the UK

This morning has opened with something which feels like it is becoming a regular feature. This is the advent of negative bond yields in the UK as we become one of those countries where many said it could not happen here and well I am sure you have guessed it! The two-year bond or Gilt yield is -0.07% and the five-year is -0.03%. As well as the general significance there are particular ones. For example I use the five-year bond yield as a signal for the direction of travel for mortgage rates especially fixed-rate ones. If we look at Moneyfacts we see this.

Lloyds Bank had the lowest rate in the five year remortgage chart for those looking for a 60% LTV. Its deal offers 1.35% (2.8% APRC) fixed until 31 August 2025, which then reverts to 3.59% variable. It charges £999 in product fees and comes with the incentives of free valuation, no legal fees and £200 cashback.

A 1.35% mortgage rate for five-years is extraordinarily low for the UK and reminds me I was assured they would not go below 2%. I am sure some of you are more expert than me in deciding whether what is effectively a £799 fee is good value for free legal fees and valuation?
If we switch to the two-year yield it is particularly significant as it is an implicit effect of all the Bank of England bond or Gilt buying because it does not buy bonds which have less than three years to go. So it is a knock-on effect rather than a direct result.

QE

The total of conventional QE undertaken by the Bank of England is £616.3 billion as of the end of last week. The rate of purchases was £13.5 billion which is relevant for the May money supply numbers we will be looking at today. Looking ahead to June there has been a reduction in weekly purchases to £6.9 billion so a near halving. So as you can see there has been quite a push provided to the money supply figures. It is now slower but would previously have been considered strong itself.

Also the buying of corporate bonds which now is just below £16 billion has added to the money supply and I have something to add to this element.

NEW: The Fed has posted the 794 companies whose bonds it began purchasing earlier this month as part of its “broad market index” Six companies were 10% of the index: Toyota, Volkswagen, Daimler, AT&T, Apple and Verizon  ( @NickTimiraos )

You may recall that the Bank of England is also buying Apple corporate bonds and I pointed out it will be competing with the US Federal Reserve to support what is on some counts the richest company in the world. Make of that what you will……

Engage Reverse Gear

This morning we have been updated on how much the UK plans to borrow.

To facilitate the government’s financing needs in the period until the end of August 2020, the UK Debt Management Office (DMO) is announcing that it is planning to raise a
minimum of £275 billion overall in the period April to August 2020.

Each sale reduces the money supply and I can recall a time when this was explicit policy and it was called Overfunding. Right now it would be a sub category of QT or Quantitative Tightening, should that ever happen.

Money Supply

We see that in a similar pattern to what we noted in the Euro area on Friday there is plenty being produced.

The amount of additional money deposited in banks and building societies by private sector companies and households rose strongly again in May (Chart 1). These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £52.0 billion in May. This followed large increases in March and April, of £67.3 billion and £37.8 billion respectively. The increase was driven by households and PNFCs, and continued to be strong relative to recent history: in the six months to February 2020, the average monthly increase was £9.3 billion.

The use of PNFCs is to try to take out the impact of money flows within the financial sector. Returning to the numbers we are seeing the consequences of the interest-rate cuts and the flip side ( the bonds are bought with newly produced money/liquidity) of the Bank of England QE I looked at earlier.

Last time around I pointed out we had seen 5% growth in short order and the pedal has continued to be pressed to the metal with a growth rate of 6.7% over the past three months. Or monthly growth rates which are higher than the annual one in May last year. All this has produced an annual growth rate of 11.3%.

Household Credit

This cratered again or to be more specific consumer credit.

Households repaid more loans from banks than they took out. A £4.6 billion net repayment of consumer credit more than offset a small increase in mortgage borrowing. Approvals for mortgages for house purchase fell further in May to 9,300.

I would not want to be the official at the Bank of England morning meeting who presented those numbers to the Governor. A period in a cake trolley free basement awaits. Indeed they may be grateful it does not have any salt mines when they got to this bit.

The extremely weak net flows of consumer credit meant that the annual growth rate was -3.0%, the weakest since the series began in 1994. Within this, the annual growth rate of credit card lending was negative for the third month running, falling to -10.7%, compared with 3.5% in February. Growth in other loans and advances remained positive, at 0.7%. But this was also weak relative to the recent past: in February, the growth rate was 6.8%.

Regular readers will recall when the Bank of England called an annual growth rate of 8.2% “weak” so I guess they will be echoing Ariane Grande.

I have no words

It seems like the air of desperation has impacted the banks too.

Effective rates on new personal loans to individuals fell 34 basis points to 5.10% in May. This was the lowest since the series began in 2016, and compares to a rate of around 7% at the start of 2020.

Mortgages

A small flicker.

On net, households borrowed an additional £1.2 billion secured on their homes. This was slightly higher than the £0.0 billion in April but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected more new borrowing by households, rather than lower repayments.

Looking ahead the picture was even worse.

The number of mortgage approvals for house purchase fell to a new series low in May, of 9,300 (Chart 5). This was, almost 90% below the February level (Chart 5) and around a third of their trough during the financial crisis in 2008.

We wait to see if the advent of lower mortgage rates and the re-opening of the economy will help here.

Comment

I am sure that many reading about the UK money supply surge will be singing along with The Beatles.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Some will go further.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go
Any jobber got the sack
Monday morning, turning back
Yellow lorry slow, nowhere to go

Do I spot a QE reference?

But oh, that magic feeling, nowhere to go
Oh, that magic feeling
Nowhere to go, nowhere to go

There will have been some sunshine at the Bank of England morning meeting.

Small and medium sized businesses drew down an extra £18.2 billion in loans from banks, on net, as their new borrowing increased sharply. Before May, the largest amount of net borrowing by SMEs was £589 million, in September 2016. The strong flow in May led to a sharp increase in the annual growth rate, to 11.8%.

Of course it was nothing to do with them but that seldom bothers a central bankers these days. This next bit might need hiding in the smallest print they can find though.

Podcast

 

Is the Bank of England financing the UK government?

Today’s subject does have historical echoes as who can consider this sort of topic without thinking at least once of Weimar Germany with its wheelbarrows full of bank notes and Zimbabwe with its trillion dollar note? These days we need to include Venezuela which cannot even provide a water supply now. There are three good reasons therefore why central bank Governors should tread very carefully around this particular subject. So it was curious to see the Governor of the Bank of England long jump into this particular pit yesterday in a Sky News podcast.

The government would have struggled to fund itself if the Bank of England had not intervened during the market “meltdown” of COVID-19, the Bank’s governor has told Sky News.

In an exclusive interview, Andrew Bailey said that in the early stages of the virus, Britain came within a whisker of not being able to sell its debt – something many would characterise as effective insolvency.

There are elements of the first paragraph which are true but “came within a whisker of not being able to sell its debt” is a curious thing to say and if we are being less kind is in fact outright stupid. We are also guided by Sky News to this.

While there was an uncovered gilt auction in 2009 – in other words, the government was unable to find buyers for all of the debt it was selling to investors – it was widely seen as a one-off.

They are trying to make this sound a big deal but it isn’t really. For example over the past few years I can recall Germany having several uncovered bond or what they call bund auctions. Nobody considered them to be within a whisker of being unable to sell their debt, in fact Germany had a very strong fiscal position. Here as an example id CNBC from the 21st of August last year.

The bund, set to mature in 2050, has a zero coupon, meaning it pays no interest. Germany offered 2 billion euros worth of 30-year bunds, and investors were willing to buy less than half of it, with a yield of minus 0.11%.

What was it about having to pay to own the bond and do so for around 30 years that put investors off? That of course provides the clue here which both Sky and Governor Bailey either have not figured out or are deliberately ignoring. The debt did not sell because of the price at which it was offered was considered too expensive. Germany could have sold its debt if it was willing to pay more,

How did the Bank of England respond?

Mr Bailey warned that the dislocation in markets in March was even more serious, prompting the Bank to intervene with £200bn of quantitative easing – the biggest single cash injection in its history.

Actually it also cut Bank Rate to 0.1% and there is significance in the date which was the 19th of March. That is because the price of our debt was rising which has been summarised by the Governor like this.

The governor said: “We basically had a pretty near meltdown of some of the core financial markets.

“We had a lot of volatility in core markets: the core exchange rate, core government bond markets.

“We were seeing things that were pretty unprecedented, certainly in recent times. And we were facing serious disorder.”

If we look at the UK we were seeing a rise in Gilt yields as the benchmark ten-year yield rose quickly from an all-time low of 0.12% on the 9th of March to 0.87% on the 19th. We have seen much worse in the past and I have worked through some of them! In historical terms we still had very low Gilt yields and so it looks as if we are seeing another case of this from a central bank.

Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again? ( The Smiths)

The job of calming down world financial markets was a dollar issue and was dealt with the next day by the US Federal Reserve.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to further enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

We will never know now how much things would have improved in response to this as a panic stricken Bank of England fired as many weapons as it could. As a technical factor overseas QE bond buying helps other markets via spread and international bond buyers. Whether that would have been enough is a moot point or as central bankers regularly try to point out, the counterfactual! We do know from experience that it is a powerful force exhibited in say Italy which only saw bond yields rise to 3% and that only briefly recently as opposed to 7% last time around.

Anyway even the relatively minor rise in UK Gilt yields has the Governor claiming this.

Asked what would have happened had the Bank not intervened, Mr Bailey said: “I think the prospects would have been very bad. It would have been very serious.

“I think we would have a situation where in the worst element, the government would have struggled to fund itself in the short run.”

Okay so he is in effect claiming to have funded the government although not long afterwards he claims that he is not.

The Bank’s decision to create so much money and use it to buy government bonds, including an extra £100bn only last week, has prompted some to ask whether it is in effect financing the government’s borrowing. Mr Bailey rejected the accusations of “monetary financing”.

“At no point have we thought that our job was just to finance whatever debts the government issue,” he said, pointing out that the objective was to ensure economic stability.

Ah so not inflation targeting then?

Comment

The situation here was explained back in the day in an episode of Yes Prime Minister and the emphasis is mine.

We believe that it is about time that the Bank ( of England) had a Governor who is known to be both intelligent and competent. Although an innovation it should certainly be tried.  ( Treasury Permanent Secretary Sir Frank)

As you can see this was a topic in the 1980s and it still is. The present Governor was in such a rush to indulge in “open mouth operations” to boast about his role in the crisis that he not only overstepped the mark he made some factual errors. The UK government could have funded itself but it would have to have paid more for the debt. It could have activated the Ways and Means account earlier than it did as well if needed ( we looked at this on the 9th of April). So we see several of my themes at play. The Bank of England is implicitly but not explicitly funding the UK government right now just like the Bank of Japan, ECB and US Federal Reserve,something I pointed out on the 6th of April.

Let me finish off on the subject of monetary financing. The simple truth is that we have an implicit form of it right now.

This means that it is about as independent as a poodle (another theme). It tends to panic in a crisis and new Governor’s tend to reward their appointment with an interest-rate cut. I cannot take full credit for the latter as that was in Yes Prime Minister as well.

Also in the podcast was a reference to this.

The governor signalled that the government may need to consider finding a vehicle to resolve the many bad debts left by companies that fail over the COVID-19 period.

“If (a bad bank) were to be contemplated, it would be as a sort of an an asset management vehicle: how do we manage small firms through a problem that they would get as a result of the loans that they’ve taken on to deal with the crisis?”

Somebody needs to tell him the UK taxpayer has one of those and it is called Royal Bank of Scotland with a share price of £1.24 as opposed to the Fiver we “invested” at.

Let me finish by giving Governor Bailey some credit for a burst of much needed honesty.

“We’ve been mis-forecasting the labour market for some time because the traditional models just didn’t seem to hold.

We can add that to his apparent enthusiasm for changing policy on the subject of any QT in a direction I have been recommending since September 2013.

Podcast

 

 

UK Retail Sales and Public-Sector Borrowing Surge

We were supposed to be receiving some grand news from the Bank of England this morning. But in fact we find ourselves simply noting a rather botched public relations spinning effort.

You spin me right round, baby
Right round like a record, baby
Right round round round ( Dead or Alive)

The main movement was in the value of the UK Pound £ which fell by around 1% so we saw using the old rule of thumb monetary easing equivalent to a 0.25% Bank Rate cut. How much of that was due to the PR shambles?

Anyway there was some good news in an implied better trajectory for the UK economy and that has been backed by the data this morning.

The monthly growth rate in May 2020 is strong because of a combination of recent increasingly rapid growth in non-store retailing and a pick-up for non-food stores from the lowest levels ever experienced.

Also let me give the Office for National Statistics credit for this.

Weights to total retail are calculated from the amount of money typically spent in each retail sector and used as a proportion to calculate growth contributions. For example, around 38.1 pence of every pound is typically spent in food stores, providing us with a weight of 38.1 to total retail. In May 2020, these proportions were recalculated to reflect the changes in spending during the pandemic. The amount of money spent in food stores increased to 51.4%,

In what are volatile and uncertain times one needs to keep on our toes and this example should be spread to the inflation numbers. The data should reflect as best we can what is happening not a world “far,far,away”. As you can see,doing so makes quite a difference. The number below gives a hint of how the inflation data would be affected and in my opinion it is a great shame that the Bank of England Minutes ignored this factor yesterday.

Fuel sales usually has a weight of just over 10.4% to total retail, but was at around 5.5% in May 2020, resulting in a positive contribution of 2.3 and 2.7 percentage points for value and volume sales respectively.

Actually the release even hints at this.

Fuel prices also continued to fall in May 2020………When compared with the same month a year earlier, fuel prices fell by 14.9%

However whilst the monthly improvement was very welcome and you might like to note was another example of the “expert” forecasters missing the dartboard as they were expecting more like 6% growth as opposed to 12% or so, we need a deeper perspective.

While we see some partial bounce back on the monthly growth rate in May 2020 at 12.0%, levels of sales do not recover from the strong falls seen in March and April 2020 and are still down by 13.1% on February 2020 before the impact of the corona virus pandemic.

Putting this another way the volume index was 93.7 in May if we set 2016 as the base level of 100. Previously the numbers were bouncing around 108.

I doubt any of you will be surprised by the shift to online retailing.

Online sales as a proportion of all retailing reached a record high of 33.4% in May 2020, exceeding the original record reported last month of 30.7%.

There was a larger uptake of online spending for food, which reached record proportions, from 9.3% in April to 11.3% in May.

Should consumers continue with this trend this is more bad news for the high street. Although as a counterpoint the mobs that descended on the shops which opened recently suggests there is some hope, although the health message sent from that was rather different.

Public Finances

Let me start with an apology as I was asked about this and thought it would probably take place in June.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of May 2020 was 100.9% of gross domestic product (GDP), the first time that debt as a percentage of GDP has exceeded 100% since the financial year ending March 1963.

There are a couple of factors in my defence however and one of them we have just been noting. That is a further hint that the economy is doing better than the consensus expectations. Oh and my first rule of OBR Club is likely to help me out.

 the current estimate of GDP used to calculate this ratio uses forecasts based on expectations published in the Office for Budget Responsibility’s (OBR’s) Coronavirus Reference Scenario.

They look well on their way to being wrong again. Also there is the large £13.9 billion revision to borrowing for April and we learn quite a bit from it. Take a look at this for example.

Central government tax receipts and National Insurance contributions for April 2020 have been increased by £5.4 billion and £2.4 billion respectively compared with those published in our previous bulletin (published 22 May 2020). Within tax receipts, Pay As You Earn income tax has been increased by £3.0 billion and Value Added Tax has been increased by £2.8 billion, both because of updated data.

As you can see there is another hint from the numbers that the economy was doing better than so far reported in April as we see upwards revisions to both income and expenditure taxes.Indeed the numbers have quite a conceptual problem as we mull whether imputation is like a pandemic?

In other words, we attempt to record receipts at the point where the liability arose, rather than when the tax is actually paid.

Oh and you can’t say I have not regularly warned you about the OBR!

On 4 June 2020, the OBR published an update to its Corona Virus analysis in which it reduced previous estimates of CJRS expenditure.

Perspective

We can start with May.

Over this period, the public sector borrowed £55.2 billion, £49.6 billion more than it borrowed in May 2019.

But via the revisions noted above we have already seen how unreliable a single month is so we do a little better looking at this.

In the current financial year-to-date (April to May 2020), the public sector borrowed £103.7 billion, £87.0 billion more than in the same period last year.

Although we need to note that we will be lucky if it is accurate to the nearest £10 billion. Within the receipts numbers there are some points of note. The Retail Sales numbers with monthly rises of 30%,61% and now 3,6% for the category with includes alcohol sales meets alcohol duty receipts which have fallen from £2.1 billion to £1.6 billion. Perhaps a health kick has been going on as tobacco receipts fall by £400 million to £1 billion. Also a slowing in the housing market is kicking in as Stamp Duty receipts fall from £2 billion to £1.1 billion.

Switching to the national debt there is this.

Debt (PSND ex) at the end of May 2020 was £1,950.1 billion, an increase of £173.2 billion (or 20.5 percentage points) compared with May 2019, the largest year-on-year increase in debt as a percentage of GDP on record (monthly records began in March 1993).

Comment

We have some welcome news today on the economy but context is needed as we have still experienced quite a drop, simply one which is smaller than reported so far. There is an irony in the two numbers released as we see this being reported which gives a worse impression.

Just in: UK government debt exceeded the size of the country’s economy in May for the first time in more than 50 years, official data published on Friday showed, as borrowing surged to pay for coronavirus response measures ( Financial Times)

Having awarded myself a slice of humble pie let me move onto an issue that the more clickbaity reports have ignored.

If we were to remove the temporary debt impact of APF and TFS, public sector net debt (excluding public sector banks) at the end of May 2020 would reduce by £195.5 billion (or 10.1% percentage points of GDP) to £1,754.6 billion (or 90.8% of GDP).

That is the role of the Bank of England in raising the reported level of the national debt and frankly this bit below is one of the silliest inclusions.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £95.7 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase. Note that the final debt impact of the APF depends on the disposal of the gilts at the end of the scheme.

Oh well. Let me end by bringing yesterday’s extra QE bond purchases and the borrowing together with these two numbers.

At the end of May 2020, the gilt holdings of the APF have increased by £46.7 billion (at nominal value) compared with the end of April 2020, to £475.1 billion in total. This increase is of a similar order of magnitude to the new issuance by the DMO in May 2020, which means that gilt holdings by units other than the APF have changed very little since April 2020.

As I have pointed out before if we take a broad brush the Bank of England is implicitly financing the government spending. That is why we can borrow so cheaply with some gilt yields negative and the fifty-year a mere 0.55%.

 

 

“All bets are off” as the Bank of England holds a “secret” press conference

Today is the turn of the Bank of England to take centre stage. On a personal level it raises a wry smile as when I was a market maker in UK short sterling options (known as a local) on the LIFFE floor it was the most important day of the month and often make or break. At other times it has been a more implicit big deal. Actually there is no likely change to short-term interest-rates on the cards. Perusing my old stomping ground shows that in fact not much action is expected at all with a pretty flat curve out to March 2024 when maybe a rise to the giddy heights of 0.25% is expected. Personally I think there is a solid chance we will see negative interest-rates first but that is not how the market is set this morning. Also I note that volumes are not great suggesting they are not expecting much today either.

If course some may be “more equal than others” to use that famous phrase as the Monetary Policy Committee voted last night following one of the previous Governor’s ( Mark Carney) “improvements”. He was of the opinion that getting his Minutes and PR prepared was more important than the risk of the vote leaking. Whereas the reality is that central banks are in fact rather leaky vessels.

Nationwide

There will have been consternation at the Bank of England when this news arrived at its hallowed doors. From the BBC.

The UK’s biggest building society has tripled the minimum deposit it will ask for from first-time buyers. The Nationwide will lower its ceiling for mortgage lending to new customers in response to the coronavirus crisis.It said the change, from Thursday, was due to “these unprecedented times and an uncertain mortgage market”.

I do not know if the new Governor Andrew Bailey has the same sharp temper as his predecessor Mark Carney but if he does it would have been in display. After all policy is essentially to get the housing market going once we peer beneath the veneer. Nearly £118 billion of cheap funding ( at the Bank Rate of 0.1%) has been deployed via the Term Funding Scheme(s) to keep the housing market wheels oiled. Also the news looks timed to just precede the MPC meeting.

In terms of detail there it is aimed at first-time buyers which is only likely to anger the Governor more.

First-time buyers are likely to be the most significantly affected because they often have smaller amounts saved to get on the property ladder.

Nationwide has reduced the proportion of a home’s value that is willing to lend from 95% to 85%.

So for example, if a property costs £100,000, a new buyer would now need a £15,000 deposit rather than a £5,000 deposit.

If we look back in time this is a familiar feature of house price falls. As mortgage borrowing becomes more restrained that by its very nature tends to pull house prices lower. For larger falls then it usually requites surveyors to join the party by down valuing some properties which as they are pack animals can spread like wildfire. The quote below shows that the situation is complex.

Some lenders, such as HSBC, still have mortgages with a 90% loan-to-value ratio. However, there is more demand for that type of mortgage than many banks have the capacity to deal with at the moment, he said.

Policy

We have already seen an extraordinary set of moves here. We have a record low interest-rate of 0.1% which is quite something from a body which had previously assured us that the “lower-bound” was 0.5%. There is a link to today’s news from this because it was building societies like the Nationwide and their creaking IT systems which got the blame for this, although ironically I think they did us a favour.

Next comes a whole barrage of Quantitative Easing and Credit Easing policies. The headliner here is the purchases of UK bonds ( Gilts) which by my maths passed the £600 billion mark just before 2 pm yesterday as it progresses at a weekly rate of £13.5 billion. This means that they are implicitly financing the UK public-sector right now, something I pointed out when the Ways and Means issue arose. We see that as I note that the UK Debt Management Office has issued some £14.4 billion of new UK bonds or Gilts this week. Whilst the Bank of England did not buy any of these it did oil the wheels with its purchases which means that the net issuance figure is £900 million which is rather different to £14.4 billion. On that road we see how both the two-year yield ( -0.07%) and the five-year yield ( -0,02%) are negative as I type this. Even the fifty-year yield is a mere 0.38%.

There has also been some £15 billion of Corporate Bond buying so far. This policy has not gone well as so desperate are they to find bonds to buy that they have bought some of Apple’s bonds. Yes the company with the enormous cash pile. Also I sure the Danes are grateful we are supporting their shipping company Maersk as it appears to need it, but they are probably somewhat bemused.

As to credit easing I have already noted the Term Funding Scheme and there is also the Covid Financing Facility where it buys Commercial Paper. Some £16.3 billion has been bought so far. Those who like a hot sausage roll may be pleased Greggs have been supported to the tune of £30 million, although North London is likely to be split on tribal lines by the £175 million for Spurs.

Comment

These days central banks and governments are hand in glove. Operationally that is required because the QE and credit easing measures require the backing of the taxpayer via HM Treasury. More prosaically the Chancellor Rishi Sunak can borrow at ultra low levels due to Bank of England policies and will do doubt raise a glass of champagne to them. Amazingly some put on such powerful sunglasses that they call this independence. Perhaps they were the ones who disallowed Sheffield United’s goal last night.

However the ability to help the economy is more problematical and was once described as like “pushing on a string”. This is not helped by the issues with our official statistics as we not inflation has been under recorded as I explained yesterday as has unemployment ( it was 5% + not the 3.9% reported) and the monthly drop of 20.4% in GDP has a large error range too. Because of that I have some sympathy for the MPC but I have no sympathy for the “secret” press conference it is holding at 1 pm. Then its “friends” will be able to release the details at 2:30 pm with no official confirmation until tomorrow.

So there are two issues. That is a form of corruption and debases what is left of free markets even more. Next it is supposed to be a publicly accountable institution with transparent policy. Along the way it means that the chances of a more aggressive policy announcement have just risen or as the bookie says in the film Snatch.

All bets are off

The Bank of England intervenes in support of Tottenham Hotspur

We have been provided with some more insights into the thinking of the Bank of England via a speech from Executive Director Andrew Hauser. We open with a curious accident of timing.

I have always had a funny feeling about Friday the 13th – and 13 March 2020, Mark Carney’s last day in the
office as Governor of the Bank of England, was no exception.

Actually he had various leaving dates as one might expect from an unreliable boyfriend. Then the speech shows it is being given by a central banker because we are told this.

But this is no time for self-congratulation.

But then it apparently is.

Hailed globally as a shining example of how monetary, fiscal and regulatory policies
could work together to reinforce one another, the combination of interest rate cuts, government spending,
cheap funding and capital easing measures seemed sure to stabilise markets and restore some muchneeded confidence to households and businesses.

Can you applaud yourself whilst also slapping yourself on the back, but avoid self-congratulation?

Policies

We get a confirmation of one of my points.

The dollar swap lines may be the most important part of the international financial stability safety net that few
have ever heard of.

In essence the US Federal Reserve was effectively operating as the world’s central bank.

QE

The events are described thus.

This was by far the largest and fastest single programme ever launched: equivalent to around a tenth of UK GDP, or 50% of the MPC’s existing holdings, and more than twice as rapid as the opening salvo of purchases in 2009.

The impact is described in glowing terms.

The impact was immediate, and decisive. Gilt yields fell back sharply as confidence returned, and market
functioning measures began to normalise . Purchase operations have since taken place
smoothly, with good participation and tight pricing.

There are issues with this though as we find ourselves noting that “as confidence returned” actually means that the Bank of England buys vast numbers of Gilts ( bonds). In fact the present rate of purchases at £13.5 billion per week means that few others need “confidence” as the UK has sold around £13.3 billion of new Gilts this week. So this week nobody else needed any confidence at all! Next is the yield issue where the Bank of England buying has driven short-dated Gilts into negative territory. I looked at the detail of the purchases on Tuesday and Wednesday and over 90% of the short-dated auction so around £2.9 billion was driving prices into negative yields which is apparently “tight pricing”. Also if I was being offered profits and in some cases enormous profits like this I think you might see “good participation” from me too.

Covid Corporate Credit Facility (CCFF)

Let me thank Andrew Hauser for reminding me of this issue and it led me down an unusual road. So in the style of children’s TV let me say to Arsenal fans are you sitting comfortably? First the details of the scheme and it is another bad day for those claiming the Bank of England is independent.

Given the credit risks involved, financial exposures and
eligibility decisions would be owned by the Treasury, but the scheme – to be known as the Covid Corporate
Credit Facility (CCFF) – would be designed and run by the Bank, and funded through the issuance of
reserves, with the MPC’s agreement.

What has it amounted to?

So far, over 140 firms have signed up for the scheme, and have borrowed over £20bn in total,
some of which has already matured. Firms’ borrowing capacity in the scheme is more than three times that
level , helping to underpin confidence – and complementing the Government-run schemes, including the Coronavirus Business Interruption and Bounce Back Loan (BBL) Schemes, which together have lent a further £31bn.

This is a tidy sum indeed and the independence crew take another punch to the solar plexus as we note that he is linking Bank of England work with HM Treasury.

Whilst the help is no doubt welcome yet again we see a central banker unable to see the wood for the trees.

First, CP issuance under the scheme has been at least three times
larger than the size of the pre-Covid-19 sterling CP market – and nearly three quarters of CCFF firms have
set up a CP programme since applying. So the CCFF has helped to deepen the CP market, with potentially
lasting benefits.

The Threadneedle Street Whale is in the market buying it all up! Who would not want to offer debt cheaply? Small and medium-sized businesses must be looking on with envy. It also gives us an addition to my financial lexicon for these times.

“the normalisation of conditions in core markets, ” means the Bank of England is buying.

Meanwhile

 

 

Term Funding Scheme

This is reviewed in dare I say it? Self-congratulatory terms.

In addition to the CCFF, the Bank also opened the borrowing window for the new Term Funding Scheme
with additional incentives for Small and Medium Sized Enterprises (TFSME) on 15 April………There has already been £12bn of lending from the scheme – a far more rapid pace than the previous TFS.

Actually I would have expected more but of course the mortgage market is not yet properly open.

It does this by providing banks with cheap funding over
a four-year term (rising to six years for loans guaranteed under the BBL scheme).

So another one in 4 years as we note there is still £107 billion under the previous scheme?

Ways and Means

I looked at this on April 9th and concluded it was a minor factor which you might recall was very different to the mainstream media view.

The Ways and Means account has not been used since the financial crisis, and is normally worth £400m. But outside experts say that this will increase by billions, perhaps tens of billions to help the government manage a sharp increase in immediate spending,

I would suggest that Faisal Islam of the BBC needs some new “outside experts” as it has remained at £370 million and has therefore not been used.

Comment

We get some perspective from the scale of the interventions by the Bank of England which is described thus.

a balance sheet that has expanded by almost a third in three months, and will reach nearly 40% of annual UK GDP by
mid-year. To deliver that, we are doing more than ten times the number of weekly operations than in the
pre-Covid19 period.

He calculates it as £769 billion and as the pace continues I think it is more like £789 billion now.

Next is something that he rues but I am more hopeful about as the lack of groups may reduce the group-think.

Face-to face meetings – the lifeblood of central banking, sadly – have been seamlessly replaced with audio and
video calls.

Andrew Hauser clearly thinks about the situation but there is an elephant missing in his room which is how do we reverse all the central banking intervention and also deal with the side-effects? Have you noticed hoe the issue of the impact on longer-term saving ( pensions and insurance companies) has seen a type of radio blackout? Here are his suggestions.

First, do we understand why intermediaries struggled to make effective markets in core government
bond, money and foreign exchange instruments at crucial moments during the crisis?

Second, are we comfortable with the central role played by highly-leveraged but thinly-capitalised
non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify
instability so starkly?

Third, how do we deal with the risks posed to financial stability by the structural tendency for Money
Market and some other open-ended funds to be prone to runs, without having to commit scarce
public money to costly support facilities?

And, fourth, how can we ensure timely transition away from LIBOR, whose weaknesses were
highlighted so starkly by the crisis?

Still according to the Halifax Building Society house prices are (somehow) 2.6% higher than last May.

 

 

 

UK consumer credit collapses as the money supply soars

As we peruse the data for the impact of all the Bank of England actions in this pandemic we have also been updated on its main priority. From the Nationwide Building Society.

“UK house prices fell by 1.7% over the month in May, after
taking account of seasonal effects – this is the largest
monthly fall since February 2009. As a result, the annual rate of house price growth slowed to 1.8%, from 3.7% in April.”

According to them things had been going really rather well before the May reverse.

“In the opening months of 2020, before the pandemic struck
the UK, the housing market had been steadily gathering
momentum. Activity levels and price growth were edging up thanks to continued robust labour market conditions, low borrowing costs and a more stable political backdrop
following the general election.”

Personally I am rather dubious about the April number but we do have a large fall for May and also something of a critique for the suspended official index from the Office for National Statistics.

Mortgage activity has also declined sharply. Nevertheless,
our ability to generate the house price index has not been
impacted to date, as sample sizes have remained sufficiently large (and representative) to generate robust results.

Rents

Perhaps such news is all too much for the boomers as I note the BBC reporting this today.

Lockdown break-ups, job losses and urgent relocations are thought to have led to a surge in the rental sector.

Demand for lettings in Great Britain is up by 22% compared to last year, according to property giant Rightmove.

Experts say the lifting of lockdown restrictions has released “two months of pent-up tension” in the market.

The supply of new rents is not keeping up with demand, however, prompting fears the surge will push up costs and leave some struggling to find homes.

The article tries to give the impression that rents are rising but provides no evidence for this at all, as the data set only has demand. It seems to lack a mention of the numbers in the data set which showed larger demand declines in the pandemic. We seem back to the get in now before rents boom message that is so familiar as the media parrots what the industry wants.

“I think we were lucky really because we got in there before demand boomed.”

On a personal level some people were viewing in my block yesterday. Fair play to the viewers who put on masks, but sadly the estate agent who is more likely to spread the virus did not bother with any PPE.

Consumer Credit

Even in the hot summer weather we are seeing the spine of the Monetary Policy Committee will have seen a sudden chill as these numbers came in.

New gross borrowing fell to £11.8 billion in April, roughly half its February level. Repayments on consumer borrowing have also fallen sharply, by 19% since February, reflecting payment holidays. On net, the larger fall in gross borrowing meant people repaid £7.4 billion of consumer credit in April, double the repayment in March, which itself was a record repayment (Chart 3). The extremely weak net flows of consumer credit meant that the annual growth rate fell below zero in April, to -0.4%, the weakest since August 2012.

What is happening here is that each month there is a large amount of new borrowing but also repayments and the usual situation is that we see net borrowing and in recent years lots of it. In April the amount of new borrowing fell and for once the use of the word collapse is appropriate whereas the level of repayments fell by much less. Thus the net amount swung by as much as I can ever recall.

In terms of the detail the main player was credit card borrowing.

The majority (£5.0 billion) of net consumer credit repayments were on credit cards, while £2.4 billion of other loans were also repaid in April. The annual growth rate of credit card lending was negative for the second month running, falling to -7.8%, compared with 3.5% in February before borrowing fell. Growth in other loans and advances remained positive, at 3.1%.

Mortgages

There was a similar pattern to be found here although in this instance it was not enough to turn the net figure negative. Also the bit I have emphasised is a signal of the financial distress I have both feared and expected.

Lending has also fallen sharply. Gross (new) mortgage borrowing fell to £14.4 billion, 38% lower than in February (Chart 5). Repayments on mortgage lending also fell sharply, to £13.9 billion, 26% lower than in February. This reflects a sharp fall in full repayments of loans, as well as the effect of payment holidays. The sharper fall in gross lending than repayments means that net mortgage borrowing fell, and was only £0.3 billion in April compared to an increase of £4.3 billion in February. This was the lowest net increase since December 2011.

One area that I do expect to pick up is this.

Approvals for remortgage (which include remortgaging with a different lender only) have fallen by less, to 34,400, 34% lower than in February.

With my indicator for fixed mortgage interest-rates ( the five-year Gilt yield) so low and effectively around 0% I expect some cheaper mortgage rates and hence more remortgaging, for those that can. As to mortgage rates they did this.

The effective interest rate paid on the stock of floating-rate mortgages fell 46 basis points, to 2.39%, the lowest rate since this series began in 2016; and the rate on new floating-rate loans fell 35 basis points to 1.48%.

They do not often tell us the mortgage rates but I guess they wanted to emphasise their own actions.

The rate paid by individuals on floating-rate mortgage borrowing fell a little further in April, however, as the MPC’s March Bank Rate cuts continued to pass through.

Business Lending

You might like to recall as you read the bit below that all of the credit easing since the summer of 2012 has been to boost small business lending.

Private sector businesses of all sizes borrowed little extra from banks in April. Small and medium sized businesses drew down an extra £0.3billion in loans from banks, on net, a similar amount as in March. The annual growth rate of borrowing by SMEs was 1.2%, in line with the growth rate since mid 2019.

For newer the readers the central banking game is to claim you are boosting lending to SMEs and then express surprise when it is mortgage lending and unsecured credit to consumers that rises and soars respectively.

The numbers below are mostly because many businesses have been desperate for cash.

But strength in borrowing by the public administration and defence industry meant total borrowing by large businesses was £12.9 billion in April. While this total is very strong by historical standards, it is down from £32.4 billion in March. The annual growth rate of borrowing by all large businesses increased to 15.4%, much stronger than the growth rate of around 5% in late 2019.

There will be quite a complicated mixture there as we no note lower and sometime zero sales colliding with many expenses continuing.

This is an ongoing problem where big businesses get help. As you can see they can access bank loans and the various Bank of England schemes are designed for them too.

 In April, firms raised £16.1 billion from financial markets, on net, the highest amount raised since June 2009 and significantly stronger than the previous six month average of £23 million. Within this, firms issued £7.7 billion of bonds, £7.0 billion of commercial paper (including funds raised through the Covid Corporate Financing Facility), and £1.4 billion of equity.

It is not easy as for obvious reasons a central bank can help a large business in ways that it cannot help a corner shop or one (wo)man band but the truth is that they also get a bit lazy and could try much harder.

Comment

I have held back the money supply data for this section and here it is.

These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £37.3 billion in April. The strength was driven by households and PNFCs. The increase was smaller than in March, when money increased by £67.3 billion.

An interesting decline in the monthly number but the main message here is the £104.6 billion in only two months which compares to a total of £2364.4 billion. So a bit short of 5% in only 2 months! The annual rate is now 9%. On terms of economic impact then that is supposed to give us a nominal GDP growth rate also of 9% in a couple of years. Because of where we are there are all sorts or problems with applying that rule but it is grounds for those who have inflation fears. Oh and as to how this is created well some £13.5 billion of QE a week sure helps.

One other factor will be that these aggregate numbers will hide very different individual and group impacts. For example some with mortgages will be in financial distress whereas others will be using lower rates to increase repayments. The same will be true of businesses with sadly as I have explained above smaller ones usually getting the thin end of the wedge. These breakdowns are as important as the aggregate data but often get ignored.

Where next for UK house prices?

Today we are going to start by imagining we are central bankers so we will look at the main priority of the Bank of England  which is UK house prices. Therefore if you are going to have a musical accompaniment may I suggest this.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me…  ( Yazz0(

In fact it fits the central banking mindset as you can see below. Even in economic hard times the only way is up.

Now we may not know, huh,
Where our next meal is coming from,
But with you by my side
I’ll face what is to come.

From the point of view of Threadneedle Street the suspension of the official UK house price index is useful too as it will allow the various ostriches to keep their head deep in the sand. This was illustrated in the Financial Stability Report issued on the 7th of May.

As a result, the fall in UK property prices incorporated in
the desktop stress test is less severe than that in the 2019 stress test.

Yes you do read that right, just as the UK economy looked on the edge of of substantial house price falls the Bank of England was modelling weaker ones!

Taking these two effects together, the FPC judges that a fall of 16% in UK residential property prices could be
consistent with the MPR scenario. After falling, prices are then assumed to rise gradually as economic activity in the
UK recovers and unemployment falls in the scenario.

Whether you are reassured that a group of people you have mostly never heard of forecast this I do not know, but in reality there are two main drivers. The desire for higher house prices which I will explain in the next section and protection of “My Precious! My Precious!” which underpins all this.

Given the loan to value distribution on banks’ mortgage books at the end of 2019, a 16% house price fall would not be likely to lead to very material losses in the event of default.

So the 16% was chosen to make the banks look safe or in central banking terms “resilient”

Research

I did say earlier that I would explain why central bankers are so keen on higher house prices, so here is the latest Bank Underground post from yesterday.

Our results also suggest that the behaviour of house prices affects how monetary policy feeds through. When house prices rise, homeowners feel wealthier and are more able to refinance their mortgages and release housing equity in order to spend money on other things. This can offset some of the dampening effects of an increase in interest rates. In contrast, when house prices fall, this channel means an increase in interest rates has a bigger contractionary effect on the economy, making monetary policy more potent.

Just in case you missed it.

Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.

So even the supposedly independent Bank Underground blog shows that “you can take the boy out of the city but not the city out of the boy” aphorism works as we see it cannot avoid the obsession with house prices. The air of unreality is added to by this.

 we look at the response of non-durable, durable and total consumption in response to a 100bp increase in interest rates.

The last time we had that was in 2006/07 so I am a little unclear which evidence they have to model this and of course many will have been in their working lives without experiencing such a thing. Actually it gives us a reason why it is ever less likely to happen with the present crew in charge.

When the share of constrained households is large, interest rate rises have a larger absolute impact than interest rate cuts.

Oh and is that a confession that the interest-rate cuts have been ineffective. A bit late now with Bank Rate at 0.1%! I would also point out that I have been suggesting this for some years now and to be specific once interest-rates go below around 1.5%.

Reasons To Be Cheerful ( for a central banker )

Having used that title we need a part one,two and three.

1.The UK five-year Gilt yield has gone negative in the last week or so and yesterday the Bank of England set a new record when it paid -0.068% for a 2025 Gilt. As it has yet to ever sell a QE bond that means it locked in a loss. But more importantly for today’s analysis this is my proxy for UK fixed-rate mortgages. So we seem set to see more of this.

the average rate on two and five year fixed deals have fallen to lows not seen since Moneyfacts’ electronic records began in July 2007. The current average two year fixed mortgage rate stands at just 2.09% while the average rate for a five year fixed mortgage is 2.35%. ( Moneyfacts 11th May)

2. The institutional background for mortgage lending is strong. The new Term Funding Scheme which allows banks to access funding at a 0.1% Bank Rate has risen to £11.9 billion as of last week’s update. Also there is the £107.1 billion remaining in the previous Term Funding Scheme meaning the two add to a tidy sum even for these times. Plus in a sign that bank subsidies never quite disappear there is still £3 billion of the Funding for Lending Scheme kicking around. These schemes are proclaimed as being for small business lending but so far have always “leaked” into the mortgage market.

3. The market is now open. You might reasonably think that a time of fears over a virus spreading is not the one to invite people into your home but that is apparently less important than the housing market.  Curious that you can invite strangers in but not more than one family member or friend.

News

Zoopla pointed out this earlier.

Buyer demand across England spiked up by 88% after the market reopened, exceeding pre-lockdown levels in the week to 19th May; this jump in demand in England is temporary and expected to moderate in the coming weeks

Of course an 88% rise on not very much may not be many and the enthusiasm seemed to fade pretty quickly.

Some 60% of would-be home movers across Britain said they plan to go ahead with their property plans, according to a new survey by Zoopla, but 40% have put their plans on hold because of COVID-19 and the uncertain outlook.

Actually the last figure I would see as optimistic right now.

Harder measures of market activity are more subdued – new sales agreed in England have increased by 12% since the market reopened, rising from levels that are just a tenth of typical sales volumes at this time of year.

Finally I would suggest taking this with no just a pinch of salt but the full contents of your salt cellar.

The latest index results show annual price growth of +1.9%. This is a small reduction in the annual growth rate, from +2% in March.

Comment

So far we have been the very model of a modern central banker. Now let us leave the rarified air of its Ivory Tower and breathe some oxygen. Many of the components for a house price boom are in place but there are a multitude of catches. Firstly it is quite plain that many people have seen a fall in incomes and wages and this looks set to continue. I know the travel industry has been hit hard but British Airways is imposing a set of wage reductions.

Next we do not know how fully things will play out but a trend towards more home working and less commuting seems likely. So in some places there may be more demand ( adding an office) whereas in others it may fade away. On a personal level I pass the 600 flats being built at Battersea Roof Garden on one of my running routes and sometimes shop next to the circa 500 being built next to The Oval cricket ground. Plenty of supply but they will require overseas or foreign demand.

So the chain as Fleetwood Mac would put it may not be right.

You would never break the chain (Never break the chain)

We should finally see lower prices but as to the pattern things are still unclear. So let me leave you with something to send a chill down the spine of any central banker.

Chunky price cut for Kent estate reports
@PrimeResi as agent clips asking price from £8m to £5.95m (26%). (£) ( @HenryPryor)

Me on The Investing Channel

The UK is being paid to borrow just as it borrows record amounts

Sometimes even when you expect something it still creates something of a shockwave. We knew that UK public spending was on speed and that tax receipts were going to be like one of those cartoon characters running off the edge of a cliff. But even so this had an impact.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in April 2020 is estimated to have been £62.1 billion, £51.1 billion more than in April 2019; the highest borrowing in any month on record (records began in January 1993).

Boom Boom Pow as the Black Eyed Peas would say. As we break it down we see it is a central government game as it also is pouring money into local authorities as we noted last time.

In April 2020, central government borrowed £66.2 billion, while local government was in surplus by £7.3 billion. This local government surplus partially reflects the increase in current transfers from central government to fund its COVID-19 measures.

If we look at spending we see this.

In April 2020, central government spent £109.3 billion, an increase of 38.3% on April 2019.

There was an increase of £1.6 billion in social benefits which ordinarily would be a big deal but this time gets swamped as the “other” category rises by £36.1 billion. We can start to break that down.

This month we have recorded the expenditure associated with the Coronavirus Job Retention Scheme (CJRS) for the first time. CJRS is a temporary scheme designed to help employers pay wages and salaries to those employees who would otherwise be made redundant……..In April 2020, central government subsidy expenditure was £16.3 billion, of which £14.0 billion were CJRS payments.

A fair bit of the amount below would have gone on the NHS.

Departmental expenditure on goods and services in April 2020 increased by £7.1 billion compared with April 2019, including a £1.2 billion increase in expenditure on staff costs and a £5.7 billion increase in the purchase of goods and services.

Also I did say they were pouring money into local government.

Central government grants to local authorities in April 2020 increased by £14.2 billion compared with April 2019, mainly to fund additional support because of the COVID-19 pandemic.

The only gain was from lower inflation

Interest payments on the government’s outstanding debt in April 2020 were £5.0 billion, a £1.2 billion decrease compared with April 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

Tax Receipts

This is an awkward category as it relies on past patterns and well you can guess the rest. But they have tried to come up with some suggestions.

In April 2020, central government receipts fell by £16.4 billion compared with April 2019 to £45.6 billion, including £29.6 billion in tax revenue.

They have tried to allow for the lower level of activity although sadly the numbers they have used have come from the Office for Budget Responsibility or OBR. For newer readers the first rule of OBR Club is that it is always wrong.

We do get some further clues from the Retail Sales numbers also released earlier.

The volume of retail sales in April 2020 fell by a record 18.1%, following the strong monthly fall of 5.2% in March 2020.

As you can see VAT receipts will be hit as will income tax payments from many shop workers. Also we got evidence that there was a lot of panic buying of food when the pandemic hit.

The fall of 4.1% for food stores was mainly due to a fall back from the strong growth of 10.1% in March 2020. Retailers provided feedback of panic buying in March, which caused a sales spike.

Also I hope that you are all sober when you are reading this.

In April, 13.6% of alcohol and tobacco stores reported having zero turnover, however, the volume of sales for these stores increased by 2.3%; a further rise from the strong growth of 23.9% in March.

As you can imagine a trend we have been noting for some years got another boost.

Online sales as a proportion of all retailing reached a record high of 30.7% in April 2020, exceeding the original record reported last month of 22.4%. All sectors reached their highest-recorded proportions except non-store retailing, which reached record proportions in February and March 2020, both at 83.2%.

As well as being sober I hope you are dressed reading this.

The sharp decline in April 2020 has resulted in the lowest levels seen in the volume of textile, clothing and footwear sales since the beginning of the series, when March 1988 was at a similar level.

Last Month

The uncertainty about the amount of tax receipts is highlighted by what has just happened to the March data.

Borrowing in March 2020 was revised up by £11.7 billion to £14.7 billion, largely due to a reduction in the previous estimate of tax receipts and National Insurance contributions and the recording of expenditure associated with the Coronavirus Job Retention scheme.

The main player here was this.

Additionally, the subsidies paid by central government in March 2020 have been increased by £7.0 billion to reflect the additional CJRS payments not previously recorded.

National Debt

This comes with some caveats but the ONS has tried to allow for an expected lower level of economic activity here so fair play.

The Bank of England’s contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund and Term Funding Schemes.

If we were to remove these temporary effects, debt at the end of April 2020 would reduce by £184.5 billion (or 9.6% percentage points of GDP) to £1,703.1 billion (or 88.1% of GDP).

Of course we know about the word “temporary” as regards Bank of England activities! However I have always thought it odd ( and frankly a bad design) where the Term Funding Scheme ended up inflating the national debt. Losses on it should be counted but there is collateral held so any net impact should be far lower than the gross.

The only flaw here is the use of an OBR scenario as I have explained above, but it is a worthy attempt none the less.

Comment

I thought I would now spin things around a little because if this was a film there would be no demand for any with titles like “Revenge of the Bond Vigilante’s”. Over the past week or two the UK has in fact increasingly been paid to borrow, so in fact we now inhabit a sort of anti matter driven Bond Vigilante universe. I have been noting for a while that the two-year UK Gilt yield has been on the edge and it has been slip-sliding away this week to -0.07%. It has been joined by the five-year which is now -0.02%.

Now let me shift to the causes of this as at first the Bond Vigilantes will be revving up on the start line.

In April 2020, the Debt Management Office (DMO) issued £51.7 billion in gilts at nominal value, raising £58.5 billion in cash. This represents an unprecedented increase in gilts issuance (at nominal value) compared with March 2020.

But the Bank of England has stepped in with its QE purchases.

At the end of April 2020, the gilt holdings of the APF have increased by £43.7 billion (at nominal value) compared with the end of March 2020,

As you can see this effectively neuters a lot of it and let me bring you right up to date. This week the UK debt management office has been working hard and issued some £16.5 billion of UK Gilts but if it was a race the Bank of England has only been a few paces back as it bought some £13.5 billion. Also the Bank of England has been driving us into negative yields by for the first time buying them as it has done on at least 4 occasions this week.

So we borrow enormously and can do so at record low yields. So for now we are “lucky” according to the definition provided by Napoleon. On the pattern so far we may see our benchmark ten-year yield go negative as well ( currently 0.14%). One consequence of this is I expect cheaper fixed-rate mortgage deals as the five-year yield is my proxy for that and it has gone negative. If the banks are as “resilient” as we keep being told they will be slashing rates. Meanwhile back in the real world we may see some mortgage rates being trimmed.

Podcast

Why are central bankers so afraid of the truth?

We find ourselves in an era where central bankers wield enormous power. There is something of an irony in this. They were given the ability to set monetary policy as a way of taking power out of the hands of politicians.This led to talk of “independence” as they set interest-rates to achieve an inflation target usually but not always of 2% per annum. Actually this is the first falsehood because we are regularly told this.

The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%

They could also tell me the moon is full of cheese but I would not believe that either. I am amazed how rarely this is challenged but price stability is clearly an inflation rate of 0%, The usual argument that this stops relative price shifts collapsed when the oil price fall of 2015/16 gave us inflation of around 0% as plainly there was a relative price shift for oil and indeed other goods. Perhaps the shrieks of “Deflation” were a type of distraction.

Next has come the way that claimed independence has morphed into collusion with the political establishment. This moves us away from the original rationale which was to take monetary policy power out of the hands of politicians to stop them manipulating it for the electoral cycle. What had apparent success which was technocratic control of interest-rates has morphed into this.

  1. Interest-Rates around 0%
  2. Large-Scale purchases of sovereign bonds
  3. Large-Scale purchases of private-sector bonds
  4. Credit Easing
  5. Purchases of equities ( for monetary policy and as a consequence of exchange-rate policy)
  6. Purchases of commercial property so far via Exchange-Traded Funds or ETFs

Not all central banks have gone all the way down the list with the Bank of Japan being the leader of the pack and who knows may go even further overnight at its unscheduled meeting? I should add as people regularly look at my back catalogue that by the time anyone in that category reads this we may see many central banks at step 6 and maybe going further. But back to my collusion point here is some evidence.

I also confirm that the Asset Purchase Facility will remain in place for the financial year 2020-21.

This is almost a throwaway sentence in the inflation remit from the Bank of England but it is in fact extremely important in two ways, and in tune with today’s theme neither of which are mentioned. The Chancellor Rishi Sunak is reaffirming that Her Majesty’s Treasury is backing the QE ( Quantitative Easing ) policies of the Bank of England which currently are steps 2 to 4 above. Next comes the issue of the amount which is huge even for these times.

The Committee voted by a majority of 7-2 for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645 billion.

The 2 dissenters voted for “More! More! More!” rather than less and I expect the extra £100 billion they voted for to be something sung about by The Undertones.

Happens all the time
Its going to happen – happen – till your change your mind
Its going to happen – happen – happens all the time

So we have a doom loop for supporters of independence as the politicians via backing any losses from QE become the masters again and the central bankers become marionettes. As so often we see Japan in the van by the way the Abenomics of Shinzo Abe appointed Governor Kuroda to the Bank of Japan pretty much as they would appoint a minister. It is the most exposed in terms of monetary policy via its 31.4 trillion Yen of equity holdings with a break-even it estimates at around 19,500 in terms of the Nikkei 225 index. Also of course an individual company in which it holds shares could fold.

Forward Guidance

This had a cacophony of falsehoods as we were promised interest-rate rises which failed to happen. In my own country it became laughable as an unemployment rate of 7% was highlighted and then unemployment rates of 6% and 5% were ignored. Then at Mansion House in June 2014 Governor Mark Carney said this.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

In fact a bit over 2 years later he cut them whilst promising to reduce them further than November to 0.1% before economic reality even reached Threadneedle Street and the latter was redacted. It is hard to believe now but many were predicting interest-rate rises by the ECB in 2019 based on Forward Guidance. Of course the US Federal Reserve did actually give it a go before retreating like Napoleon from Moscow and as we recall the role of President Trump in this I would remind you of my political collusion/control point above.

Negative Interest-Rates

This area is littered with falsehoods. In Beatles terms it took only a week for this.

Bank of Japan Governor Haruhiko Kuroda said he is not thinking of adopting a negative interest rate policy now,

to become this.

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank.1 It will cut the interest rate further into negative territory if judged as necessary.

As Hard-Fi put it.

Can’t believe it
You’re so hard to beat
Hard to beat

The new Governor of the Bank of England seems to be on the same road to Damascus. From Sky News yesterday.

Mr Bailey told MPs it was now studying how effective that cut had been as well as “looking very carefully” at the experience of other countries where negative rates had been implemented.

On the prospect of negative rates, he said: “We do not rule things out as a matter of principle.

Curious because that is exactly what people had thought he had done several times in this crisis.

Comment

There are other areas I could highlight as for example there is the ridiculous adherence to the output gap philosophy that has proved to be consistent only in its failures. But let me leave you via the genius of Christine McVie the central bankers anthem.

Tell me lies
Tell me sweet little lies
Tell me lies, tell me, tell me lies
Oh, no, no, you can’t disguise
(You can’t disguise, no, you can’t disguise)
Tell me lies
Tell me sweet little lies

Me on The Investing Channel

 

The one thing we can be sure of is that the inflation numbers are wrong

Today’s has brought us inflation data with more and indeed much more than its fair share of issues. But let me start by congratulating the BBC on this.

The UK’s inflation rate fell in April to its lowest since August 2016 as the economic fallout of the first month of the lockdown hit prices.

The Consumer Prices Index (CPI) fell to 0.8% from 1.5% in March, the Office for National Statistics (ONS) said.

Falling petrol and diesel prices, plus lower energy bills, were the main drivers pushing inflation lower.

But prices of games and toys rose, which the ONS said may have come as people occupied their time at home.

They have used the CPI inflation measure rather than the already widely ignored CPIH which the propagandists at HM Treasury are pushing our official statisticians to use. Although in something of an irony CPIH was lower this month! Also it would be better to use the much more widely accepted RPI or Retail Prices Index and the BBC has at least noted it.

Inflation as measured by the Retail Prices Index (RPI) – an older measure of inflation which the ONS says is inaccurate, but is widely used in bond markets and for other commercial contracts – dropped to 1.5% from 2.6%.

Yes it is pretty much only the establishment which makes that case about the RPI now as supporters have thinned out a lot. It also has strengths and just as an example does not require Imputed or fantasy Rents for the housing market as it uses actual prices for houses and mortgages.

So as an opener let us welcome the lower inflation numbers which were driven by this.

Petrol prices fell by 10.4 pence per litre between March and April 2020, to stand at 109.0 pence per litre, and
diesel prices fell by 7.8 pence per litre, to stand at 116.0 pence per litre……..which was the result of a 0.2% rise in
the price of electricity and a 3.5% reduction in the price of gas between March and April 2020, compared with price rises of 10.9% and 9.3% for electricity and gas over the same period last year.

Problems. Problems,Problems

Added to the usual list of these was the fact that not only did the Office for National Statistics have to shift to online price collection for obvious reasons which introduces a downwards bias there was also this.

Hi Shaun, the number of price quotes usually collected in store was about 64% of what was collected in February – so yes just over a third. This is for the local collection only.

Let me say thank you to Chris Jenkins for replying so promptly and confirming my calculations. However the reality is that there is a problem and let me highlight with one example.

prices for unavailable seasonal items such as international travel were imputed for April 2020. This imputation was calculated by applying the all-items annual growth rate to the index from April 2019.

Yes you do read that correctly and more than one-third of the index was imputed. In addition to this rather glaring problem there is the issue of the weighting being wrong and I am sure you are all already thinking about the things you have spent more on and others you have spent less on. Officially according to our Deputy National Statistician Jonathan Athow it does not matter much.

A second was to also account for lower consumption of petrol and diesel, which has been falling in price. Reducing the weight given to petrol and diesel gives a figure similar to the official CPI estimate.

Sadly I have learnt through experience that such research is usually driven by a desire to achieve the answer wanted rather than to illuminate things. If we switch to the ordinary experience I was asked this earlier on social media.

Are face masks and hand sanitiser included in the CPI basket? (@AnotherDevGuy)

I have just checked and they are not on the list. This poses a couple of issues as we note both the surge in demand ( with implications for weighting) and the rise in price seen. A couple of area’s may pick things up as for example household cleaners are on the list and judging by their suddenly popularity albeit in a new role lady’s scarves but they are on the margins and probably underweighted.

The New Governor Has A Headache

If we check the inflation remit we see that the new Governor Andrew Bailey will be getting out his quill pen to write to the new Chancellor Rishi Sunak.

If inflation moves away from the target by more than 1 percentage point in either direction, I
shall expect you to send an open letter to me, covering the same considerations set out above
and referring as necessary to the Bank’s latest Monetary Policy Report and forecasts, alongside
the minutes of the following Monetary Policy Committee meeting.

He will of course say he is pumping it up with record low interest-rates and the like. He is unlikely to be challenged much as this morning has brought news of a welcome gift he has given the Chancellor.

Negative Interest-Rates in the UK Klaxon!

For the first time the UK has issued a Gilt (bond) with a negative yield as the 2023 stock has -0.003%. So yes we are being paid to borrow money.

A marginal amount but it establishes a principle which we have seen grow from an acorn to an oak tree elsewhere.

There is trouble ahead

There are serious issues I have raised with the ONS.

How will price movements for UK houses be imputed when there are too few for any proper index? The explanation is not clear at all and poses issues for the numbers produced.

Also this feeds into another issue.

“It should be noted that the methodologies used in our consumer price statistics for many of these measures tend to give smoothed estimates of price change and will therefore change slowly.”

The suspension of the house price index below after today poses big problems for the RPI which uses them and actually as happens so often opens an even bigger can of worms which is smoothing.

In other words we are being given 2019 data in 2020 and this is quite unsatisfactory. So whilst the ONS may consider this a tactical success it is a strategic failure on the issue of timeliness for official statistics. I think all readers of this would like to know more detail on the smoothing process here as to repeat myself it goes against the issue of producing timely and relevant numbers.

Some of you may recall the disaster smoothing had on the with-profits investment industry and once people understand its use in inflation data there will be plenty of issues with it there too. My full piece for those who want a fuller picture is linked to below.

https://www.statsusernet.org.uk/t/measuring-prices-through-the-covid-19-pandemic/8326/2

Comment

As the media projects lower inflation ahead sadly the picture is seeing ch-ch-changes,

Oil prices rose for a fourth straight session on Tuesday amid signs that producers are cutting
output as promised just as demand picks up, stoked by more countries easing out of curbs
imposed to counter the coronavirus pandemic. Brent crude, climbed 25 cents or 0.7% to
$35.06 a barrel, after earlier touching its highest since April 9. (uk.reuters.com 19 May 2020)

That may not feed into the May data but as we move forwards it will. That also highlights something which may be one of the Fake News events of our time which is the negative oil price issue. Yes it did happen but since then we have seen quite a bounce as we are reminded that some issues are complex or in this instance a rigged game.

How much of other price rises the inflation numbers will pick up is open to serious doubt. Some of this is beyond the control of official statistics as they could hardly be expected to know the changes in the patterns for face masks for example. But the numbers will be under recorded right now due to factors like this from the new HDP measure.

Out of stock products have been removed where these are clearly labelled, however, there may be products out of stock that have still been included for some retailers. If the price of these items do not change, this could cause the index to remain static.

What do you think might have happened to prices if something is out of stock?

Meanwhile there is another signal that inflation may be higher ahead.

BoE Deputy Governor Ben Broadbent said it might go below zero around the end of 2020

The reality is of a complex picture of disinflation in some areas and inflation sometimes marked inflation in others.