Where next for UK house prices?

This week has opened in what by recent standards is a relatively calm fashion. Well unless you are involved in the crude oil market as prices have taken another dive. That does link to the chaos in the airline industry where Easyjet has just grounded all its fleet. Although that is partly symbolic as the lack of aircraft noise over South West London in the morning now gives a clear handle on how many were probably flying anyway. So let us take a dip in the Bank of England’s favourite swimming pool which is UK house prices.

Bank of England

It has acted in emergency fashion twice this month and the state of play is as shown below.

Over recent weeks, the MPC has reduced Bank Rate by 65 basis points, from 0.75% to 0.1%, and introduced a Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME). It has also announced an increase in the stock of asset purchases, financed by the issuance of central bank reserves, by £200 billion to a total of £645 billion.

If we look for potential effects then the opening salvo of an interest-rate cut has much less impact than it used to as whilst there are of course variable-rate mortgages out there the new mortgage market has been dominated by fixed-rates for a while now. The next item the TFSME is more significant as both its fore-runners did lead to lower mortgage-rates. Also the original TFS and its predecessor the Funding for Lending Scheme or FLS lead to more money being made available to the mortgage market. This helped net UK mortgage lending to go from being negative to being of the order of £4 billion a month in recent times. The details are below.

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 10% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).

We have seen this sort of hype about lending to smaller businesses before so let me give you this morning;s numbers.

In net terms, UK businesses borrowed no extra funds from banks in February, and the annual growth rate of bank lending to UK businesses remained at 0.8%. Within this, the growth rate of borrowing from SMEs picked up to 0.7%, whilst borrowing from large businesses remained at 0.9%.

It is quite unusual for it to be that good and has often been in the other direction.

In theory the extra bond purchases (QE) should boost the market although it is not that simple because if the original ones had worked as intended we would not have seen the FLS in the summer of 2012.

Today’s Data

It is hard not to have a wry smile at this.

Mortgage approvals for house purchase (an indicator for future lending) had continued to rise in February, reaching 73,500 . This took the series to its highest since January 2014, significantly stronger than in recent years. Approvals for remortgage also rose on the month to 53,400. Net mortgage borrowing by households – which lags approvals – was £4.0 billion in February, close to the £4.1 billion average seen over the past six months. The annual growth rate for mortgage borrowing picked up to 3.5%.

As you can see the previous measures to boost smaller business lending have had far more effect on mortgage approvals and lending. Also there is another perspective as we note the market apparently picking up into where we are now.

In terms of mortgage rates in February the Bank of England told us this.

Effective rates on new secured loans to individuals decreased 4bps to 1.81%.

So mortgages were getting slightly cheaper and the effective rate for the whole stock is now 2.36%.

The Banks

There is a two-way swing here. Help was offered in terms of a three-month payment holiday which buys time for those unable to pay although in the end they will still have to pay but for new loans we have quite a different situation. From The Guardian on Thursday.

Halifax, the UK’s biggest mortgage lender, has withdrawn the majority of the mortgages it sells through brokers, including all first-time buyer loans, citing a lack of “processing resource”.

In a message sent to mortgage brokers this morning, Halifax said it would no longer offer any mortgages with a “loan-to-value” (LTV) of more than 60%. In other words, only buyers able to put down a 40% deposit will qualify for a loan.

Other lenders have followed and as Mortgage Strategy points out below there are other issues for them and prospective buyers.

Mortgage lenders are in talks with ministers over putting the housing market in lockdown and transactions on hold, according to reports.

Lenders have been withdrawing products and restricting loan-to-values as they are unable to get valuers to do face-to-face inspections.

Property transactions are failing because some home owners in the chain are in isolation and unable to move house or complete on purchases.

Removals firms have been advised by their trade body not to operate, leaving movers in limbo.

So in fact even if the banks were keen to lend there are plenty of issues with the practicalities.

Comment

The next issue for the market is that frankly a lot of people are now short of this.

Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh ( The Adventures of Stevie V )

I have been contacted by various people over the past few days with different stories but a common theme which is that previously viable and successful businesses are either over or in a lot of trouble. They will hardly be buying. Even more so are those who rent a property as I have been told about rent reductions too if the tenant has been reliable just to keep a stream of income. Now this is personal experience and to some extent anecdote but it paints a picture I think. Those doing well making medical equipment for example are unlikely to have any time to themselves let alone think about property.

Thus we are looking at a deep freeze.

Ice ice baby
Ice ice baby
All right stop ( Vanilla Ice)

Whereas for house prices I can only see this for now.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

Podcast

A blog from my late father about the banks

The opening today is brought to you by my late father. You see he was a plastering sub-contractor who was a mild man but could be brought to ire by the subject of how he had been treated by the banks. He used to regale me with stories about how to keep the relationships going he would be forced to take loans he didn’t really want in the good times and then would find they would not only refuse loans in the bad but ask for one’s already given back. He only survived the 1980-82 recession because of an overdraft for company cars he was able to use for other purposes which they tried but were unable to end. So my eyes lit up on reading this from the BBC.

Banks have been criticised by firms and MPs for insisting on personal guarantees to issue government-backed emergency loans to business owners.

The requirement loads most of the risk that the loan goes bad on the business owner, rather than the banks.

It means that the banks can go after the personal property of the owner of a firm if their business goes under and they cannot afford to pay off the debt.

Whilst borrowers should have responsibility for the loans these particular ones are backed by the government.

According to UK Finance, formerly the British Bankers Association, the scheme should offer loans of up to £5m, where the government promises to cover 80% of losses if the money is not repaid. But, it notes: “Lenders may require security for the facility.”

In recent times there has been a requirement for banks to “Know Your Customer” or KYC for short. If they have done so then they would be able to sift something of the wheat from the chaff so to speak and would know which businesses are likely to continue and sadly which are not. With 80% of losses indemnified by the taxpayer they should be able to lend quickly, cheaply and with little or no security.

For those saying they need to be secure, well yes but in other areas they seem to fall over their own feet.

ABN AMRO Bank N.V. said Thursday that it will incur a significant “incidental” loss on one of its U.S. clients amid the new coronavirus scenario.

The bank said it is booking a $250 million pretax loss, which would translate into a net loss of around $200 million.

Well we now know why ABN Amro is leaving the gold business although we do not know how much of this was in the gold market. Oh and the excuse is a bit weak for a clearer of positions.

ABN AMRO blamed the loss on “unprecedented volumes and volatility in the financial markets following the outbreak of the novel coronavirus.”

Returning to the issue of lending of to smaller businesses here were the words of Mark Carney back as recently as the 11th of this month when he was still Bank of England Governor.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

That boasting was repeated by the present Governor Andrew Bailey. Indeed he went further on the subject of small business lending.

there’s a very clear message to the banks-, and, by the way, which I think has been reflected in things that a number of the banks have already said.

Apparently not clear enough. But there was more as back then he was still head of the FCA.

One of the FCA’s core principles for business is treating customers fairly. The system is now, as we’ve said many times this morning, in a much more resilient state. We expect them to treat customers fairly. That’s what must happen. They know that. They’re in a position to do it. There should be no excuses now, and both we, the Bank of England, and the FCA, will be watching this very
carefully.

Well I have consistently warned you about the use of the word “resilient”. What it seems to mean in practice is that they need forever more subsidies and help.

On top of that, we’re giving them four-year certainty on a considerable amount of funding at the cost of
bank rate. On top of that, they have liquidity buffers themselves, but, also, liquidity from the Bank of
England. So, they are in that position to support the economy. ( Governor Carney )

Since then they can fund even more cheaply as the Bank Rate is now 0.1%.

Meanwhile I have been contacted by Digibits an excavator company via social media.

Funding For Lending Scheme was crazy. We looked at this to finance a new CNC machine tool in 2013. There were all sorts of complicated (and illogical) strings attached and, at the end of the day, the APR was punitive.

I asked what rate the APR was ( for those unaware it is the annual interest-rate)?

can’t find record of that, but it was 6% flat in Oct 2013. Plus you had to ‘guarantee’ job creation – a typical top-down metric that makes no sense in SME world. IIRC 20% grant contribution per job up to maximum of £15k – but if this didn’t work out you’d risk paying that back.

As you can see that was very different to the treatment of the banks and the company was worried about the Red Tape.

The grant element (which theoretically softened the blow of the high rate) was geared toward creating jobs, but that is a very difficult agreement (with teeth) to hold over the head of an SME and that contribution could have been clawed back.

Quantitative Easing

There is a lot going on here so let me start with the tactical issues. Firstly the Bank of England has cut back on its daily QE buying from the £10.2 billion peak seen on both Friday and Monday. It is now doing three maturity tranches ( short-dated, mediums and longs) in a day and each are for £1 billion.

Yet some still want more as I see Faisal Islam of the BBC reporting.

Ex top Treasury official @rjdhughes

floated idea in this v interesting report of central bank – (ie Bank of England) temporarily funding Government by buying bonds directly, using massive increase in Government overdraft at BoE – “ways & means account”

Some of you may fear the worst from the use of “top” and all of you should fear the word “temporarily” as it means any time from now to infinity these days.

This could be justified on separate grounds of market functioning/ liquidity of key markets, in this case, for gilts/ Government bonds. There have been signs of a lack of demand at recent auctions…

Faisal seems unaware that the lack of demand is caused by the very thing his top official is calling for which is central bank buying! Even worse he seems to be using the Japanese model where the bond market has been freezing up for some time.

“more formal monetary support of the fiscal response will be required..prudent course of action is yield curve control, where Bank can create fiscal space for Chancellor although if tested this regime may mutate into monetary financing”

Those who have followed my updates on the Bank of Japan will be aware of this.

Comment

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks. But it seems to get lost as the promises of more business lending now morph into us seeing more and cheaper mortgage lending later. That boosts the banks and house prices in what so far has appeared to be a never ending cycle. Meanwhile the Funding for Lending Scheme started in the summer of 2012 so I think we should have seen the boost to lending to smaller businesses by now don’t you?

Meanwhile I see everywhere that not only is QE looking permanent my theme of “To Infinity! And Beyond” has been very prescient. No doubt we get more stories of “Top Men” ( or women) recommending ever more. Indeed it is not clear to me that a record in HM Treasury and the position below qualifies.

he joined the International Monetary Fund in 2008 where he headed the Fiscal Affairs Department’s Public Finance Division and worked on fiscal reform in a range of crisis-hit advanced, emerging, and developing countries.

 

 

Spend! Spend! Spend!

The weekend just passed was one which saw one of the economic dams of our time creak and then look like it had broken. This was due to the announcements coming out of Germany which as regular readers will be aware has a debt brake and had been planning for a fiscal surplus.

Under Germany’s so-called debt brake rule, Berlin is allowed to take on new debt of no more than 0.35% of economic output, unless the country is hit by a natural disaster or other emergencies. ( Reuters)

Actually the economic slow down in 2019 caused by the trade war was pulling it back towards fiscal balance and what it taking place right now would have caused a deficit anyway. But now it seems that the emergency clause above is being activated.

Germany is readying an emergency budget worth more than 150 billion euros ($160 billion) to shore up jobs and businesses at risk from the economic impact of the coronavirus outbreak, the finance minister said on Saturday.

Government sources told Reuters hundreds of billions in additional backing for the private sector would be raised, as Finance Minister Olaf Scholz said a ceiling on new government debt enshrined in the country’s constitution would be suspended due to the exceptional circumstances.

Putting that into context it is around 5% of Germany’s GDP in 2019 and I am stating the numbers like that because we have little idea of current GDP other than the fact there will be a sizeable drop. It then emerged that there was more to the package.

According to senior officials and a draft law seen by Reuters, the package will include a supplementary government budget of 156 billion euros, 100 billion euros for an economic stability fund that can take direct equity stakes in companies, and 100 billion euros in credit to public-sector development bank KfW for loans to struggling businesses.

On top of that, the stability fund will offer 400 billion euros in loan guarantees to secure corporate debt at risk of defaulting, taking the volume of the overall package to more than 750 billion euros.

As you can see we end up with intervention on a grand scale with the total being over 22% of last year’s economic output or GDP. This will lead to quite a change in the national debt dynamics which looked on their way to qualifying under the Stability and Growth Pact or Maastricht rules. This is because it was 61.2% of GDP at the end of the third quarter of last year which now looks a case of so near and so far.

Bond Market

There were times when such an audacious fiscal move would have the bond market creaking and yields rising. In fact the ten-year yield has dropped slightly this morning to -0.37%. Indeed even the thirty-year yield is at -0.01% so Germany is either being paid to borrow or is paying effectively nothing.

This is being driven by the purchases of the ECB or European Central Bank and as the Bundesbank seems not to have updated its pages then by my maths we will be seeing around 30 billion Euros per month of German purchases. Also let me remind you that the risk is not quite what you might think.

This implies that 20% of the asset purchases under the PSPP will continue to be subject to a regime of risk sharing, while 80% of the purchases will be excluded from risk sharing. ( Bundesbank)

The situation gets more complex as we note Isabel Schnabel of the ECB Governing Council put this out on social media over the weekend.

The capital key remains the benchmark for sovereign bond purchases, but flexibility is needed in order to tackle the situation appropriately.

That will be particularly welcomed by Italy as other ECB policy makers try to undo the damage created by the “bond spreads” comment of President Lagarde. Although you may note that most of the risk will be with the Bank of Italy.

Also as a German she did a bit of cheer leading for her home country.

The success of our measures hinges on what happens in fiscal policy. This is a European issue which needs a European solution. No country can be indifferent to what happens in another European country – not only because of solidarity, but also for economic reasons.

Some might think she has quite a cheek on the indifference point as that is exactly how countries like Greece described Germany. Still I also think the ECB has plenty of tools but maybe not from the same perspective.

The ECB is in the comfortable position of having a large set of tools, none of which has been used to its full extent

QE

It was only last Thursday that I was pointing out that I expected QE to go even more viral and last night it arrived at what is in geographical terms one of the more isolated countries.

The Monetary Policy Committee (MPC) has decided to implement a Large Scale Asset Purchase programme (LSAP) of New Zealand government bonds……..The Committee has decided to implement a LSAP programme of New Zealand government bonds. The programme will purchase up to $30 billion of New Zealand government bonds, across a range of maturities, in the secondary market over the next 12 months. The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low.

You can almost hear the cries of “The Precious! The Precious!”

Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding.

Which follows on from this last week.

“To support credit availability, the Bank has decided to delay the start date of increased capital requirements for banks by 12 months – to 1 July 2021. Should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary.”

This reminds me of one of my themes from back in the day that bank capital requirement changes were delayed almost hoping for something to turn up. Albeit of course they had no idea a pandemic would occur.

Let us move on noting for reference purposes that the ten-year All Black yield is 1.46%.

The US

There are some extraordinary numbers on the way here according to CNBC.

Administration statements over the past few days point to something of the order of $2 trillion in economic juice. By contrast, then-President Barack Obama ushered an $831 billion package through during the financial crisis.

Indeed they just keep coming.

That type of fiscal burden comes as the government already has chalked up $624.5 billion in red ink through just the first five months of the fiscal year, which started in October. That spending pace extrapolated through the full fiscal year would lead to a $1.5 trillion deficit, and that’s aside from any of the spending to combat the corona virus.

At the moment we know something is coming but not the exact size as debate is ongoing in Congress but we can set some benchmarks.

A $2 trillion deficit, which seems conservative given the current scenario, would push deficit to GDP to 9.4%. A $3 trillion shortfall, which seems like not much of a stretch, would take the level to 14%.

Comment

The headline today for those unaware was from Viv Nicholson back in the day after her husband had won the pools. But we see something of a torrent of fiscal action on its way oiled by an extraordinary amount of sovereign bond buying by central banks. For example the Bank of England will buy an extra £5.1 billion today in addition to its ongoing replacement of its holdings of a matured bond.

On the other side of the coin is the scale of the economic contraction ahead. Below are the numbers for the German IFO which we can compare with the fiscal response above albeit that I suggest we treat them as a broad brush.

“If the economy comes to a standstill for two months, costs can range from 255 to 495 billion euros, depending on the scenario. Economic output then shrinks by 7.2 to 11.2 percentage points a year, ”says Fuest. In the best scenario, it is assumed that economic output will drop to 59.6 percent for two months, recover to 79.8 percent in the third month and finally reach 100 percent again in the fourth month. “With three months of partial closure, the costs already reach 354 to 729 billion euros, which is a 10.0 to 20.6 percentage point loss in growth,” says Fuest.

Podcast

 

 

What can the UK do in the face of an economic depression?

We are facing quite a crisis and let us hope that we will end up looking at a period that might have been described by the famous Dickens quote from A Tale of Two Cities.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.

The reason I put it like that is because we have examples of the worst of times from food hoarders to examples of an extreme economic slowdown. On a personal level I had only just finished talking to a friend who had lost 2 of his 3 jobs when I passed someone on the street talking about her friend losing his job. Then yesterday I received this tweet.

Funny, Barclays quoted me 18% interest on a £10k business loan this morning to keep my employees paid, unfortunately the state will now need to pay them. Bonkers! ( @_insole )

If we look at events in the retail and leisure sector whilst there are small flickers of good news there are large dollops of really bad news. Accordingly this is a depression albeit like so many things these days it might be over relatively quickly for a depression in say a few months. Of course the latter is unknown in terms of timing. But people on low wages especially are going to need help as not only will they be unable to keep and feed themselves they will be forced to work if they can even if they are ill. In terms of public health that would be a disaster.

Also I fear this from the Bank of England Inflation Survey this morning may be too low.

Question 2b: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, remaining the same as in November.

Whilst there are factors which will reduce inflation such as the lower oil price will come into play there are factors the other way. Because of shortages there will be rises in the price of food and vital purchases as illustrated below from the BBC.

A pharmacy which priced bottles of Calpol at £19.99 has been criticised for the “extortionate” move.

A branch of West Midlands-based chain Jhoots had 200ml bottles of the liquid paracetamol advertised at about three times its usual price.

The UK Pound

If we now switch to financial markets we have seen some wild swings here. The UK Pound always comes under pressure in a financial crisis because of our large financial sector and as I looked at on Wednesday we are in a period of King Dollar strength. Or at least we were as it has weakened overnight with the UK Pound £ bouncing to above US $1.18 this morning. Now with markets as they are we could be in a lot of places by the time you read this but for now the extension of the Federal Reserve liquidity swaps to more countries has calmed things.

Perhaps we get more of a guide from the Euro where as discussed in the comments recently we have been in a poor run. But we have bounced over the past couple of days fro, 1.06 to 1.10 which I think teaches us that the UK Pound £ is a passenger really now. We get hit by any fund liquidations and then rally at any calmer point.

The Bank of England

It held an emergency meeting yesterday and then announced this.

At its special meeting on 19 March, the MPC judged that a further package of measures was warranted to meet its statutory objectives.  It therefore voted unanimously to increase the Bank of England’s holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion to a total of £645 billion, financed by the issuance of central bank reserves; and to reduce Bank Rate by 15 basis points to 0.1%.  The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME).

Let me start with the interest-rate reduction which is simply laughable especially if we note what the business owner was offered above. One of my earliest blog topics was the divergence between official and real world interest-rates and now a 0.1% Bank Rate faces 40% overdraft rates. Next we have the issue that 0.5% was supposed to be the emergency rate so 0.1% speaks for itself. Oh and for those wondering why they have chosen 0.1% as the lower bound ( their description not mine) it is because they still feel that the UK banks cannot take negative interest-rates and is nothing to do with the rest of the economy. So in an irony the banks are by default doing us a favour although we have certainly paid for it!

QE

Let us now move onto this and the Bank of England is proceeding at express pace.

Operations to make gilt purchases will commence on 20 March 2020 when the Bank intends to purchase £5.1bn of gilts spread evenly between short, medium and long maturity buckets.  These operations will last for 30 minutes from 12.15 (short), 13.15 (medium) and 14.15 (long).

But wait there is more.

Prior to the 19 March announcement the Bank was in the process of reinvesting of the £17.5bn cash flows associated with the maturity on 7 March 2016 of a gilt owned by the APF.

As noted above, and consistent with supporting current market conditions, the Bank will complete the remaining £10.2bn of gilt purchases by conducting sets of auctions (short, medium, long maturity sectors) on Friday 20 March and Monday 23 March (i.e. three auctions on each day).

So there will be a total of £10.2 billion of QE purchases today and although it has not explicitly said so presumably the same for Monday. As you can imagine this has had quite an impact on the Gilt market as the ten-year yield which had risen to 1% yesterday lunchtime is now 0.59%. The two-year yield has fallen to 0.08% so we are back in the zone where a negative Gilt yield is possible. Frankly it will depend on how aggressively the Bank of England buys its £200 billion.

The next bit was really vague.

The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME)……

Following today’s special meeting of the MPC the Initial Borrowing Allowance for the TFSME will be increased from 5% to 10% of participants’ stock of real economy lending, based on the Base Stock of Applicable Loans.

Ah so it wasn’t going to be the triumph they told us only last week then? I hope this will do some good but the track record of such schemes is that they boost the banks ( cheap liquidity) and house prices ( more and cheaper mortgage finance).

We did also get some humour.

As part of the increase in APF asset purchases the MPC has approved an increase in the stock of purchases of sterling corporate bonds, financed by central bank reserves.

Last time around this was a complete joke as the Bank of England ended up buying foreign firms to fill its quota. For example I have nothing against the Danish shipping firm Maersk but even they must have been surprised to see the Bank of England buying their bonds.

Comment

There are people and businesses out there that need help and in the former case simply to eat. So there are real challenges here because if Bank of England action pushes prices higher it will make things worse. But the next steps are for the Chancellor who has difficult choices because on the other side of the coin many of the measures above will simply support the Zombie companies and banks which have held us back.

Also this is a dreadful time for economics 101. I opened by pointing out that unemployment will rise and maybe by a lot and so will prices and hence inflation. That is not supposed to happen. Then the UK announces more QE and the UK Pound £ rises although of course it is easier to state who is not doing QE now! I guess the Ivory Towers who so confidently made forecasts for the UK economy out to 2030 are now using their tippex, erasers and delete buttons. Meanwhile in some sort of Star Trek alternative universe style event Chris Giles of the Financial Times is tweeting this.

In a moment of irritation, am amazed at how little UK public science has learnt from economics – making mistakes no good economist has made in 50 years Economists have been beating themselves up for a decade Shoe now on other foot…

Podcast

 

Fiscal Policy will now take centre stage as France has shown

One of our themes is now fully in play. We have observed over the past year or two a shift in establishment thinking towards fiscal policy. This had both bad and good elements. The bad was that it reflected a reality where all the extraordinary monetary policies had proved to be much weaker than the the claims of their supporters and even worse for them were running out of road. The current crisis has reminded us of this as we have had, for example, two emergency moves from the US Federal Reserve already, in its role as a de facto world central bank.

A more positive factor in this has been the change we have been observing in bond yields. We can get a handle on this by looking back at the world’s biggest which is the US Treasury Bond market. Back in the autumn of 2018 when worlds like “normalisation” ans phrases like “Quantitative Tightening” were in vogue the benchmark ten year yield saw peaks around 3.15%. Basically it then spent most of a year halving before rallying back to 1.9% at the end of last year and beginning of this. But this move took place in spite of the fact that we have the Trump Tax Boost which was estimated to have an impact of the order of one trillion US Dollars. I mention this because as well as the obvious another theme was in play which was that the Ivory Towers were wrong-footed yet again. The Congressional Budget Office has had to keep reducing its estimate of debt costs as the rises it expected turned into falls. Also whilst I am on this subject I am not sure this from January is going to turn out so well!

In 2020, inflation-adjusted GDP is projected to grow by 2.2 percent, largely because
of continued strength in consumer spending and a rebound in business fixed investment. Output is
projected to be higher than the economy’s maximum sustainable output this year to a greater degree
than it has been in recent years, leading to higher inflation and interest rates after a period in which
both were low, on average.

Best of luck with that.

Meanwhile we have seen a fair bit of volatility in bond yields but the US ten-year is 0.8% as I type this. Even the long bond ( 30 years) is a relatively mere 1.4%.

Thus borrowing is very cheap and only on Sunday night the US Federal Reserve arrived in town and did its best to keep it so.

 over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.

Step Forwards France

There was an announcement yesterday evening by President Macron which was announced in gushing terms by Faisal Islam of the BBC.

The €300 billion euro fiscal support package announced by Macron for the French economy, to ensure businesses dont go bust and taxes/ charges suspended, is worth about 12% of its GDP – in UK terms that would mean £265 billion…

This morning the French Finance Minster has given some different numbers.

French measures to help companies and employees weather the coronavirus storm will be worth some €45bn, the country’s finance minister Bruno Le Maire said on Tuesday. ( Financial Times)

He went on to give some details of how it would be spent.

He told RTL radio the package of financial aid, which includes payments to temporarily redundant workers and deferments of tax and social security bills, would help “the economy to restart once the corona virus epidemic is behind us”. Previously he had referred to “tens of billions of euros”.

Now let us look at the previous position for France. We had previously note that France was in the middle of a fiscal nudge anyway as the first half of 2019 saw quarterly deficits of 3.2% and 3.1% of GDP respectively, The third quarter was back within the Maastricht rules as it fell to 2.5% of GDP but we still had a boost overall and as you can see below the national debt to GDP ratio went over 100%

At the end of Q3 2019, Maastricht’s debt reached €2,415.1 billion, up €39.6 billion in comparison to Q2 2019. It accounted for 100.4% of gross domestic product (GDP), 0.9 points higher than last quarter. Net public debt increased more moderately (€+15.0 billion) and accounted for 90.3 % of GDP.

Of course debt to GDP numbers have gone out of fashion partly because the “bond vigilantes” so rarely turn up these days. There was a time that a debt to GDP ratio above 100% would have them flying in but they restricted their flying well before the Corona Virus made such a move fashionable. The French ten-year yield is up this morning but at 0.27% is hardly a deterrent in itself to more fiscal action. However whilst it is still as low as it has ever been before this stage of the crisis a thirty-year yield of 0.8% is up a fair bit on the 0.2% we saw only last week. Another factor in play is this.

Third, we decided to add a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes. ( ECB )

Whilst only a proportion of the buying we can expect monthly purchases of French government bonds to rise from the previous 4 billion Euros or so and accordingly the total to push on from 434.4 billion. Also whilst President Lagarde was willing to express a haughty disdain for “bond spreads” I suspect the former French Finance Minister would be charging to the rescue of France if necessary.

One feature of French life is that taxes are relatively high.

The tax-to-GDP ratio varies significantly between Member States, with the highest share of taxes and social
contributions in percentage of GDP in 2018 being recorded in France (48.4%), Belgium (47.2%) and Denmark
(45.9%), followed by Sweden (44.4%), Austria (42.8%), Finland (42.4%) and Italy (42.0%). ( Eurostat )

Short Selling Bans

France along with some other European nations announced short-selling bans this morning which stop investors selling shares they do not own.

#BREAKING French market regulator bans short-selling on 92 stocks: statement ( @afp )

I pointed out that these things have a track record of failure

These sort of things cause a market rally in the short-term but usually wear off in a day or two.

The initial rally to over 4000 on the CAC 40 index soon wore off and we are now unchanged on the day having at one point being 100 points off. Of course some policy work will be writing a paper reminding us of the counterfactual.

Comment

I am expecting a lot more fiscal action in the next few days. The French template is for a move a bit less than 2% of GDP. That will of course rise as GDP falls.

The French government was assuming the economy would shrink about 1 per cent this year, instead of growing more than 1 per cent as previously predicted, Mr Le Maire said. ( Financial Times)

Frankly that looks very optimistic right now. The situation is fast moving as doe example Airbus which only yesterday expected to remain open announced this today.

Following the implementation of new measures in France and Spain to contain the COVID-19 pandemic, Airbus has decided to temporarily pause production and assembly activities at its French and Spanish sites across the Company for the next four days. This will allow sufficient time to implement stringent health and safety conditions in terms of hygiene, cleaning and self-distancing, while improving the efficiency of operations under the new working conditions.

Let me now shift to the other part of the package.

Mr Le Maire said ammunition to prop up the economy also included €300bn of French state guarantees for bank loans to businesses and €1tn of such guarantees from European institutions. ( FT )

The problem is how will this work in practice? The numbers sound grand but for example the Bank of England announced up to £290 billion for SMEs only last week which everyone seems to have forgotten already! One bit that seemed rather devoid of reality to me at the time was this.

The release of the countercyclical capital buffer will support up to £190bn of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.

Returning to pure fiscal policy I am expecting more of it and would suggest it is aimed at two areas.

  1. Supporting individuals who through not fault of their own have seen incomes plunge and maybe disappear.
  2. Similar for small businesses and indeed larger ones which are considered vital.

Just for clarity that does not mean for banks and the housing market where such monies have a habit of ending up.

Meanwhile a country which badly needs help is still suffering from the “ECB not here to close bond spreads” of Christine Lagarde last week as its ten-year yield has risen to 2.3%. Her open mouth operation has undone a lot of ECB buying.

Unsecured credit and mortgage lending market will be the winners after the Bank of England move

Today has arrived with an event we have been expecting but the timing was a few days early. Those walking past the Bank of England building in Threadneedle Street early this morning may have got a warning from the opening of Stingray being played on the wi-fi stream.

Stand by for action!

Anything can happen in the next 30 minutes

Before the equity and Gilt markets opened it announced this.

At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. …..The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.

So we see that yesterday morning’s equity market falls put the Bank of England into a state of panic. We also see why the UK Pound £ was weak on the foreign exchanges late yesterday as the news seems to have leaked giving some an early wire. The “improvement” announced by Governor Carney of voting the night before should be scrapped. But as we look at the statement the “help to” suggests a lack of conviction and was followed by this.

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

Okay the first sentence covers a lot of ground. Firstly it implicitly agrees with our theme that banks struggle to reduce interest-rates for ordinary depositors as we approach 0%, we have seen this in places with negative interest-rates. That also means that there is an opportunity to give the banks known under the code phrase “The Precious! The Precious!” at the Bank of England yet another subsidy estimated at the order of £100 billion.

Term Funding Scheme

We have had one of these before as it was initially introduced the last time the Bank of England panicked back in August 2016. It too like its predecessor the Funding for Lending Scheme was badged as being for small and medium-sized businesses but the change of name to the acronym TFSME gives us the clearest clue as to its success. after all successes like Coca-Cola keep the same name whereas leaky nuclear reprocessing plants like Windscale get called Sellafield.

So let me go through the scheme firstly with the Bank of England rhetoric and secondly with what happened last time.

help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;

Mortgage rates fell to record lows providing yet another boost to house prices, building companies and estate agents.

provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;

Unsecured lending went through the roof going on a surge that has continued as can you think of anything else in the economy growing at 6% per annum? You do not need to take my word for it as the Bank of England cake trolley will not be going near whoever wrote this in the latest Money and Credit report.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

Let me now give you the numbers for business borrowing. Now the FLS and the first TFS are now flowing anymore but the numbers are in fact better than hat we sometimes saw when they were.

Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

Oh and in line with the dictum that old soldiers never die they just fade away if you look at the Bank of England balance sheet the Term Funding Scheme still amounts to £107 billion.

Numbers bingo!

We can see this from two perspectives as a rather furious soon to be Governor of the Bank of England Andrew Bailey was given this to announce.

The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.

Once I had stopped laughing at the ridiculousness of this number I had two main thoughts. Firstly I guess he had to announce something as he had been robbed of rewarding the government with an interest-rate cut later this month. But next remember how we keep being told how we have more secure and indeed “resilient” banks? That seems to have morphed into this.

To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect.  The rate had been 1% and had been due to reach 2% by December 2020.

So yet another disaster for Forward Guidance! It actively misleads…

Comment

After all the Forward Guidance from Bank of England Governor Mark Carney about higher interest-rates he is going to leave them lower ( 0.25%) than when he started ( 0.5%). That about sums up his term in office as those like the Financial Times who called him a “rock star” Governor hope we have shirt memories. Also I have had many debates on social media with supporters of the claims that the Bank of England is politically independent. After an interest-rate cut to record lows on UK Budget Day I suspect they will be very quiet today. After all even Yes Prime Minister did not go quite that far! Indeed the Governor confirmed it in his press conference.

“We have coordinated our moves with the Chancellor in the Budget”

Actually there was also a Dr.Who style vibe going on as we had two Governors at one press conference.

More fundamentally there is the issue that interest-rate cuts at these levels may even make things worse. I am afraid our central planners have little nous and imagination and go for grand public gestures rather than real action. After all if you are short on staff because they are quarantined due to the Corona Virus what use is 0.5% off your borrowing costs? The latter of course assumes the banks pass it on.

As to ammunition left well the present Governor has established the lower bound for them at 0.1% ( hoping we will forget he previously claimed it was 0.5% before cutting below it). Will that survive him? It is hard to say because the real issue here is not you or I ot even business it is “The Precious” who they fear cannot take lower rates. That is the real reason for all the Term Funding Schemes and the like. However Monday did bring a curiosity as the Bank of England bought a Gilt with a yield of -0.025% so maybe it is considering plunging below zero.

Meanwhile there was something else curious today and the PR office of the Bank of England in an unusual turn may be grateful to me for pointing it out, But this was the sort of thing that used to make it cut interest-rates.

Gross domestic product (GDP) showed no growth in January 2020……The economy continued to show no growth overall in the latest three months.

No-one but the most credulous ( Professors of economics and those hoping to or previously having worked at the Bank of England) will believe that was the cause but it is a curious turn of events.

Meanwhile let us look at the term of Mark Carney via some music. Remember when he mentioned Jake Bugg? Well he would hope we would think of today’s move as this.

But that’s what happens
When it’s you who’s standing in the path of a lightning bolt

Whereas most will be humming The Smiths.

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

Central Banks will demand even more powers in response to this crisis

Yesterday was quite something with the extraordinary oil price decline topped off by a more than 2000 point fall in the Dow Jones Industrial Average in the United States. I know that it is an outdated and flawed index but nonetheless it felt symbolic. So far today things are quieter with some bounce back in equity markets and the reverse in bond markets. But we have some familiar themes at play so let us get straight to them.

Japan

The Bank of Japan has been at the outer limit of monetary policy for some time now as The Mainichi pointed out earlier today.

The BOJ already owns around 50 percent of outstanding Japanese government bonds of about 1,000 trillion yen ($9.73 trillion), while pledging to buy 80 trillion yen of them per year. It has also bought nearly exchange traded funds.

Further cuts in the negative interest rate of minus 0.1 percent, which have pushed down longer-term interest rates for years, are expected to snap the profitability of the banking sector and hurt returns for insurers and pensions of private companies.

They have got a little excited on the issue of equity purchases as I am not sure what a nearly exchange traded fund is? Let me help out by pointing out that the Bank of Japan purchased some 101.4 billion Yen of equity ETFs both yesterday and today. Today’s purchases have a different perspective because the market closed higher, this is because the Bank of Japan has established a principle of only buying on down days. In this present crisis it has abandoned that twice so far. In addition its “clip size” has risen from 70.4 billion Yen to 101.4 billion. So far in March it has bought around 410 billion Ten of equities.

So Andrea True Connection continues to be playing from its loudspeakers.

More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it

It also buys commercial property ETFs although it is much less enthusiatic about this and has only bought 3.6 billlion Yen of them this month. Frankly I am not sure what these particular purchases are to achieve but they continue.

Fiscal Policy

I regularly point out that fiscal policy has been oiled and facilitated by the low level of bond yields. As The Mainichi points out above The Tokyo Whale has purchased half the Japanese bond market meaning that at many maturities Japan is being paid to borrow and even the thirty-year yield is a mere 0.3%. Thus it helps this.

President Donald Trump on Monday said he will be taking “major” steps to gird the U.S. economy against the impact of the spreading coronavirus outbreak, while Japan’s government plans to spend more than $4 billion in a second package of steps to cope with fallout from the virus. ( Reuters)

If we stay with Japan for now I note that as I looked this up there were references to a US $122 billion stimulus as recently as December. This is a problem as Japan keeps needing more fiscal stimuli and it is a particular issue right now. This is because last year’s rise in the Consumption Tax was supposed to improve the fiscal position whereas all we have seen since is stimuli or moves in the opposite direction.

This is a recurring theme in Japan as we mull the consequences of such extreme monetary action. Let me give you another example of a backwash for the control agenda. The policy of Yield Curve Control because it aims at a specific yield target for Japanese Government Bonds has been keeping yields up and not down in recent times.

The Euro area

It was only last week that I suggested the ECB could become the next major central bank to buy equities and thus I noted this overnight from a former Vice-President.

Should the central banks’ mandate be extended to explicitly include financial stability, giving them more instruments to try to contain asset prices booms instead of just “mopping-up after the crash”. Policy reviews are ongoing and everything must be on the table this time.

That is Vitor Constancio saying “everything must be on the table this time”.

I doubt he meant this but something has turned up today that will require ECB support.

ROME (Reuters) – Payments on mortgages will be suspended across the whole of Italy after the coronavirus outbreak, Italy’s deputy economy minister said on Tuesday.

“Yes, that will be the case, for individuals and households,” Laura Castelli said in an interview with Radio Anch’io, when asked about the possibility.

Italy’s banking lobby ABI said on Monday lenders representing 90% of total banking assets would offer debt moratoriums to small firms and households grappling with the economic fallout from Italy’s coronavirus outbreak.

Yesterday we noted that businesses were going to get a debt payment moratorium and today we see mortgages will also be on the list. This will immediately lead to trouble for the banks and of course the Italian banks were in enough trouble as it is. Even the bank considered the strongest Unicredit has a share price 23% lower than a year ago and of course there are all the zombies.

This also impacts at a time when Italian bond yields have risen albeit to a mere 1.3% for the ten-year benchmark. But even that leads to worries as Reuters point out.

Despite the introduction of tougher banking regulation and oversight in the wake of the euro zone debt crisis a decade ago, the doom loop remains.

Italian banks held 388.22 billion euros of Italian government bonds in their portfolios at the end of January, around a sixth of the country’s public debt.

“The feedback loop between the sovereign and banks in Italy is alive and well, and both sovereign and bank debt should trade in lock-step,” said Antoine Bouvet, senior rates strategist at ING.

Mentions of something that was in danger of being forgotten are on the rise so let me point out this from the ECB website.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

There are other issues here as plainly Italy is about to blast through the Stability and Growth Pact or Maastricht fiscal rules. Also I note that the European Stability Mechanism would be involved as why put things on balance sheet when you can tuck them away in a Special Purpose Vehicle or SPV? But the ECB will be busy and let me throw a snack into the debate, might it support bank shares?

Comment

There is quite a bit to consider here and the news keeps coming on this front.

#JAPAN SEEN MULLING EXPANSION OF ETF BUYING PROGRAM, KYODO SAYS – BBG ( @C.Barraud )

On and on it goes with so few ever questioning why it is always more needed? At some point you need an audit of progress so far and successes and failures. Whereas obvious failures get swept under the carpet. Let me give you an example of this from a Sweden which had negative interest-rates for several years but has now climbed back to the giddy heights of 0%. Yet Sweden Statistics reports this.

In recent years, households have made large net deposits in bank accounts despite low interest rates.

Then there is this as well.

Households’ net purchases of new tenant-own apartments amounted to SEK 21 billion in the fourth quarter of 2019, which is the highest value ever in a single quarter.

This returns us to the side-effects of such policies which is where we came in looking at Japan which has loads of them.

But ever quick to use a crisis to expand their powers the central bankers will be greedily using this crisis to do so. So we can expect more mortgage moratorium’s which of course will require even more help for “The Precious”.

Just as I was posting this it seems to be happening already.

BREAKING: RBS confirms it will give a three-month mortgage payment holiday to homeowners impacted by coronavirus. Follows Italy saying mortgage payments will be suspended. ( @gordonrayner )

I wonder if the Bank of England has been moving behind the scenes? Meanwhile it too moved on yesterday as one of the bonds it purchased in its Operation Twist QE purchases was at a negative yield.