The unreliable boyfriend has tripped over his own feet again

Today brings the “unreliable boyfriend” centre stage as we come to the moment when he gave Forward Guidance that he will raise interest-rates. Of course he would not be the unreliable boyfriend if things did not look very different by the time the event arrived! Sadly that has been the history of Bank of England Forward Guidance under Governor Mark Carney which has been anything but. From the initial false start of flagging up an unemployment rate of 7% that was supposed to be like the “train in the distance” sung about by Paul Simon but actually then arrived at high-speed it has been an error strewn path. Reuters have put it like this.

The BoE governor’s guidance on the path for interest rates has repeatedly been knocked off course by surprises in the economy, hence the accusation of unreliability from a lawmaker.

Care is needed as there are always going to be surprises and in a way that is a good thing as fans of the novel Dune will know. But there are themes that can be got right and sadly Governor Carney grasped the wrong stick right from the beginning. If we think back to yesterday’s article on Japan its unemployment rate of 2.5% is relevant here as tucked away in the original Forward Guidance was the Bank of England saying the natural rate of unemployment ( which some take as the equilibrium one and others even as a guide to full employment) was 6.5% The utter hopelessness of this view is shown by looking at the UK unemployment rate or even worse the Japanese one. Or if you prefer the natural rate in the UK has been 6%,5.5% then 4.5% and more recently 4.25% which illustrates the words of Oliver Hardy.

That’s another fine mess you’ve got me into

Sadly I do see teachers on social media referring to such views at the Bank of England and fear for what their students are being taught.

Also of course the media do need to keep their place in the pecking order for questions at press conferences and interviews which I think we should keep in mind as we read this from Reuters.

Drab data show Bank of England’s Carney a ‘sensitive boyfriend’

The data view was highlighted here.

Carney’s highlighting last month of “mixed” economic signals shocked investors who had bet the BoE would raise rates to a new post-financial-crisis high of 0.75 percent on May 10.

Since then, almost all the gauges of Britain’s economy have disappointed. Financial markets now point to a less than 10 percent chance of a rate hike on Thursday, compared with 90 percent a month ago.

Britain’s economy barely grew in the first three months of 2018 and bad weather was not the only reason why, official statisticians said last month.

Today’s data

The opening salvo was again drab.

In March 2018, total production was estimated to have increased by 0.1% compared with February 2018.Manufacturing fell by 0.1% in March 2018 compared with February 2018.

Maybe the weather had an impact but not a large one according to our official statisticians. If we look for some perspective we find ourselves continuing the recent theme of a slowing down economy.

>In the three months to March 2018, the Index of Production increased by 0.6% compared with the three months to December 2017, due mainly to a rise of 2.5% in energy supply; this was supported by rises in mining and quarrying of 2.2% and manufacturing of 0.2%.

It is kind of an irony that we find a positive impact from the weather! Although of course for domestic consumers this is a cost and a likely subtraction from other output for those whose budgets are tight.

If we step back and consider the credit crunch era then unless you raise the counterfactual to heroic levels then the £435 billion of QE and an emergency interest-rate of 0.5% seem to have failed here.

Since then, both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 5.1% and 0.8% respectively in the three months to March 2018.

Construction

The news here was better but only in the context of not being quite as bad as we had previously thought.

Construction output continued its recent decline in the three-month on three-month series, falling by 2.7% in March 2018, the biggest fall seen in this series since August 2012.

Here there was much more likely to have been an adverse impact from the weather and the recent pattern has been grim. However the overall picture is rather different to that shown by the production sector.

Construction output peaked in December 2017, reaching a level that was 30.3% higher than the lowest point of the last five years, April 2013. Despite the month-on-month decrease in March 2018, construction output remains 22.7% above this level.

If we consider monetary policy then supporters of the QE era have a case for arguing that there was a boost here from easy monetary policy and perhaps the Funding for Lending Scheme which did so much to reduce mortgage rates. So the implicit bank bailout did help one sector perhaps. The catch comes with the slow down as it was already happening before the Bank Rate rise last November and of course the Term Funding Scheme only ended in February. Even in the wildest dreams of Mark Carney and he has had some pretty wild ones monetary policy does not act that quickly.

Trade

Here the news was ( fortunately) better.

The UK total trade deficit (goods and services) narrowed £0.7 billion to £6.9 billion in the three months to March 2018, due mainly to falling goods imports from non-EU countries.

Even data over 3 months is not entirely reliable but the longer data was better too.

In the 12 months to March 2018, the total trade deficit narrowed £13.3 billion to £26.6 billion due to 9.2% export growth exceeding 6.4% growth for imports.

There is some genuine good news for the UK economy there in the growth achieved by our exporters. Because of our long-running trade deficit we need export growth to exceed import growth for us to make any progress. Also I am pleased to point out that earlier this week news appeared that confirmed my theme that our services exports have been badly measured and if we put more effort into recording them we were likely to get some good news.

provisional revisions to the UK trade balance range from a downward revision of £1.2 billion to the total trade deficit (goods and services) in 2001 to an upward revision of £9.8 billion in 2016 (Table 1). The £9.8 billion upward revision to the total trade deficit in 2016 means the deficit has been revised from £40.7 billion to £30.9 billion

As you can see the ch-ch-changes make quite a difference. If we factor in the impact of the lower UK Pound £ since the EU leave vote the narrative shifts somewhat. My opinion is that we have had long-running deficits but they have not been as bad as the numbers produced. As ever care is needed because do we really know this even now.

The main driver of the revision in 2016 came from improvements made to methods used to estimate net spread earnings, which feed into exports of services. The net spread earnings improvement revised trade in services exports back to 2004.

Well done to the Office for National Statistics for making a new effort something I asked for in my response to the Charlie Bean review. Of course the former Bank of England Governor Mervyn King was always keen on some rebalancing although it did not happen on poor Mervyn’s watch. By poor I do not mean financially poor as I am sure Baron King of Lothbury will be enjoying the benefits of his RPI-linked pensions as well as his other work.

Comment

The simple fact is that if we look at past Forward Guidance from the Bank of England then its conventional view would be moving towards a Bank Rate cut rather than a rise today. So yet again it has tripped over its own feet. The only factor heading in the other direction is the higher price of crude oil ( Brent Crude is over US $77 as I type this) which will push inflation higher further down the line. Although of course such influences are usually described as “temporary” however long they last and thereby get ignored.

An actual cut would be silly because as I have pointed it before the drop in the UK Pound £ since the unreliable boyfriends latest public U-Turn has been the equivalent of a 0.5% Bank Rate cut as it is. You could argue that would aid a Bank Rate rise but with monetary and economic data slowing I think that now would be a case of bad timing and I am someone who wants Bank Rate back up between 1.5% and 2% to provide a better balance between savers and depositors.

I would not worry too much about Governor Carney’s future though as those at the top of the establishment have a Teflon coating. After his role in the Libor scandal you might think that ex Bank of England Governor Paul Tucker should be in obscurity if not jail and yet apparently his thoughts are valuable. From the Brookings Institute.

Paul Tucker, drawing from his 33 years as a central banker, says that Congress should be much more specific about the objectives it wants the Federal Reserve to achieve and the Fed should try harder to explain what it’s doing

Tucker’s Luck?

Me on Core Finance TV

youtu.be/GtrmZbRPTgY

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Millennials need lower UK house prices rather than £10,000

This morning the attention of Mark Carney and the Bank of England will have been grabbed by this from the Halifax Building Society.

On a monthly basis, prices fell by 3.1% in April, following a 1.6% rise in March, reflecting the
volatility in the short-term monthly measure.

Those who watched the ending of the Lord of the Rings on television over the bank holiday weekend may be wondering if this is like when the eye of Sauron spots that the ring of power is about to be thrown into the fires of Mount Doom? More on the Bank of England later as of course it meets today ready for its vote on monetary policy tomorrow although we do not get told until Thursday.

If we step back for some perspective we see this.

House prices in the latest quarter (February-April) were 0.1% lower than in the preceding
three months (November-January), the third consecutive decline on this measure

This means that we have fallen back since the apparent boom last October and November when the quarterly rate of growth reached 2.3%. Now we see that over the past three months it has gone -0.7%,-0.1% and now -0.1%.

Moving to annual comparisons we are told this.

Prices in the last three months to April were 2.2% higher than in the same three months a year earlier, down from the 2.7% annual growth recorded in March.

Again the message is of a lower number.

What have we learnt?

Whilst the monthly number is eye-catching this is an erratic series as going from monthly growth of 1.6% to -3.1% shows. Even the quarterly numbers saw falls last year at this time but then recovered as we mull a seasonal effect. But for all that as we look back we do see a shift from numbers of the order of 5% annual growth to numbers of the order of 2%. Of course that is the inflation target or would be if the UK establishment allowed house prices to be in the inflation index rather than keeping it out of them so it can claim any rise as wealth effects. Personally I see the decline in the rate of house price inflation as a good thing as for example the last three months has seen it much more in line with the growth in UK wages.

What does the Halifax think looking ahead?

They are not particularly optimistic.

“Housing demand has softened in the early months of 2018, with both mortgage approvals and completed home sales
edging down. Housing supply – as measured by the stock of homes for sale and new instructions – is also still very
low. However, the UK labour market is performing strongly with unemployment continuing to fall and wage growth finally picking up. These factors should help to ease pressure on household finances and as a result we expect
annual price growth will remain in our forecast range 0-3% this year.”

In terms of detail we are pointed towards this.

Home sales fell in March. UK home sales dropped by 7.2% between February and March to 92,270 –
the lowest level since May 2016.

And looking further down the chain to this.

Housing market activity softens in March. Bank of England industry-wide figures show that the
number of mortgages approved to finance house purchases – a leading indicator of completed house
sales – fell for the second consecutive month in March to 62,914 – a drop of 1.4%. Approvals in the
three months to March were 1.7% higher than in the preceding three months, further indicating a
subdued residential market.

So the fires of the system are burning gently at best.

The UK establishment responds

Of course so much of the UK economic system is built on rising house prices so we should not be surprised to see the establishment riding to the rescue. Here is the Financial Times on today’s report from the Intergenerational Commission and the emphasis is mine.

After an exhaustive, two-year examination of young Britons’ strained living standards and the elderly’s concerns about health and social care, the commission recommended a £10,000 “citizen’s inheritance” for 25-year-olds to help them buy their first home or reduce their student debt, lower stamp duty for people moving home and billions more spent on health in a report published on Tuesday.

Nobody at this august institutions seems to ever stop and ask the question as to why so much “help” is always needed? The truth is that it is required because house prices are too high. They of course turn a not very Nelsonian blind eye to that reality. Also the bit about creating the money seems rather vague.

The commission said the government could find the money needed to fund the additional public expenditure by introducing new taxes on property and wealth.

Indeed the lack of thought in this bit is frightening especially when we see the role of who said it.

Carolyn Fairbairn, CBI director-general and a member of the commission, said: “The idea that each generation should have a better life than the previous one is central to the pursuit of economic growth. The fact that it has broken down for young people should therefore concern us all.”

No challenging of all about can or should we grow if it means draining valuable resources and sadly no doubt soon we will get more global warming rhetoric from the same source. Then to correct myself on the issue of taxes we do get some detail and it is something that the establishment invariably loves.

The bulk of the additional tax measures came from a proposal for a new property tax, with annual rates of 1.7 per cent of the capital value of a home for any properties worth more than £600,000 and 0.85 per cent on values below that.

What sort of mess is that? You inflate house prices and tell people they are better off. Then you make the mess even worse by taxing many on gains they have not taken! A clear cash flow issue for many who may have a more expensive property but still live in it. This will be especially true for the retired living on a pension.

Oh and £10,000 won’t go far will it? So this is something that will plainly go from bad to worse.

Also some advice to millennials. Should you ever get this £10,000 don’t pay off your student debt as that looks to be something likely to be written off road to nowhere style in the end anyway.

Comment

If we start with millennials I do think that times are troubled but the real driving factor affecting them is this.

Those in their late 20s and early 30s were the first generation not to have higher pay on average than people of the same age 15 years earlier, according to the commission.

We are back to wages again which the establishment of course then shouts look over here and moves to house prices. But then it has a problem because its claim that there has been little or no inflation faces this inconvenient reality.

With the prospect of more time spent renting from private landlords, the average millennial spent 25 per cent of their income on housing, compared with roughly 17 per cent for baby boomers when they were younger, a figure that subsequently fell for that generation as their incomes rose sharply in the 1980s and 1990s.

So we have higher prices and payments without having much inflation! It is a scam which the establishment continue with their claim that housing inflation can be measured using imputed rents. Even worse they measure rents badly and may be underestimating the rises by around 1% per annum.

Now we can return to Mark Carney and the Bank of England who no doubt feel like they have heat stroke when they read of house price falls. This is because of the enormous effort they have put into this area of which the latest was the Term Funding Scheme which ended in February.  It started in August 2016 and UK Bank Rate is the same now at the emergency rate of 0.5% but we can measure its impact on mortgage rates. You see according to the Bank the last 3 months before it saw new business at 2.39% twice and then 2.3% whereas now it has gone 1.96%,2.02% and now 2,04%. So an extra Bank Rate cut just for mortgages.

Now if we factor that into house prices would it be churlish to suggest it may have raised them by the £10,000 the Intergenerational Commission wants to gift to millennials?

 

 

 

How long will it be before the Bank of England hints at a Bank Rate cut?

After Friday’s disappointing UK GDP release this morning brings the beginnings of the first snapshot into the economy in the second quarter. Also there is in the Financial Times a reminder of the problems experienced by the Governor of the Bank of England Mark Carney.

“>Quiz: Do you have what it takes to study economics?Mark Carney wants teenagers to understand how the economy works. Do you measure up?

A laudable plan but first it would help if the Governor understood what was going on! After all it was as recently as a few months ago that he told us this. From Bloomberg.

But it was February’s Inflation Report, and Mark Carney’s statement that rates needed to rise “somewhat earlier and to a somewhat greater extent” than previously thought that really solidified investors’ view.

Only a couple of months later he fully lived up to his reputation as the “unreliable boyfriend”

That confidence soon expired when Carney used a BBC interview to damp expectations for an imminent interest-rate increase.

Mind you as recently as the 8th of April the Telegraph seemed to be in a 2013 time warp.

Mark Carney is known as the George Clooney of central banking…………have all served to reinforce what former Canadian colleagues term his “star quality”. ……The glamorous governor of the UK’s central bank will soon depart, however.  ( h/t PeterHoskinsTV )

The media seem to have a natural deference to authority as the Financial Times has had to do a screeching U-Turn from the analysis that told us the road to a May Bank Rate rise was a triumph of Forward Guidance.

The UK Pound £

One area which has kept much more up with the times has been the foreign exchanges. The UK Pound £ headed down against the US Dollar by more than a cent as soon as markets were aware of Governor Carney singing along with Luther Vandross.

But now I know
I don’t need you at all, you’re no good for me
I’ve changed my mind
I’m taking back my love

This has now been added to by the weak GDP report and we find ourselves noting that the effective exchange rate at 79.48 is a fair bit lower than the 81.24 of the 17th of April. Or to put it that is the equivalent of a 0.44% Bank Rate cut. Amazing isn’t it when we are told a 0.25% change is such a big deal?

Not all of this is Governor Carney;s fault as for example the US Dollar has rallied but the “rockstar” as he was once called got this completely wrong.

Manufacturing

This has been a bright spot for the UK economy over the past 18 months or so. However there is some food for thought in today’s Markit PMI business survey.

The upturn in the UK manufacturing sector slowed
further at the start of the second quarter. Rates of
expansion eased for output, new orders and
employment, in part reflecting a weakening in the
pace of expansion of new work from abroad.

The monthly reading did this.

fell to a 17-month low of 53.9 in April, down from 54.9 in
March. The PMI has signalled expansion in each
of the past 21 months.

Also there was news from an area of the economy that has been particularly robust.

Manufacturing employment increased in April.
The rate of job creation eased to the weakest in 14
months.

If we look for some perspective we see that UK manufacturing did not seem to pick up in April. A change from 54.9 to 53.9 may or may not mean something due to the errors in the estimates but whilst growth compared to our past history is good ( the overall average is 51.2) compared to the recent period it is not.

Inflation

The burst driven by the post EU leave vote fall in the UK Pound £ is passing us by now.

However, the rate of output charge inflation eased
for the third straight month to the slowest since
August 2017.

But the new weaker Pound £ will not help and the fact that the Sugar Tax is back in the news and Scotland now has a minimum price for alcohol reminds us of our tendency towards institutionalised inflation. Each individual change may have its merits but we can be sure we will face higher prices and inflation as a result.This is especially significant at a time of weak wage growth.

This has been added to recently by the issues in the Middle East raising the price of a barrel of Brent Crude Oil to around US $74. Although not all commodities are on the rise as this from the Reserve Bank of Australia reminded us earlier today.

Preliminary estimates for April indicate that the index decreased by 3.8 per cent (on a monthly average basis) in SDR terms, after increasing by 0.4 per cent in March (revised). Iron ore and coking coal prices led the decrease……Over the past year, the index has decreased by 1.4 per cent in SDR terms, led by lower iron ore prices.

There is an Australian bias to the commodities chosen but it does show that some are not adding to price pressure.

Unsecured Credit

This was an area that received what looked like praise from Mark Carney as the annual rate of growth pushed past 10% following his Sledgehammer QE of August 2016.

The stimulus is working

The problem is twofold. Firstly he has shifted his language to being “vigilant”. Secondly and much more importantly it has continued on something of a tear.

Consumer net credit rose by £0.3 billion in March 2018. Annual growth of consumer credit fell on the month to 8.6%

Not doubt someone will be trying out a PR release calling this a success as in annual growth shows the stimulus whilst the monthly drop is a success for vigilance. Actually the Bank of England will be worried here as they did not want a lurch downwards like this! Care is needed as the numbers are erratic but if this is an example of macroprudential policy it is also a sign of the problems as you tend to lurch from boom to bust rather than applying the brakes and slowing down.

Anyway even the 8.6% compares with wage growth that has been a bit over 2% and economic growth at 1.2%. Which number looks out of line?

Money Supply

Yesterday we noted that the growth of broad money had fallen to 3.7% in the Euro area and today we discovered that in the UK it had fallen to 3.8%. Thus both have seen a slowing which continues the theme of the last few weeks. If we look at the likely mixture between growth and inflation that currently looks worse for the UK as we start with a higher rate of inflation so lat us hope that drops and soon.

Comment

Today’s data is more fuel for the theme that the UK economy has slowed in 2018 and ironically even the news that consumer credit growth lurched downwards in March will worry the Bank of England. Be careful what you wish for is a theme of macroprudential style policies that so many seem to have forgotten. Anyway that may be a one month mirage so let us simply note that recent economic evidence would ordinarily have Mark Carney mulling a Bank Rate cut and not a rise.

We have covered the problems of his Forward Guidance many times so let us now take a different tack which is to compare it with the ECB and Mario Draghi. They face what are similar situations which is broad money growth slowing to as it happens pretty much the same rate of growth. They both will now have the occasional sleepless night wondering of the chance to change policy passed them by and that the boat sailed without them in it. But Mario will sleep better I think as whilst I am no fan of negative interest-rates and large-scale QE he had the Euro area crisis to contend with whereas Mark Carney has had at least a couple of chances to hop on the boat but in a nervous unreliable boyfriend state missed them.

Much of the stimulus in the UK was supposed to boost business borrowing, how has that been going?

Net finance raised was £0.0 billion in March

Yet if we switch to mortgages the beat goes on. If we go back to February 2016 the rate for new mortgages overall was 2.49%. So with the Bank Rate back at 0.5% since November it should be back there? Er no it is 2.04%. As we are told in the Matrix series of films “some things never change…”

 

 

 

 

 

 

 

Will the Bank of England ignore the UK GDP data and raise the Bank Rate in May?

We find ourselves facing another day where far too much pressure will be put on a GDP ( Gross Domestic Product ) print which is partly driven by the fact that the UK produces the numbers too quickly. That is about to change this summer and that change is for the better although I have to confess the addition of monthly GDP numbers is not helpful. They cannot be accurate enough and are more likely to confuse than enhance understanding I think.

Moving to prospects there was a downbeat tone on the first quarter provided yesterday by ECB ( European Central Bank) President Mario Draghi. At first we were presented with this in the Introductory Statement.

Following several quarters of higher than expected growth, incoming information since our meeting in early March points towards some moderation, while remaining consistent with a solid and broad-based expansion of the euro area economy.

But later as he replied to questions Mario left the marked runs and seemed to be going off-piste. The emphasis is mine.

 It’s quite clear that since our last meeting, broadly all countries experienced, to different extents of course, some moderation in growth or some loss of momentum. When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators. Sharp declines were experienced by PMI, almost all sectors, in retail, sales, manufacturing, services, in construction. Then we had declines in industrial production, in capital goods production. The PMI in exports orders also declined. Also we had declines in national business and confidence indicators. ( PMI is the Markit Purchasing Managers Index)

There seems to be a lot of this sort of mood music around from central bankers today as earlier we got this from the Bank of Japan. From the Nikkei Asian Review.

The Bank of Japan kept monetary policy unchanged at Gov. Haruhiko Kuroda’s first meeting of his second term on Friday. At the same time, the central bank deleted from its statement the date for achieving 2% inflation, which had been targeted for “around fiscal 2019.”

Now of course this had been always just around the corner on a straight road but Japan is ploughing ahead in what we are told is a boom. Continuing the theme the Swiss National Bank has joined the (bloc) party.

 The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential.

That is from a speech by Thomas Jordan its Chairman in Berne this morning and I also note this.

Tightening monetary conditions would be premature at this juncture, and would risk unnecessarily jeopardising the positive economic momentum that has been established.

That makes you wonder when he might ever tighten does it not?

A labour market perspective

Ed Conway has pointed out this in The Times.

Delve deeper into the data and you find something even more remarkable. During the recessions of the 1980s, nearly half of all unemployed Britons were jobless for more than a year. In other words, scarring was rife. In the 1990s recession the proportion dropped to just over 45 per cent. In this recession it peaked at 36 per cent and it is now below 25 per cent — the lowest level since the recession and, for that matter, lower than at any point in the 1980s or 1990s, boom or bust.

 

And here’s the really interesting thing: this improvement was UK-specific. In every other G7 country the share of long-term unemployed people flatlined or rose in the decades since the early 1980s. Indeed, the long-term share of unemployment in France is 44 per cent. In Italy it is 58 per cent, more than double Britain’s level. In Greece it’s a staggering 72 per cent and rising.

Put like that we are doing really well as I have noted in my updates but there are undercuts to this. For example it does not cover the issue of underemployment where the data we get is poor nor does it cover the weak levels of wage growth we keep seeing. There is for example an element of truth to this from David ( Danny) Blanchflower.

“In the gig economy they fear that they are going to lose their jobs. Other groups of workers fear that if they ask for higher wages, the employer will bring in workers from Poland or farm everything out overseas.”

Today’s data

The opening salvo from the release will make the headlines.

UK gross domestic product (GDP) was estimated to have increased by 0.1% in Quarter 1 (Jan to Mar) 2018, compared with 0.4% in Quarter 4 (Oct to Dec) 2017. UK GDP growth was the slowest since Quarter 4 2012.

So a weak number which was basically driven by this.

construction being the largest downward pull on GDP, falling by 3.3%……..However, construction contracted by 3.3%, contributing negative 0.21 percentage points to GDP.

Thus we see that in essence it was construction which was the player here and we get a confirmation that it is in recession.

This marked the second consecutive quarterly decline in construction output and the sharpest decline since Quarter 2 (Apr to June) 2012.

As we drill deeper we see that the issue was probably more related to the collapse of Carillion than the weather but both were factors.

The latest published monthly path for construction shows that output fell by 3.1% in January 2018, the largest monthly fall since April 2012. This was due mainly to an 8.3% fall in private new housing, following a historically high level of output in December 2017.

The campaign to blame the weather needs to note that it also had a positive effect on the numbers.

Production increased by 0.7%, with manufacturing growth slowing to 0.2%; slowing manufacturing was partially offset by an increase in energy production due to the below-average temperatures.

Comment

The headline number had the power to shock and will no doubt be emphasised by the media. Coming with it was the implication that there was no growth at all on an individual or per capita basis. However if we apply some critical analysis we can note that construction and agriculture subtracted from the numbers as we might have expected by a total of 0.22%. Accordingly rather than the “plummet” advertised by some the real situation is much more like what has taken place in the majority of our economy.

The services industries were the largest contributor to GDP growth, increasing by 0.3% in Quarter 1 2018, although the longer-term trend continues to show a weakening in services growth.

So we have shifted lower but perhaps from 0.4% to 0.3% especially if we remind ourselves that the UK economy has in the credit crunch era tended to produce weak first quarter numbers.

However the Forward Guidance of the Bank of England from as recently as at the time of the February Inflation Report is in disarray. From the MPC ( Monetary Policy Committee ) Minutes.

The Committee judged that the prospect was for continued growth in 2018 Q1, although the balance of
evidence at this early stage pointed to growth being a touch lower, at 0.4%, than in 2017 Q4………The Committee’s latest central projection for GDP growth had the economy growing at a steady pace,

It would seem that the May Bank Rate rise will find itself being deferred to 2019. Here is the economics editor of the Financial Times Chris Giles who  you may recall was telling us that the road to a Bank Rate rise this May was a triumph of Forward Guidance by the Bank of England.

Poor GDP figures today means the cost of keeps growing and hopes of a snap back more urgent

 

The return of the unreliable boyfriend causes carnage for the Pound £

Yesterday was not one of the better days for the Bank of England. To explain why let us take the advice of Kylie Minogue and step back in time. We go back to its house journal or the economics editor of the Financial Times Chris Giles on the 22nd of March.

The Bank of England has set the stage for an interest rate rise at its meeting in May, saying that pay growth was picking up and inflation was expected to remain above its 2 per cent target.

For Chris this was an example of deja vu and another success on its way for Forward Guidance.

Michael Saunders and Ian McCafferty broke ranks and voted for an immediate increase in interest rates, in a replay of events last September, when their dissenting views foreshadowed the MPC’s policy tightening announced in November.

The hits kept coming for the rise in May and go away camp.

The remaining seven MPC members argued that while nothing had changed significantly enough since the February meeting to justify an immediate move, they still believed rates would have to rise faster than markets had expected at the last meeting.

So the view advanced that an interest-rate rise in May was pretty much a done deal and markets moved towards suggesting a 90% chance of it. This was further reinforced by a speech given by Gertjan Vlieghe which I have mentioned before. From April 6th.

But last month Gertjan Vlieghe, an external MPC member, broke ranks with his colleagues on the nine-member committee when he said that rates could rise above 2 per cent over the same period.

So the stage was set and if there was a warning from the FT it was heavily coded and looked at something else.

The Riksbank has had some difficulties with its predictions. Until last year, it had been persistently over-optimistic about its ability to raise interest rates, always expecting rates to start rising soon

A bit like the England batsman James Vince who plays some flashy eye-catching shots but then gets out in the same familiar fashion.

Yesterday

Unfortunately for Governor Carney all his troubles were not so far away and it looked as though they were about to stay. He gave an interview to the BBC.

The governor of the Bank of England has said that an interest rate rise is “likely” this year, but any increases will be gradual.
Mark Carney said major decisions had to be taken on Brexit, including on the detail of the implementation period and the shape of a final deal.

There would also be a parliamentary vote on the future relationship between Britain and rest of the EU.

All those events would weigh on how fast interest rates rises would occur.

This poses more than a few problems. Firstly there is the issue of Brexit about which of course there are opposite views. But whichever side of the fence you are on the truth is that the water has been much less choppy recently so the Governor is flying a false flag. This adds to the problem he has in this area because he has been consistently too pessimistic on this subject, From the Guardian in May 2016.

That would leave the Bank with a difficult balancing act as it decides whether to cut, hold or raise interest rates to counter opposing forces, Carney added.

Of course the difficult balancing act suddenly became cut as fast as he could with a promise of a further cut that November which was later abandoned. This contrasts in polar fashion with the pace at which interest-rate increases arrive as we are still waiting for the one promised back in the summer of 2014. From the Wall Street Journal.

Bank of England Gov. Mark Carney said Thursday that interest rates in the U.K. could rise sooner than investors expect, sending the clearest signal yet that Britain’s central bank is inching closer to calling time on five years of record-low borrowing costs.

Well not that clear as it turned out to be comfortably numb.

A distant ship, smoke on the horizon
You are only coming through in waves

This was something which created quite a disturbance in the markets as they scrambled to move interest-rate and bond futures. It is easy to forget now but the words of Governor Carney caused quite a bit of damage as the move eventually reversed. Also there was this.

And he warned the BOE intends to be vigilant over any risks to the recovery emanating from the housing market, where rising prices are stoking fears that Britons could become too indebted.

Indeed

Term Funding Scheme. Our Term Funding Scheme (TFS) provides funding to banks and building societies at rates close to Bank Rate. It is designed to encourage them to reflect cuts in Bank Rate in the interest rates faced by households and businesses.

Oh sorry not that £127 billion one nor the extra £60 billion of QE Gilt purchases. anyway as there is nothing to see here let;s move along.

How fast?

This issue is something which just gets ever more breathtaking so let me take you to the Bank of England Minutes.

All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

The problem here is that whilst this is repeated by the media like a mantra nobody points out that we have had years of such hints and promises now with us remaining at the “emergency” Bank Rate of 0.5%. We did of course get a panic cut in the summer of 2016 followed after what was considered to be a suitable delay to avoid embarrassment an overdue reversal but no increases at all.I am reminded of the explanation of what minutes mean by the apochryphal civil servant Sir Humphrey Appleby which was along the lines of “Whatever you want” from Status Quo, But feel that this from June 2014 was more accurate.

Part of that normalisation would be a rise in Bank
Rate at some point

The some point has never arrived but of course the hot air rhetoric carries on regardless. From Bloomberg.

Bank of England Governor Mark Carney says the U.K. should prepare for a few interest-rate increases over the next few years.

Perhaps he means after June 2019 when he leaves.

Comment

We find ourselves looking at a familiar theme which is the woeful forecasting record of the Bank of England. In this instance we see that it has changed its mid again about pay growth and inflation if we look through the Brexit inspired smokescreen. This matters because the present Governor Mark Carney has placed enormous emphasis on so-called Forward Guidance which of course has turned out to be anything but. It is a feature of his tenure that he is a dedicated follower of fashion but in his private moments he must regret following that particular central banking one. His forward guidance on climate change also has its troubles.

Carney said in the comments, made on the sidelines of the International Monetary Fund meetings in Washington.

This morning another member of the Bank of England Michael Saunders has demonstrated what a land of confusion they live in.

because the economy’s response to
changes in interest rates, especially rises, is more uncertain than usual.

Is it? Maybe one day we will find out! Also there is this rather bizarre statement and the emphasis is mine.

He also discusses why any further tightening is likely to be at a gradual pace and to a limited extent.

So there you have it. As to the decision well the Bank of England has led itself and the markets up the garden path and now is having second thoughts. The real problem is not the current view which is more realistic but why it keeps being wrong?

A new Governor?

An ability not to see anything inconvenient seems a good start and of course the ability to deny almost anything would be of great help. Some have suggested he has gone because he wants to be in Europe next season but personally I think we should remember the positive influence he brought to English football in the early days. A big change to the drinking and eating cultures for a start.

What will the Bank of England claim next?

This morning has seen Reuters publish the details of an interview with one of the Bank of England’s policymakers Ian McCafferty. So let us take a look at what he said.

The Bank of England should not delay raising interest rates again, one of its top policymakers said, pointing to the possibility of faster pay rises and the recent strong pick-up in the world economy.

This is already a little awkward for our self-proclaimed inflation warrior. This is because the Bank of England has been forecasting faster pay rises for several years now usually due to output gap theory.

Speaking in his office in the BoE on Monday, adorned with books on the economy and a framed page of The Times newspaper with a headline about inflation, McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labor market.

The slack issue has been a problem for him and his colleagues for some time as this from a speech of his four years ago illustrates.

That is why, in the second phase of forward guidance that came into effect this month as the unemployment
rate passed 7%, the MPC expanded the range of indicators of labour market slack that we are formally
monitoring.

The first phase of Forward Guidance lasted around 6 months and it is hard not to have a wry smile as we have left both the unemployment level originally indicated and the other measure suggested by Ian well behind.

At present, these indicators suggest that the current level of slack in the economy, as reported in the
February Inflation Report, is in the region of 1-1½% of GDP, suggesting that there remains some room for
demand to recover further without exerting upward pressure on inflation.

Even if we are generous that had gone by the end of the year and yet Bank Rate is where it was then having followed the strategy of the Grand Old Duke of York when it did move. Oh and did I mention problems with forecasting a wages boom?

So the pickup in January settlements reported by a number of data providers certainly suggests that nominal pay is finally on the rise.

That is because it is from 2014 but pretty much same rhetoric has been used by the Bank of England this year. Actually Ian was embarrassingly wrong back then was average earnings fell sharply in that April meaning that the rolling three-month measure was at -0.3% in July.

What is the current wages evidence?

Ian gives us yet another regurgitation of the output gap or slack style analysis that has worked so badly for him over the past four years.

Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure.

The official data does not give much of a backing for this as the three monthly average at 2.8% in January is higher than last year but by 0.6%. Also if you look back then this measure was around 3% in the late spring and summer of 2015 so it is a case of back to the future. If we move to the latest quarterly report of the Agents of the Bank of England we get what sounds like the same old scene.

Growth in total labour costs had remained modest, although average pay settlements this year were a little higher than in 2017 for many contacts (Chart 6). Most settlements were between 2½%–3½%, driven by a combination of improved profitability among exporters, the annual NLW increase and higher consumer price inflation.

As consumer inflation is set to fade there is an issue there and I will leave you to mull how government policy via the National Living Wage can lead to the Bank of England raising Bank Rate! Oh and many would regard exporters raising pay in response to higher profitability as a good thing.

There is more backing for the higher wages in prospect view from private-sector surveys such as this from this morning on Bloomberg.

U.K. firms facing a shortage of workers are pushing up starting salaries, according to IHS Markit and the Recruitment and Employment Confederation.

Pay for temporary or contract staff rose at the quickest pace in six months in March, as the supply of job candidates fell sharply, they said in a report on Tuesday. Vacancies grew across all categories, with engineers and IT workers the most sought after for permanent roles, and hotel and catering employees in highest demand for temporary jobs.

However City-AM has spotted something which Bloomberg seems to have overlooked.

However, signs of increasing pay pressure for staff in permanent roles have diminished since hitting an almost three-year high in January.

A Space Oddity

This is somewhere between confused and simply wrong and the emphasis is mine.

The BoE raised rates for the first time in more than a decade in November, saying that Britain, while growing more slowly than other rich countries because of the impact of the 2016 Brexit vote, was more prone to inflation than in the past.

If we look back to the past we have seen plenty of examples where inflation has been much higher. Ian should know this as I worked with him during one of them. But if we look more recently there are two reasons for using less not more. Firstly there has so far been no sign that the inflation caused by the fall in the UK Pound £ has had secondly and tertiary effects and rolled through the system like it used to. On the evidence so far it hit and then faded. Secondly inflation has not even gone as high as it did in the autumn of 2010.

The World Economy

This is an example of a type of space oddity.

the boost from the world economy’s strong recovery

This is an example of steering monetary policy via the rear window when you are supposed to be looking ahead via the front window. To set monetary policy correctly you would have needed to raise interest-rates around a year before this in fact you could argue somewhere around the time they cut them.

Andy Haldane

There is a clear problem in you being judge and jury on your own actions as Andy as attempted in Melbourne Australia today.

A detailed, disaggregated analysis of household balance sheets suggests the material loosening in UK
monetary policy after the financial crisis did not have significant adverse distributional consequences.

These days it only takes a couple of minutes for him to be challenged about reality which is very different to the lauding he used to get.

 

Personally I am disappointed that having invited Billy Bragg to give a talk at the Bank of England Andy has not produced one of these for him.

Some illustrative and tentative examples of these personal “monetary policy scorecards” have been shown.

Oh and I owe the Bank of England an apology as I though their version of sending Andy to Coventry was complete when they sent him to the Outer Hebrides whereas I now note he is giving speeches in Australia. Will he be the first man on Mars?

Also let me help him out on a subject which he has confessed to not understanding which is pensions. By my calculations his is worth at least £3.4 million will he be producing a personal scorecard?

Comment

There are two fundamental problems here. The first is the error made by the Bank of England back in August 2016 when it confused cut with raise something from which it has never fully recovered. It now has figured out that interest-rates are too low but in terms of timing would be raising in the face of falling inflation and signs of a weakening economic outlook.

Next is the issue of telling everyone it has made them better off. Apart from the obvious moral hazard involved if it was true then why does it need to keep telling us? Moving to a more technical issue it is difficult for a man who does not understand one of the biggest sources of wealth (pensions) to lecture us about it. Sweet summed it up back in the day.

Does anyone know the way, did we hear someone say?
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way?
To Block Buster!

 

 

 

 

The Bank of England has forgotten the economic power of the Pound

Yesterday saw the Bank of England plough familiar territory as we note the excerpts below from its meeting minutes.

Regarding Bank Rate, seven members of the Committee (the Governor, Ben Broadbent, Jon Cunliffe, Dave
Ramsden, Andrew Haldane, Silvana Tenreyro and Gertjan Vlieghe) voted in favour of the proposition. Two
members (Ian McCafferty and Michael Saunders) voted against the proposition, preferring to increase Bank
Rate by 25 basis points.

I say familiar territory because with apologies with Carly Rae Jepson Governor Carney has “really really really really” wanted to raise Bank Rate since he told us this back at Mansion House in the summer of 2014 but somehow there has never quite been the time.

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.

Of course when he wanted to cut he did so at the very next meeting in August 2016 but that arrow hit the wrong target so had to be reversed last November leaving us back where we have been for quite some time. If Forward Guidance is the big deal that central bankers tell us perhaps they might one day update us on the costs of misguidance? Also if we jump back to 2014 it is hard not to wonder what the scale of the issue after so many house price friendly policies is now?

The housing market is showing the potential to overheat.

Perhaps we misunderstood all along and he was saying this was a good thing.

Wealth Effects

Events have brought us to something of what David Bowie would call a space oddity on this front. Not with house prices as if we overlook London they are still rising according to the official measure as we were told only on Tuesday.

Average house prices in the UK have increased by 4.9% in the year to January 2018 (down from 5.0% in December 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% since 2017.

Just for clarity I think that there are problems with that measure especially with new house prices but it is the official number so the Bank of England will love all the wealth effects it continues to give. Of course my argument that this is inflation has had a good week with Chris Giles the economics editor of the Financial Times and Paul Johnson of the Institute of Fiscal Studies both singing along to Kenny Rogers.

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run

But in line with its reply to me that I discussed on Tuesday the Bank of England will no doubt persist with its economic equivalent of phlogiston.

However there is another area where the wealth effects argument is even more troubled as highlight by this from Paul Lewis of BBC Radio 4’s Moneybox.

FTSE100 plunges below the level it reach at the end of 1999 (6930). So the value of the biggest 100 companies on the London Stock Exchange is now lower than it was 18 years 3 months ago. *awaits angry ‘yes buts’ from investment industry!*

The yes buts will now doubt be around  the dividend yield which is a bit over 4% for the FTSE 100 but then of course you need to allow for tax and inflation. But if we return to capital gains on a collective basis there have been thin times to say the least. Of course central bankers would point to when the FTSE 100 fell below 4000 in 2009 and for those who bought then fair enough. But for those who have bought and held as the investment advice invariably is then on a collective or index basis we have been singing along to Talking Heads.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride

Quantitative Easing

For all the rhetoric of the Bank of England it has undertaken another £3.66 billion of Gilt purchases this week. This is part of this

As set out in the Minutes of the MPC’s meeting ending 7 February 2018, the MPC has agreed to make £18.3bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2018 of a gilt owned by the Asset Purchase Facility (APF)

That poses a few questions as if we are on the verge of interest-rate increases why bother with this? I started arguing back in City Am in September 2013 that a way forwards would be to let these Gilts mature and run-off. It would be a slow process but we would have made some solid progress by now. Personally I think that the Bank of England has no plan at all for reducing QE and is hoping that the US Federal Reserve will be a form of crash test dummy for it.

The UK Pound £

Regular readers will join me in having a wry smile at this from the Bank of England.

The sterling exchange rate index had risen by over 1% since the February MPC meeting.

For newer readers there is a Bank of England rule of thumb that they seem to have forgotten which states that this is equivalent to a 0.25% rise in Bank Rate. This puts their waffling rather into perspective especially if we take the analysis to a more advanced level than they do. What I mean by this is that the major factor in inflation trends is the rate against the US Dollar as we see that the vast majority of commodity prices are in US Dollars. Here we see that we are around 16 cents higher than a year ago at US $1.41 meaning that there has been an anti inflationary effect.

We are seeing that effect in the producer price data where at the input level it is offsetting the rise in the price of crude oil and this will feed into the other inflation numbers as 2018 develops. Actually the situation here is what used to be considered a “dream ticket” as we have been weaker against the Euro where we see more trade flows and thus can hopefully benefit. On a smaller scale linking to yesterday the same is true against the Yen which with the equity market turmoil has risen and pushed us back to 148 Yen.

Comment

The communication of the Bank of England or as it increasingly describes it forward guidance has got itself into quite a mess. For example there is this.

These members noted the widespread
evidence that slack was largely used up

Is this the same slack that Governor Carney told us was used up in June 2014 or a different one? Also if you are going to say this it would help if you had actually raised interest-rates! I am talking in net terms here as last November only corrected the panic cut of August 2016.

All members agreed that any future increases in Bank Rate were likely to be at a gradual pace and to a limited extent.

Also I note that some seem to be taking my view that the MPC are “Carney’s cronies” to the ultimate extreme. From Berenberg Bank in yesterday’s Guardian Business Live

Step one, signal to markets that a hike could come soon. Step two, let a couple of known hawks dissent in a policy vote shortly thereafter. Step three, hike rates.

So Mark Carney allows them to vote that way? “Permission to dissent sir” “Granted Smyth” “Thank you Sir”. It makes you wonder what the point of the other eight MPC members is and of course where this leaves those who continue to argue that the Bank of England is independent except of course to add to the gaiety of the nation.

As a final point I recall my debate on BBC Radio 4 with ex Bank of England staffer Professor ( he was then) Tony Yates in the autumn of 2016. Back then I pointed out the sterling rule above and with the obvious moral hazard of praising myself it worked a treat. Meanwhile Professor Yates was noting all sorts of financial markets except to my mind the relevant one on his way to recommending the Bank of England cut interest-rates again in November 2016. How did they forget something that works so often?