The Mark Carney Show has misfired again

Yesterday was something of an epoch-making day for the UK but it also turned into a rather odd one. Also this morning has produced another piece of evidence for my argument that we finally got a rise in official interest-rates above the emergency 0.5% level because the Bank of England finally thought the banks have recovered enough to take it. From the Financial Times.

Royal Bank of Scotland will pay its first dividend since it was bailed out during the financial crisis, marking a major milestone on the bank’s road to recovery and paving the way for a further reduction of the government’s 62.4 per cent stake. The bank will pay an interim dividend of 2p per share after it confirms a final agreement on a recent fine with the US Department of Justice.

So even RBS has made some progress although it remains attracted to disasters like iron filings to a magnet as this seems a clear hint that it managed to be long Italian bonds into the heavy falls.

 RBS blamed “turbulence in European bond markets” for a 20 per cent drop in income at Natwest Markets.

As an aside the Italian bond market is being hit again today with the ten-year yield pushing over 3%.

Returning to the UK we also saw a 9-0 vote for a Bank Rate rise as I predicted in my podcast. This was based on my long-running theme that they are a bunch of “Carney’s Cronies” as five others suddenly changed their mind at the same moment as him, making the most popular phrase “I agree with Mark”. As some are on larger salaries added to by generous pension schemes we could make savings here.

A Space Oddity

This was provided by the currency markets which initially saw the UK Pound £ rally but then it fell back and at the time of writing it has dipped just below US$1.30. The US Dollar has been strong but at 1.122 we have not gained any ground against the Euro either at 145 we lost ground against the Japanese Yen.Why?

At first Governor Carney backed up his interest-rate rise with talk of more as in the press conference he suggested that 3 rises over the next 3 years was his central aim. Of course his aim has hardly been true but this disappeared in something of a puff of smoke when he later pointed out that he could keep interest-rates the same or even cut them. This rather brain-dead moment was reinforced by pointing out that he had cut interest-rates after the EU leave vote. This left listeners and viewers thinking will he cut next March?

Then he told Sky News this.

Mark Carney tells me is prepared to cut interest rates back again depending on how Brexit negotiations go. ( Ed Conway)

This morning he has managed to end up discussing interest-rate cuts with Francine Lacqua of Bloomberg after a brief mention of further rises. Then he added to it with this.

Mark Carney threw himself back into the thick of the Brexit debate on Friday, saying the chance of the U.K. dropping out of the European Union without a deal is “uncomfortably high.”

He also spoke to the Today programme on Radio Four which of course has its own audience troubles and here is the take away of Tom Newton Dunn of The Sun,

Blimey. Carney reveals the BoE recently ran a Brexit no deal exercise that saw property prices plummet by a third, interest rates go up to 4%, unemployment up to 9%, and a full-blown recession.

You can see from that why rather than a rally the UK Pound £ has struggled rather than rallied.  Due to his strong personal views Governor Carney keeps finding himself enmeshed in the Brexit debate which given his views on the subject will always head towards talk of interest-rate cuts. He is of course entitled to his personal views but in his professional life he keeps tripping over his own feet as just after you have raised interest-rates this is not the time for it. He could simply have said that like everyone else he is waiting for developments and will respond if necessary when events change.

Oh and we have heard this sort of thing from Governor Carney before. How did it work out last time?

interest rates go up to 4%

 

Today’s News

This has added to the theme I posited yesterday about the interest-rate increase which can be put most simply as why now?

The latest survey marked two years of sustained
new business growth across the service sector
economy. However, the rate of expansion eased
since June and was softer than seen on average
over this period. ( Markit PMI )

This followed a solid manufacturing report and a strong construction one but of course the services sector is by far the largest. This added to the report from the Euro area.

If the headline index continues to track at its current
level, quarterly GDP growth over the third quarter as
a whole would be little-changed from the softer-than expected expansion of 0.3% signalled by official
Eurostat data for quarter two.

Whilst these surveys are by no mean perfect guides there does seem to be something going on here and as I pointed out yesterday it is consistent with the weaker trajectory for money supply growth.

The UK Pound £

This did get a mention in the Minutes.

The sterling effective exchange rate had depreciated slightly since the Committee’s previous meeting and was down 2.5% relative to the 15-day average incorporated in the May Report.

This is awkward on two fronts. Firstly the fall was at least partly caused by the way Governor Carney and his colleagues clearly hinted at an interest-rate rise back then but then got cold feet in the manner of an unreliable boyfriend. Next comes the realisation that all the furore over a 0.25% interest-rate rise mostly ignores the fact that monetary conditions have eased as the currency fall is equivalent to a ~0.6% cut.

R-Star

This appeared having been newly minted in the Bank of England Ivory Tower. Or at least newly minted in £ terms as the San Francisco Fed put it like this last year.

The “natural” rate of interest, or r-star (r*), is the inflation-adjusted, short-term interest rate that is consistent
with full use of economic resources and steady inflation near the Fed’s target level.

If anyone has a perfect definition of “full use of economic resources” then please send it to every Ivory Tower you can find as they need one. Actually the Bank of England has by its actions suggested it is near to here which is rather awkward when they want to claim it is somewhere above 2%. Actually I see no reason why there is only one and in fact it seems likely to be very unstable but in many ways David Goodman of Bloomberg has nailed it.

They don’t know their r* from their elbow

Comment

This is all something of a dog’s dinner and I mean that in the poetic sense because in reality dog’s in my family  always seem to be fed pretty well. We have monetary policy being delivered by someone who looks as though he does not really believe in it. Even the traditional support from ex Bank of England staff seems to be half-hearted this time around and remember that group usually behave as if The Stepford Wives is not only their favourite film but a role-model.

If this is the best that Mark Carney can do then the extension of his term of tenure by Chancellor Hammond can be summed up by Men At Work.

It’s a mistake, it’s a mistake
It’s a mistake, it’s a mistake

 

 

 

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The Bank of England is in a mess of its own making

Today looks as if it may be something of an epoch-making day for the UK as there is finally a decent chance that the 0.5% emergency Bank Rate will be consigned into history. Actually one way or another the decision has already been made as the Monetary Policy Committee voted last night. This was a rather unwise change made by Governor Carney as it raises the risk of leaks or what is called the early wire as the official announcement is not made until midday. As you can see from the chart below the BBC seems to think that the decision is a done deal or knows it is ( h/t @Old_Grumpy_Dave ).

This provides us scope for a little reflection as any move hardly fulfils this from back in June 2014.

This has implications for the timing, pace and degree of Bank Rate increases.
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.

This was taken at the time as a promise and markets responded accordingly as interest-rate futures surged and the UK Pound £ rallied. From time to time people challenge me on this and say it was not a promise. What that misses is that central bankers speak in a coded language and in that language  this was a clear “Tally Ho”. Of course the “sooner than markets currently expect” never happened and whilst you may or may not have sympathy for professional investors and traders it was also true that ordinary people and businesses switched to fixed-rate borrowing in response to this. The reality was that the Bank of England via its credit easing policies and then Bank Rate cut of August 2016 pushed mortgage and borrowing rates lower affecting them adversely. Such has been the record of Forward Guidance.

What about now?

There was something else in that speech which was revealing as a sentence or two later we were told this.

The ultimate decision will be data-driven

Okay so let us take the advice of Kylie and step back in time. If we do so we see that the UK economy was on a bit of a tear which of course was another reason for those who took Governor Carney at his word. In terms of GDP growth the UK economy had gone 0.6%,0.5%,0.9% and 0.5% in 2013 which was then followed by 0.9% in the first quarter of 2014. It did the same in the second quarter which he would not have known exactly but he should have known things were going well.

Let us do the same comparison for now and look at 2017 where GDP growth went 0.3%,0.2%,0.5% and 0.4% followed by 0.1% in the first quarter of this year. If you were “data driven” which sequence would have you pressing the interest-rate trigger? I think it would be a landslide victory. The MPC may not have known these exact numbers due to revisions but a 0.1% here or there changes little in the broad sweep of things.

Some might respond with the pint that he is supposed to achieve an inflation target of 2% per annum. That is true but that has not bothered the MPC much in the credit crunch era as we have just been through a phase of above target inflation which of course they not only cut Bank Rate into but promised a further cut before even they came to the realisation that their Forward Guidance had been very wrong. Also before Governor Carney took office the MPC turned a blind eye to inflation going above 5%. Whereas post the EU leave vote they rushed to ease policy in something of a panic in response to expectations of a weaker economy.

The Speed Limit

The Bank of England Ivory Tower has had a very poor credit crunch. It has clung to outdated theories rather than respected the evidence. Perhaps the most woeful effort has been around the output gap which if you recall led to it highlighting an unemployment rate of 7% which the economy blasted through ( which you might consider was yet another case for an interest-rate rise in 2014). It has clung to equilibrium unemployment rates of 6.5%,6% 5.5% and 4.5% which of course have all been by-passed by reality. Such outdated thinking has led it to all sorts of over optimism on wage growth. Yet is seems to have learned little as this illustrates.

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

This is the MPC rationale for a Bank Rate rise and the problem is that they simply do not know that. They keep trying to build theoretical scaffolding around the reality of the UK economy but seem to learn little from the way the scaffolding regularly collapses.After all we grew much faster in 2014.

The banks

As ever the precious will be at the forefront of the Bank of England’s mind. I cannot help thinking that having noted the apparent improvement shown below maybe the real reason for a change is that the banks can now take it. First Lloyds Banking Group.

Since taking over the reins in 2011, Horta-Osório has presided over a bank which has swung from an annual loss of £260mln to a profit of £3.5bn.  ( Hargreaves Landsdown).

Then Barclays.

Barclays reported pretax profit of 1.9 billion pounds ($2.49 billion) for the three months from April-June, up from 659 million pounds a year ago and higher than the 1.46 billion average of analysts’ estimates compiled by the bank. ( Reuters)

Comment

A Martian observing monetary policy in the UK might reasonably be rather confused by the course of events. He or she might wonder why now rather than in 2014? Furthermore they might wonder why a mere 0.25% change is being treated as such a big deal? After all it is only a small change and the impact of such a move on those with mortgages will be both lower and slower than in the past.

Nationwide: The vast majority of new mortgages have been extended on fixed interest rates. The share of outstanding mortgages on variable interest rates has fallen to its lowest level on record, at c.35% from a peak of 70% in 2001. ( h/t @moved_average )

So if they do move the impact will be lower than in the past which makes you wonder why they have vacillated so much and been so unreliable?

The MPC have got themselves on a road where all the indecision means that the timing is likely to be off. What I mean by that is that whilst I expect economic growth to pick-up from the first quarter this year will merely be an okay year and currently the threats seem to the downside in terms of trade for example. We do not yet know where the Trump trade tariffs will lead but we do know that the Euro area has seen economic growth fall such that the first half of 2018 was required to reach what so recently was the quarterly growth rate. Also the ongoing rhetoric of the Bank of England about Brexit prospects hardly makes a case for a Bank Rate rise now either as it would be impacting as we leave ( assuming we do leave next March).

The next issue is money supply growth which in 2018 so far has been weak and now (hopefully) has stabilised. That does not make much of a case for raising now and would lead to the MPC operating in the reverse way to monetary trends as it cut into strength in August 2016 and now would be raising into relative weakness.

So there you have it on what is an odd day all round. I think UK interest-rates should be higher but also think that timing matters and that a boat or two has sailed already without us on it. Accordingly my view would be to wait for the next one. For the reasons explained above whilst the MPC has managed to verbally box itself into a corner I still  think that there is a chance ( 1/3rd) of an unchanged vote today. It is always the same when logic points in a different direction to hints of direction.

There is also the issue of QE which rarely gets a mention. If we skip the embarrassment all round of the Corporate Bond purchases we could also have taken the chance to trim the QE package when money supply growth was strong. I remember making that case nearly five years ago in City-AM.

Me on Core Finance TV

 

 

 

What is happening to the UK housing market and house prices?

The last year of two has seen something of a change in the environment for UK house prices. The most major shift of all has come from the Bank of England which for the moment seems to have abandoned its policy where the music was “Pump it up” by Elvis Costello. This meant that when around 2012 it saw that even what was still considered an emergency Bank Rate of 0.5% plus its new adventure into Quantitative Easing was not enough to get house prices rising it introduced the Funding for Lending Scheme. This reduced mortgage rates by around 1% quite quickly and had a total impact that rose towards 2% on this measure according to Bank of England research. This meant that net mortgage lending improved and then went positive and the house price trend turned and then they rose.

The next barrage came in August 2016 with the “Sledgehammer QE” and the cut in Bank Rate to 0.25%. This was accompanied by the Term Funding Scheme (TFS) which was a way of making sure banks could access liquidity at the new lower Bank Rate and it rose to £127 billion. This was something of a dream ticket for the Bank of England as it boosted both the “precious” ( the banks) and house prices in one go,

However that was then as the Bank reversed the Bank Rate cut last November and the TFS ended this February. So whilst the background environment for house prices is favourable they have risen to reflect that and for once there are no new measures to keep the bubble inflated. Also we have seen real wages fall and then struggle in response to higher inflation.

Valuations

This morning has brought news about something which has not happened for a while now but is something which is destabilising for house prices. From the BBC.

There has been a “significant” rise in homes being valued at less than what buyers have agreed to pay, the UK’s largest mortgage advisers have said.

These “down valuations”, by lenders, can mean buyers having to pay thousands of pounds extra, up front, to avoid the sale collapsing.

Estate agents Emoov said it reflected surveyors predicting a financial crash.

UK Finance said lenders, which it represents, were right to ensure property values were realistic.

The organisation said borrowers also benefited from houses having an “independent valuation”.

Emoov are an interesting firm that have recently completed a crowdfunding program and perhaps want some publicity but for obvious reasons estate agents usually stay clear of this sort of thing. If we step back for a moment we note that whilst they are mostly in the background surveyors do play a role in price swings via their role in providing a base for mortgage valuations. They should know the local market and therefore have knowledge about relative valuations but absolute ones is a different kettle of fish. If they get nervous and start to be stricter with valuations then the situation can snowball though mortgage chains. As to the numbers the BBC had more.

Emoov, one of the UK’s largest digital estate agents, said one in five of its sales now resulted in a down valuation.

Two years ago, it was fewer than one in 20, it added.

This is the highest rate since the UK’s financial crash in 2008, according to agents from 10 mortgage adviser groups contacted by the Victoria Derbyshire programme.

There is a specific example quoted by the BBC.

Phil Broodbank, from Wirral, bought his house for £180,000 a few years ago and spent up to £25,000 renovating it.

When the time came to remortgage, a surveyor valued his house at £200,000 without visiting it in person – in what is known as a “drive by”.

This valuation was £20,000 lower than a local estate agent had valued the property.

One bonus is that “drive by” in the Wirral does not quite have the same menace as in Los Angeles. Also these have been taking place for quite some time now but there were fewer complaints when the bias was upwards. The response from UK Finance is fascinating.

“Although the valuation is carried out for the lender, borrowers also benefit from a realistic independent valuation as it could help them avoid paying over the odds for the property they are buying.”

How do they know it is “realistic” especially if it was a cursory observation from the road? Also as the valuation is for the lender there are always going to be more interested in downturns that rises as of course the bank is more explicitly vulnerable then. In case you are wonder who UK Finance are they took over the British Bankers Association.

Borrowing Limits

The Guardian pointed out over the weekend that some old “friends” seem to be back.

this week Clydesdale Bank said it will grant first-time buyers mortgages of 5.5 times a borrower’s income and lend up to £600,000 – and the buyer only needs a 5% deposit.

A little care is needed as this is for the moment only available to those classed as professionals by Clydesdale Bank who earn more than £40,000 a year. Also there is a theoretical limit in that according to Bank of England rules mortgage lenders are supposed to keep 85% or more of their business using a 4.5 times times a borrower’s income. But if history is any guide these things seem to spread sometimes like wildfire and this industry has a track record that even a world-class limbo dancer would be envious of in terms of slipping under rules and regulations.

This bit raised a wry smile.

But mortgage brokers said they were relaxed about Clydesdale’s new deal.

As it is a potential new source of business they are no doubt secretly pleased. Also I did smile at this from the replies.

 5.5 times of income is nothing unusual. In Australia this is very common and goes as high as 7 to 9 times. ( GlobalisationISGood )

This Australia?

Rising global interest rates are combining with bank caution on lending, via extreme vetting of loan applications in the wake of financial services Royal Commission revelations, to generate a mini-credit crunch.

That’s putting further pressure on house prices, whose falls are gathering pace. ( Business Insider )

What this really represents if we return to the UK is another sign that houses are unaffordable for the ordinary buyer. Another factor in the list is this.

While 25-year terms were the standard in the 1990s, 30 years is now the norm for new borrowers, with many lenders stretching to 35 years to make monthly payments more affordable. ( Guardian )

 

Comment

We do not know yet how the two forces described today will play out in the UK housing market but down valuations seem to be a stronger force. After all Clydesdale will only do a limited amount of its mortgages and fear is a powerful emotion. Mind you some still seem to be partying like its 2016.

The billionaire founder of Phones4u John Caudwell has claimed his Mayfair property development will be “the world’s most expensive and prestigious apartment block”.

The entrepreneur, who turned to property after selling his mobile phone company for £1.5bn in 2006, plans to convert a 1960s multi-storey car park in the heart of Mayfair into 30 luxurious flats.  ( City-AM).

As to hype well there is this.

“I see London as the epicentre of the world and I see Mayfair as the epicentre of London. Therefore, I see my building site as the epicentre of the world,” Caudwell told City A.M. “I can’t think of anywhere better for people to live.”

Meanwhile I am grateful to Henry Pryor for drawing my attention to this. From the Independent in August 2000.

Roger Bootle, who predicted the death of inflation five years ago, says Britain has seen the last of extreme gyrations in house prices…………Nationwide, Britain’s largest building society, reported yesterday that the price of the average home fell 0.2 per cent, or £319, to £81,133 between June and July.

As of this June it was £215,844.

 

 

 

Mark Carney is back making promises about interest-rates

Yesterday the Governor of the Bank of England visited the Great Exhibition of the North and went to Newcastle but sadly without any coal. As usual he was unable to admit his own role in events when they have gone badly and this was illustrated by the sentence below.

We meet today after the first decade of falling real incomes in the UK since the middle of the 19th century.

Perhaps he had written his speech before the Office of National Statistics told these specifics on Wednesday but he should have been aware of the overall picture. The emphasis is mine.

Both cash basis and national accounts real household disposable income (RHDI) declined for the second successive year in 2017. This was due largely to the impact of inflation on gross disposable household income (GDHI),

The issue here is that the Bank Rate cut and Sledgehammer QE sent the UK Pound £ lower after the EU Leave vote. Just for clarity it would have fallen anyway just not by so much and certainly not below US $1.20, After all we have seen it above US $1.30 now and if you look back you see that it has in general two stages. The first which was down accompanied the period the Bank of England promised more easing – it is easy to forget now that they promised to cut Bank Rate to 0.1% in November 2016 before events made it too embarrassing to carry it through –  and then once that stopped stability and then a rise. With a lag inflation followed this trend but with a reverse pattern. So if we return to the data above we now see this.

On a quarter on same quarter a year ago basis, both measures of RHDI increased in Quarter 1 2018. Cash RHDI increased by 2.4% and national accounts RHDI grew by 2%;

Now the inflation effect has faded the numbers are growing again. Again not all of the effect is due to it dropping as stronger employment has helped but it is in there. As a final point these numbers make me smile as I recall some of you being kind enough to point out my role in us finally getting numbers without the fantasy elements.

This bulletin provides Experimental Statistics on the impact of removing “imputed” transactions from real household disposable income (RHDI).

Forward Guidance

It would not be a Mark Carney speech if he did not reverse what he told us last time as he racks up the U-Turns. First he did some cheerleading for himself.

That approach has worked . Employment is at a record high. Import price inflation is fading. Real
wages are rising.

This of course relies on the power of a 0.25% Bank Rate cut ( plus more QE) but sadly nobody asked why if that is so powerful why the previous 4% or so of cuts did not put the economy through the roof? Also his policies made imported inflation worse and real wages are only rising if you choose a favourable inflation measure.

Also we got what in gardening terms is a hardy perennial.

Now, with the excess supply in the economy virtually used up

It has been about to be used up for all of his term! Remember when an unemployment rate of 7% was a sign of it? Well it is 4.2% now.  But in spite of the obvious persistent failures it would appear that it is deja vu allover again.

The UK labour market has remained strong, and there is widespread evidence that slack is
largely used up.

Next we get this

Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first
quarter was largely due to the weather, not the economic climate.

And this.

A number of indicators of household
spending and sentiment have bounced back strongly from what increasingly appears to have been erratic
weakness in Q1………….Headline
inflation is still expected to rise in the short-term because of higher energy prices.

Leads to the equivalent of something of a mouth full and the emphasis is mine.

As the MPC has stressed, were the economy to develop broadly in line with the May Inflation Report
projections – with demand growth exceeding the 1½% estimated rate of supply growth leading to a small
margin of excess demand emerging by early 2020 and domestic inflationary pressures continuing to build
gradually to rates consistent with the 2% target – an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its target at a conventional horizon.

For newer readers unaware of how he earned the nickname the unreliable boyfriend let me take you back four years and a month to his Mansion House speech.

The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path
thereafter – that is, the degree and pace of increases after they start. In particular, we expect that eventual
increases in Bank Rate will be gradual and limited.

Well he was right about the limited bit as it is still where it was then at the “emergency” level of 0.5%. Actually of course he was believed to have been much more specific at 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.

The next day saw quite a scramble as markets adjusted to what they believed in central banker speak was as near to a promise as they would get. You may not be bothered too much about financial traders ( like me) but this had real world implications as for example people took out fixed-rate mortgages and then found the next move was in fact a cut.

Yet some saw this as a sign as this from Joel Hills of ITV indicates.

Mark Carney signalling that, despite all the uncertainty, “gradual and limited” interest rate rises are looming. Market is betting that Bank of England will probably increase Bank Rate in August.

Just like in May when they lost their bets as part of a now long-running series. The foreign exchange markets have learnt their lesson after receiving some burnt fingers in the past and responded little. Perhaps they focused on this bit.

Pay and domestic cost growth have continued to firm broadly as expected.

Now if we start in December the official series for total pay growth has gone 3.1%, 2.8%, 2.6%,2.5% and then 2.5% in April which simply is not “firm” at all. Of course central bankers love to cherry pick but sadly the season for cherries has not been kind here either. If we move to private-sector regular pay as guided we see on the same timescale 2.9%, 3%, 2.8%, 3.2% but then a rather ugly 2.5% in April. There are few excuses here as they have excluded bonuses which are often high in April.

Comment

We have been here so may times now with the unreliable boyfriend who just cannot commit to a Bank Rate rise. Each time he echoes Carly Rae Jepson and ” really really really really really really ” wants to but there is then a slip between cup and lip. If we look back to May which regular readers will recall had been described by the Financial Times as an example of forward guidance for an interest-rate rise the feet got cold. If they do so again will we see wage growth as the excuse? We do not know this month’s numbers but as we stand they looked better back then than now.

If we look over the Atlantic we see a different story of a central bank raising interest-rates into an apparently strong economy and promising more. We are of course between the US and Euro area in economic terms but in my opinion it would have been much better if we had backed up the rhetoric and now had interest-rates of say 1.25%.or 1.5%. If we cannot take that then what has the claimed recover been worth.

Considering all the broken promises and to coin a phrase four years of hurt this is really rather breathtaking,

 

 

Good news for UK GDP and maybe even productivity trends

Rather aptly on GDP ( Gross Domestic Product ) day the UK received some good economic news as from a land down under the clock ticked past midnight.

Prime Minister Malcolm Turnbull will on Friday confirm that — as reported last week by Fairfax Media — Britain’s BAE Systems has won a hard-fought contest to help Australia with the $35 billion program to build nine new frigates to be named the Hunter class. ( Sydney Morning Herald)

According to Save the Royal Navy around a third of the contract is up for grabs with the rest being in Australia mostly Adelaide.

BAES will now have to conduct an extensive round of negotiations with many potential suppliers in Australia and globally. The exact break down of benefits to UK manufacturers is obviously not yet available but the Rolls Royce prime movers and the David Brown gearboxes will be UK-made. Overall economies of scale across the supply chain will help reduce both construction and through-life costs for both nations.

The success puts the UK and BAES in good position to compete for an even larger order from Canada and there are some suggestions that if we win we should call it the Commonwealth class. Still let us not get too carried away but it has been decades since we had success in terms of naval exports on this scale.

Still whilst we are looking at good news for GDP let us take in this morning’s data as well.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 4 (Oct to Dec) 2017 and Quarter 1 (Jan to Mar) 2018; the 0.1 percentage points upward revision since the second estimate reflects improvements to the measurement of construction output.

So a case of entente cordiale as we move to the same rate of growth as France albeit by a different route as we have revised up they have revised down. Also this brings into play three themes of which as we note the first quarter of 2017 was revised up as well the issue of (under) measuring the first quarter remains. That is something we share with the US. Next comes my theme that the UK GDP growth trajectory is of the order of 0.3% per quarter. Finally the one sad aspect here is yet more trouble with the construction series which is what “improvement” is defined as in my financial lexicon for these times.

Construction output was estimated to have decreased by 0.8% in Quarter 1 2018, revised upwards from negative 2.7% in the second estimate of GDP.

Seeing as the construction numbers were originally estimated at -3.3% there is quite a problem here. I have discussed this many times as we have seen a large company transferred in from services as a “quick fix” and meddling with the deflator too but we remain in a type of groundhog day. Now as we cannot produce reliable quarterly estimates what could go wrong with switching to a monthly series for GDP as we are about to do?

Productivity

Regular readers will be aware that I think that a fair bit of the UK’s so-called productivity crisis is down to miss measurement. This is to some extent confirmed by a speech by the Bank of England’s Chief Economist Andy Haldane yesterday. After stumbling in the dark he has realised this.

The first and most important point to make is that the UK does not lack for innovative, high-productivity companies…..Their productivity is world-leading,
their technology world-beating, their managers and workers world-renowned. They are inspirational.

However in the UK they are forming their own type of island.

Fact three is that the productivity gap between the top- and bottom-performing companies is materially larger
in the UK than in France, Germany or the US. In the services sector, the gap between the top- and
bottom-performing 10% of companies is 80% larger in the UK than in our international competitors .
This productivity gap has also widened by far more since the crisis – around 2-3 times more – in
the UK than elsewhere.

Looked at in this way we are doing well.

There are more UK companies in the upper tail than in
Germany, with its much-vaunted industrial reputation, and France. The top 10% of UK companies have
levels of productivity at least 100% above the median.

Returning to my view I think that the concept of productivity only applies to certain sector of the economy as how do you measure it in say a haircut? Sometimes when service is involved faster is not necessarily better it is worse.

Along the way we discover why Andy Haldane has changed his economic views.

The short answer appears to be because the UK is, on many dimensions, a global innovation hub……..The UK is the largest magnet for tech talent in Europe.

This is really rather awkward for the man who brought us “Sledgehammer QE” and wanted a 0.1% Bank Rate. Of that more later as with his usual forecasting skill Andy chose yesterday to emphasis the success of England on the football field.

And then, of course, there is the World Cup. Without wishing to tempt fate, England’s recent sporting
success on the football field (and cricket pitch) has probably added to that feel-good factor among
England-supporting consumers.

Once I read this I should have immediately bet on England losing to Belgium! Anyway returning to this theme Andy was keen to do some ( let’s face it badly needed) cheerleading for himself and by default his ongoing campaign to be the next Governor of the Bank of England,

The MPC has also undertaken asset purchases amounting to almost £½ trillion since 2009. This has
provided additional monetary stimulus to the UK economy, at its peak equivalent to a further reduction in
interest rates of up to around 2.5 percentage points.

I do not know if he stopped for an expected round of applause at this point or after this attempt to present himself and his colleagues as a set of economic super heroes.

Without these measures, we estimate the economy would have been around 8% smaller and unemployment 4 percentage points higher.

A more accurate response would have been to laugh after all Andy would have thought it was with him as opposed to the reality of it being at him.

Comment

The last day or so has seen some better economic news for the UK and this continued in this morning’s money supply data.

The total amount of money held by UK households, businesses and non-intermediary other financial corporations (NIOFCs) (Broad money or M4ex) increased by £19.6 billion in May

This balanced out April’s dip.

 Smoothing through the recent volatility by taking a two-month average suggests money has increased broadly in line with its recent average.

The annual rate of growth of 4% means that should we achieve our inflation target of 2% then we can expect economic growth of 2% towards the end of this year and early next. The flaw in this is the oil price and of course the impact of the Unreliable Boyfriend on the UK Pound £.

The less satisfactory situation is something that Chief Economist Haldane is less keen to emphasis which is that if you apply a “Sledgehammer” to the monetary system then the UK’s history tells you to expect this.

Annual growth of consumer borrowing, excluding mortgages, slowed a little in May to 8.5%

Remember that is on top of double-digit annual growth rates.

Meanwhile those who have followed my critiques of imputed rent and its impact on the inflation numbers and GDP since 2012 or so may like to note this. From the economics editor of the Financial Times for whom it is apparently good enough for the former factors but not for measuring productivity.

Only if you include owner occupied imputed rents, which anyone sensible who does this sort of thing excludes.

Still if you apply that much more widely he and I agree for once.

Why is the Bank of England preparing for a 0% interest-rate?

Sometimes events have their own motion as after enjoying watching England in the cricket yesterday which is far from something I can always I had time to note it was Mansion House speech time. My mind turned back to 2014 when Bank of England Governor Mark Carney promised an interest-rate rise.

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 four years later we are still waiting for the unreliable boyfriend to match his words with deeds. Indeed last night he was sailing in completely the opposite direction as shown by this.

The additional capital means the MPC could, if necessary, re-launch the TFS in future on the Bank’s balance sheet, cementing 0% as the lower bound.

We have learnt in the credit crunch era to watch such things closely as preparations for an easing on monetary policy have so regularly turned into action as opposed to tightening for which in the UK we have yet to see an outright one. All we have is a reversal of the last error ridden cut to a 0.25% Bank Rate as I note that the extra £60 billion of QE, Corporate Bond QE and Term Funding Scheme are still in existence.

There was another mention of a 0% interest-rate later in the piece.

Although the principles guiding the MPC’s choice of threshold still hold, with the lower bound on Bank Rate
now permanently close to 0%,

In the words of Talking Heads “is it?”

The Lower Bound

This has been an area which if we keep our language neutral has been problematic for Governor Carney to say the least! For example last night’s speech mentioned an area I have flagged for some time.

relative to the effective lower bound on Bank
Rate of 0.5% at that time

When the statement was originally made there were obvious issues when we had countries that had negative interest-rates well below the “lower bound”. As an example the Swiss National Bank announced this yesterday morning.

Interest on sight deposits at
the SNB remains at −0.75% and the target range for the three-month Libor is unchanged at
between −1.25% and −0.25%

As they are already equipped for a -1.25% interest-rate and have a -0.75% one it is hard not to smile at the “lower bound” of Mark Carney. The truth in my opinion is that it means something quite different and as ever the main player is the “precious” or the banks.

In August 2016, the MPC launched the Term Funding Scheme (TFS) in order to reinforce the pass-through
of the cut in Bank Rate to 0.25% to the borrowing rates faced by households and companies.

As you can see it is badged as a benefit to you and me which of course is a perfect way to slip cheap liquidity to the banks. After all competing for savings from us must be a frightful bore for them and it is much easier to get wholesale amounts and rates from the Bank of England.

Bank of England balance sheet

There are changes here as well.

With the Chancellor’s announcement tonight of a ground-breaking new financial arrangement and capital
injection for the Bank of England, we now have a balance sheet fit for purpose and the future.

What arrangement? There will be a capital injection of £1.2 billion this year raising it to £3.5 billion. That can go as high as £5.5 billion should the Bank of England make profits bur after that it has to be returned to HM Treasury.

The gearing for liquidity operations is quite something to behold.

The additional capital will significantly increase the amount of liquidity the Bank can provide through
collateralised, market-wide facilities without needing an indemnity from HM Treasury to more than half a
trillion pounds. This lending capacity would expand to over three quarters of a trillion pounds when, as
designed, additional capital above the target level is accrued through retained earnings.

On the first number the gearing would be of the order of 140 times.Care is needed with that though as the Bank of England does insist on collateral in return for the liquidity. Mind you that is not perfect as a guardian as those who recall the episode where the Special Liquidity Scheme was ended early due to “phantom securities”. If you do not know about that the phrase itself is rather eloquent as an explanation.

Reducing the National Debt

Yesterday was  good day for data on the UK public finances but that may be dwarfed by what was announced in the speech.

Today’s announcement increases the amount of risk the Bank can carry on its balance sheet. As a result,
the Bank plans to bring the £127 billion of lending extended through the TFS onto our balance sheet by the
end of 2018/19 the financial year.

That had me immediately wondering if the Office for National Statistics will now drop the requirement for this to be added to the UK National Debt. this would bring us into line with rules elsewhere as for example if you will forgive the alphabetti spaghetti the TLTROs and LTROs of the European Central Bank are not added to the respective national debts. Such a change would reduce our national debt from 85.4% of GDP to below 80%. I am sure I am not the only person thinking that would be plenty to help finance the suggested boost to the NHS should you choose.

QE

There was a change here and this reflects the 0.5% change in the “lower bound”

Although the principles guiding the MPC’s choice of threshold still hold, with the lower bound on Bank Rate
now permanently close to 0%, the MPC views that the level from which Bank Rate can be cut materially is
now around 1.5%.
Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches
around 1.5%.

Let me offer you two thoughts on this. Firstly as the Bank of England has yet to raise interest-rates from the emergency 0.5% level then discussing 1.5% or 2% is a moot point. Secondly this is a way of locking in losses as you will be driving the price of the Gilts owned lower by raising Bank Rate. Even holding the Gilts to maturity has issues because you get 100 back and in the days of the panic driven Sledgehammer QE buying where market participants saw free money coming and moved prices away the Bank of England paid way over 100.

Comment

It is hard not to have a wry smile at Governor Carney planning for a 0% Bank Rate as one of his colleagues joins those voting for a rise to 0.75%. Of course Governor Carney wants a rise to 0.75% eventually, say after his term has ended for example. The irony was that the person who has put so much effort into trying to be the next Governor voted for a rise. As to how Andy Haldane’s campaign has gone let me offer you this from Duncan Weldon.

Next month: 6 votes to hold 2 votes to hike And one vote for something involving a dog and a frisbee.

There was a time when people used to disagree with my views about Andy Haldane whereas now the silence is deafening in two respects. One is that I do not get challenged on social media about it anymore and the other is that if you look for the chorus line of support that used to exist it appears to have disappeared and in some cases been redacted.

Moving to more positive news there has been rather a good piece written by the England footballer Raheem Sterling and whilst no doubt there has been some ghostwriting the final message is very welcome I think.

England is still a place where a naughty boy who comes from nothing can live his dream.

 

 

 

 

 

 

“Why, sometimes I’ve believed as many as six impossible things before breakfast.” says Mark Carney

Last night the Governor of the Bank of England Mark Carney gave a speech which was extraordinary even for him. At the Society of Professional Economists he stood up and immediately took listeners into a parallel universe that was like the episode in Star Trek where Spock was irrational and violent.

Our guidance means that those who follow us will be better able to anticipate our actions. It will make those
actions more powerful. And it will help households and businesses consume, save, hire and invest with
confidence as the UK determines its path forward.

Just for clarity he is talking about the Forward Guidance of the Bank of England where he has promised interest-rate rises and not only not delivered them but of course ended up making a cut and adding £60 billion of Quantitative Easing. So guiding you in the wrong direction up the garden path helps? Well apparently it is most helpful when he sends you the wrong way.

Guidance is most useful at such turning points.

I was challenged on social media last night by those who claimed he has never promised interest-rate rises. I responded by taking them back to Mansion House in June 2014 when Governor Carney announced this.

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

This is because central bankers speak in code as Alan Greenspan of the US Federal Reserve pointed out back in the day.

 I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.

Returning to June 2014 financial markets were sure they knew what Mark Carney meant and that was that an interest-rate rise was coming soon. In response the Short Future for interest-rate expectations soared as did the UK Pound £. Here is a nuance to this which is that those who were going to be right as in nothing would happen were probably stopped out of their positions. This was added to by even David ” I can see for” Miles the easing fan writing this about interest-rate rises in the Sunday Telegraph.

But that day is coming.

Back in my days on Mindful Money I pointed this out on the 24th of June 2014.

 If we were in America then Mark Carney would be called a “flip-flopper” as we have had a lot of different types of Forward Guidance from an individual who has not yet been in office for a year. Others may be wondering at Mark Carney’s claim that he has met “thousands of businesses” in less than a year which is quite a rate!

The version according to Mark Carney

Remember this.

the MPC would not even think about tightening policy at least until the unemployment rate had fallen below 7%

Which went wrong about as fast as it could as even the Governor admits.

In the event, the unemployment rate fell far faster than we had expected, falling below 7% in February 2014

If we skip the obvious issue of Forward Guidance from an organisation making yet another large forecasting error there is a clear issue of logic. This is that a sharp fall in unemployment suggests a stronger economy and thus Bank Rate rises as it is a measure according to Governor Carney that is.

– a clear and widely understood indicator of the degree of slack

But apparently less slack meant this.

That guidance was effective. Surveys conducted in the months that followed indicated high awareness of it
among companies, with almost half reporting that they expected Bank Rate to remain at low levels for longer
than they would have done were guidance not in place

So it worked by being wrong! Of course if we switch to the real world companies were probably ignoring all the “flip-flopping” that was already evident. After all he had only been Governor for a year when this happened. From the BBC.

The Bank of England has acted like an “unreliable boyfriend” in hints over interest rate rises, according to MP Pat McFadden…………

“We’ve had a lot of different signals,” he said. “I mean it strikes me that the Bank’s behaving a bit like a sort of unreliable boyfriend.

“One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand.”

Apparently misleading is helpful

The next section was aptly described by Earth Wind and Fire.

Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies

We find that according to Governor Carney being an unreliable boyfriend brings a whole raft of benefits.

The MPC’s guidance speaks first and foremost to UK households and businesses.

Okay so he is swerving away from the financial markets he has misled to take us where?

And last year, we introduced layered communications, with simpler, more accessible language and graphics to
reach the broadest possible audience.

So we have had some dumbing down and then climbed the steps to the highest Ivory Tower he could find.

It now publishes its best collective judgments on the natural rate of unemployment, the output gap, as well as the
expected growth in productivity, labour supply and potential output.

I would like to pick out just one to illustrate how lost in the clouds this particular Ivory Tower is and that is the natural rate of unemployment. Was it the 7% he first used? Er no. In fact on the 28th of June 2014 it was already in disarray.

Governor Mark Carney pointed out that some work had suggested that the equilibrium unemployment rate (the lowest rate compatible with non-accelerating inflation) may be more like 5.5% than the 6.5% previously used.

I cannot recall if it went to 5% but it did go to 4.5% and is now 4.25%. Imagine the Bank of England had used such “science” to design the Titanic. They would be able to claim that it had not hit the iceberg but only because it would have sunk before it got out of port.

Reality got most suspended here.

The interest rate expectations of households and businesses have remained in line with the MPC’s limited
and gradual guidance………Guidance has reduced the impact of economic uncertainty on short-term interest rates

No the regular hints of an interest-rate rise have increased uncertainty especially when as has so often happened the unreliable boyfriend has flip-flopped. Ironically the next bit is true but not for the reasons given.

Guidance has dampened the volatility of interest rates, consistent with the expected and actual path of policy
rates (Chart 4). Guidance has reduced the impact of economic uncertainty on short-term interest rates.

The truth is that fewer and fewer people take any notice of his pronouncements. This was highlighted last night by the way the UK Pound £ responded with a yawn to the speech. Such a development must be most hurtful to someone whose ego is such that they changed the Bank of England website to have “Latest from the Governor” on the front page.

Comment

This is provided by two responses to last night’s speech. Here is a view which is clear on one side.

Okay so the only way is up! Or perhaps not. From Reuters.

The Bank of England could pump more stimulus into Britain’s economy if this year’s Brexit negotiations result in a bad deal, BoE governor Mark Carney said on Thursday.

In the past this would have been considered to be a masterly speech from a central bank Governor but not when he/she is claiming to provide Forward Guidance. because as you can see they can claim to be right whatever happens via some selective cherry picking but the ordinary person can not.

Why might Governor Carney hint at interest-rate rises and not do them. As ever the “precious” seems to be in the mix. From @IrkHudson.

Helps banks margins