Falling house prices in Germany add to the pressure on the ECB

Last week brought some news which caught my eye. On Thursday Bloomberg told us this.

Germany’s housing boom is over as prices for residential properties dropped for the first time in over a decade.

For newer readers the significance of this is that central banking policy has been driven in the credit crunch era by house prices. Or more specifically they want house prices higher so they can claim wealth effects for them. In the Euro area they are aided bu the fact that the official inflation measure or HICP ignores owner-occupied housing entirely. So in theory any house price rise is officially pure gravy, as it is a real increase or wealth effect. Of course, in the real word things are different because first-time buyers face inflation for example. But the credit crunch has taught us that central banks are not very good at telling the difference between theory and inflation. Otherwise we would not be where we are.

What were the numbers?

Bloomberg told us this.

A measure of home valuations fell in December by 0.8% from the same month a year ago, according to data released by the mortgage technology provider Europace AG on Thursday. That’s the first decline in the company’s EPX index for the month since 2009.

Their chart shows that post credit crunch house price growth was of the order of 5% per annum. Then the advent of negative interest-rates and mass QE saw it rise to more like 10% and 2021 saw it push towards 15%.

What is causing this?

The drop in housing prices highlights how much the situation in the German real estate market has changed since the European Central Bank started last year to reverse a decade of low and even negative interest rates. The move has doubled or even tripled the cost of mortgages, pricing many consumers out of the once red-hot market for homes. ( Bloomberg)

That is interesting because as the ECB only raised interest-rates in July then we have apparently a very fast reaction function. What that fails to take account of is the fact that mortgage rates were already rising due to what was happening in the rest of the world influencing German bond yields and hence mortgage rates. The ECB has a composite mortgage rate measure which was 1.31% in December 2021 but by July 2022 it has already risen to 2.82% so more than double. So as Nelly reminded us.

It’s gettin’ hot in here (So hot)

So in essence we learn that there are quite a few fixed-rate mortgages in Germany and that they were impacting well before the ECB moved variable ones.

We can bring that more up to date because in the latest figures ( November) we see that the composite mortgage rate was 3.62%. So the pressure continued. Oh and there is something one might not expect which is that Germany was a fair bit above the Euro area average of 2.98%. whilst having one of the lower bond yields. I rather suspect this is telling us that it has more fixed-rate mortgages than Italy at 3.4%. As we stand those borrowing for a mortgage in Italy have been able to do so more cheaply than their government!

What happens next?

We get a fair clue from the rhetoric of the ECB itself.


That was from an hour ago as the ECB continues its open mouth operations. Bloomberg has summarised what the market thinks about this.

The deposit rate will be raised to a peak of 3.25% — from its current level of 2% in three steps. The survey shows two half-point hikes at the February and March meetings, followed by a 25 basis-point increase in May or June.

ECB policymaker Isabel Schnabel spoke on the 10th and is relevant on several counts. First she is a good weather vane for ECB opinion and secondly she is German. She starts with some outright hype.

Over the past year, we have moved forcefully to contain inflation by first stopping net asset purchases and then by raising our key policy rates by a cumulative two and a half percentage points.

So forcefully in fact that the Deposit Rate is 2% whilst inflation has been over 10 %. But the crucial issue is here.

We judge that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target.

This is another confirmation ( steady pace) that they intend to raise by 0.5% at the next two meetings. She takes an unusual route to this but as central bankers have gone “green” it shows that she really means it.

Therefore, the green transition would not thrive in a high inflation environment. Price stability is a precondition for the sustainable transformation of our economy.

Tucked away there is I think a direct hint for mortgage rates.

To resolve today’s inflation problem, financing conditions will need to become restrictive. Tighter financing conditions will slow growth in aggregate demand,

We can take that forwards because one of the lessons of the credit crunch was that the ECB could get some sort of control over shorter-term bond yields. Now it took a lot of bond buying or QE but it forced German ones in particular into especially negative territory. So we see that has continued on the rise with the German two-year yield at 2.6%. So it will presumably follow the planned  0.5% rises at the next couple of meetings with a clear implication for mortgage rates.


Actually for once the official series was ahead of the game.

WIESBADEN – The prices of residential property (house price index) in Germany rose an average 4.9% in the third quarter of 2022 on the same quarter a year earlier…… The Federal Statistical Office (Destatis) also reports that the prices of dwellings and of single-family and two-family houses were down by an average 0.4% compared with the previous quarter.

So we see that the price signal is now clear as in lower. As for prospects there is the issue of the supply of mortgage finance as well. According to Bloomberg that is pretty clear as well.

The amount of new loans for house purchases in Germany dropped 30% in the four months following the decision last July to raise interest rates for the first time since 2011, according to ECB data.

Thus the overall situation looks very bearish for house prices in Germany as we start 2023. Both mortgage finance supply and price is applying a squeeze and the ECB plans to increase both. But whilst I welcome lower house prices as first-time buyers deserve some relief. I expect that central bankers will start to get itchy short-collars as soon as we get a series of reports of house price falls. After all higher house prices are one of the few concrete things they can claim as a response to their policies.

Thus by the summer I am expecting the ECB to be mulling the words of Tears for Fears.

ChangeYou can changeChangeYou can change




The UK energy situation has improved considerably as we start 2023

Good economic news was rather thin on the ground in 2022 but this year has at least started with some better news. It comes from the area of energy and we can look at something else unusual as the weather has helped. It’s role is to take the blame so it may not get much credit as I am sure there are plenty jostling for that role. There are consequences from this which start with inflation and hence the cost of living crisis. This rolls into economic prospects partly via the likely paths for bond yields and interest-rates. Let me give you an example from this morning.


They are catching up with us on here but this is rather different to the 5%+  that has been around and even more so from the frenzied 6% of last September/October.

UK Energy Prices

Earlier this week the Financial Times reported this.

British household energy bills are forecast to be lower than previously anticipated in 2023, dropping below the level of the government’s price guarantee in the second half of the year.

Analysts have sharply reduced their estimates for domestic energy bills after unseasonably warm weather across Europe in recent weeks has led to lower gas usage on the continent.

The latter part of the first sentence rather echoes and let me add another area it will affect favourably which is the public finances should the energy price guarantee  be above market prices. The present forecasts are below.

Martin Young of Investec bank, who has a record of accurately predicting the level of the price cap that dictates energy bills for the majority of British households, said he anticipates the cap to reduce to about £3,460 a year in April based on typical usage, dropping to £2,640 a year in July and hitting just over £2,700 in October.

These ch-ch-changes have left Ofgem behind.

The price cap, which is revised every three months by energy regulator Ofgem, is currently at £4,279 a year on average.

Just as a reminder here is the government support level.

The government scheme is aimed at restricting a typical household bill at about £2,500 a year until the end of March. From April 1, Jeremy Hunt, chancellor, had committed to continue support but at a lower level so a typical bill would have been around £3,000 a year.

So as you can see things will be expensive for the public finances until April but less so than feared. But the real gains come from then and in the summer it may be paying out very little or indeed nothing at all. My first rule of OBR Club that the OBR is always wrong works again! There is also something which trips the Office for Budget Responsibility up.

Young estimated that the government’s energy bill support could reduce to £3bn in the 2023-24 fiscal year, versus £25bn in the 12 months to April 5, although he warned the forecasts were subject to revision if there were further upswings in wholesale energy prices.

What has been happening?

One element has been renewable power.

Wow, wasn’t it windy  yesterday! So much so that we saw a new max #Wind generation record 🏅 of over 21.6GW We are still waiting for all the data to come through for yesterday – so this might be adjusted slightly. Great news for #ZeroCarbon #Electricity operation.

That was from the UK National Grid on Monday and it even worked in terms of timing as it was during the evening peak ( 6:30 to 7 pm). Here is their most recent daily breakdown.

Yesterday #wind produced 53.7% of GB electricity followed by nuclear 15.3%, gas 11.2%, imports 9.8%, biomass 5.2%, hydro 2.9%, coal 1.8%, solar 0.2%, other 0.0% *excl. non-renewable distributed generation.

You may note that we are importing a larger amount which is at least partly due to the fact that Edf in France has got more of its nuclear reactors online. Also we seem to have fixed at least part of the interconnector that was damaged by fire as the UK and France can now exchange up to 3.5 GW rather than 3. So there is a little more security in that nukes provide a reliable consistent supply. In fact this was the old plan where we would import in winter from France and export in summer. Overall there has been a shift in that the UK has become an electricity exporter as according to iamkate the net export rate gas been 0.5 GW over the past year.

We are in the period where there was a risk of blackouts although care is needed as the weather pattern is expected to change soon.

The weather in North-West Europe is looking like will turn to “normal” around Jan 16 after a very prolonged period of spring-like temperatures that have crushed gas and electricity demand. NWE mean temperature has been above the 30-year average since Dec 22nd. ( @JavierBlas)

Another area has helped out as we have moved into winter.

A Nottinghamshire coal-burning power plant will stay open for two years beyond its planned closure date after a call from ministers prompted by the UK’s energy crisis.

Ratcliffe-on-Soar had initially been pencilled in to shut in 2022, but last year said it would have an initial extension until 31 March 2023. ( The Guardian)

Coal is providing some 0.7 GW and we seem to have retained a peak above 1.5 GW for when times get tough. In fact if the Guardian is right we may have some more in reserve.

So far none of the coal-fire powered stations asked to stay online this winter as a precaution have been asked to supply power, the Daily Telegraph reports.

Oh and it is way beyond even irony for the Guardian to be reporting this about coal

But in another, it’s really simple: we need to leave fossil fuels in the ground. George Monbiot (November 2021)

There was more.

 We have the technology required to replace fossil fuels. There’s plenty of money, which is currently being squandered on the destruction of life on Earth

How is that going George?

Arise Sir Alok Sharma

It seems appropriate at this point to note this. From my twitter feed on November 2nd.

Alok Sharma wants someone else to dig the coal and for us to ship it to the UK. 1. Making environmental issues worse 2. Weakening our economy via higher imports Somebody please stop this fool before he does even more damage.

He also wanted to end the use of coal altogether so he is one of those responsible for higher energy prices and some going cold and hungry this winter. In a reward for failure he got a Knighthood which is one of the ways the establishment tries to cover things up.


Next week will be tougher but we go into it in about as strong a position as presently possible. This has quite a few implications for our economic prospects. I have already noted the likely improvement in the UK public finances which could be substantial. This is being reflected in our 50 year yield which was 3.7% earlier this week and is now 3.35%.

Added to this is weaker prospects for inflation. Should prices fall from now for domestic energy then there will be an extra effect on the official numbers from likely higher weights being used. But the overall principle will be of much lower inflation pressure and maybe a fall from domestic energy. This will add to the already lower prices at the pump as I noted 144.8 pence for a litre of petrol at the Applegreen garage at The Oval the other day. Over time this will feed into other prices such as food for example.

The above has several implications for economic growth. With the cost of living crisis not as bad as feared then economic growth looks more hopeful. Added to that the government has just got a lot more flexibility on the public finances so with an election not so far away it is likely to spend it.

The risk remains of a succession of cold still days but so far we have been singing along with Kylie.

I should be so lucky
Lucky, lucky, lucky
I should be so lucky in love
I should be so lucky
Lucky, lucky, lucky
I should be so lucky in love







How much will the central banks lose on their QE bond holdings?

As we start a new financial week the calendar sees the Bank of England restart its plan to reduce its large UK bond or Gilt holdings. But before we get to that the Swiss National Bank came racing out of the traps this morning with this.

According to provisional calculations, the Swiss National Bank will report a loss in the order of CHF 132 billion for the 2022 financial year. The loss on foreign currency positions amounted to around CHF 131 billion and the loss on Swiss franc positions was around CHF 1 billion. A valuation gain of CHF 0.4 billion was recorded on gold holdings.

There is an obvious issue here with the concept of a central bank as a hedge fund. Also the SNB has been raising interest-rates in 2022 from -0.75% which is a little awkward when you have built up an enormous store of cash abroad. The main loser here I would imagine is all the bond holdings ( mostly in Europe) as bond holding values decline as interest-rate rises have seen bond yields rise. The investements are usually in short-dated bonds but they have been hit hard in the last year or so.

There is a real world consequence from this because the era of central bank’s bestriding the world like masters of the universe has led to them being able to send money to their national treasuries.

After taking into account the distribution reserve of CHF 102.5 billion, the net loss will be around CHF 39
billion. Pursuant to the provisions of the National Bank Act and the profit distribution agreement between the Federal Department of Finance and the SNB, this net loss precludes a distribution for the 2022 financial year.

So no money for the Swiss treasury this rime around. I have regularly pointed out that the profits from the QE era were being financed via buying from the same bodies claiming the profits! Or if you prefer what could go wrong? Indeed many European markets had central banks ( ECB & SNB) competing to buy at times which us why we saw negative bond yields even in Italy.

Bank of Japan

If we now switch to the other Currency Twin as we used to call them we see a domestic issue in play and it comes from this announcement.

The Bank of Japan shocked markets in December by widening the band in which 10-year government bonds could trade from 25 to 50 basis points. Investors responded by pushing two- to 10-year yields to their highest since 2015,  ( Financial Times )

That is again rather awkward when you own so many bonds or JGBs. It owns more than half the market or if you prefer the end of year accounts show this, 564,155,789,895,000 Yen’s worth. Actually in typically Japanese fashion this apparently QE retreat has come with more of it.

The Bank of Japan just set a new monthly record for bond purchases. They bought more than $128 Billion in Japanese government bonds this month. ( @stackhodler )

There was more emergency bond buying last week as the Bank of Japan continued to apply a policy of Face. After announcing a move to a bond yield of 0.5% they have tried to stop it and with today’s range being from 0.5% to 0.51% they are having more than a little trouble.

But for our main purpose today there is the issue that the Bank of Japan is taking losses on what is an enormous portfolio. The March JGB future was over 151 in the last year whereas it is 146 now. So when we look at the size of the Bank of Japan position mark to market losses are already large and the only body stopping them getting larger is the buying of The Tokyo Whale itself. Which of course leaves it with an ever riskier position.


The European Central Bank is next on my list because it too pushed bond yields negative and so gave us peaks in prices. At this point it is hard not to think of all those Italian bonds it bought at negative yields but also even Germany saw quite a bubble as we mull the Swiss buying too. One way of looking at this is the Italian bond future which went above 154 and is 112.5 as I type this so the PEPP purchases look simply awful on a mark to market basis. You do not need to take my word for it as here is the ECB blog from last week.

Government borrowing rates have increased sharply on the back of high inflation and the normalisation of monetary policy.

It is both in the other side of that trade and via a combination of open mouth operations and higher interest-rates is enforcing it.

It is pretty much obvious that, on the basis of the data that we have at the moment, significant rise at a steady pace means that we should expect to raise interest rates at a 50-basis-point pace for a period of time. ( ECB President Lagarde)

Those who have followed me since the beginning may recall that the claims from the ECB that it could not lose money as long as Euro area bonds were repaid. The problem this time around is that it paid more than 100 for them sometimes much more and will only get 100 back. Whilst it can turn a blind eye to mark to market losses bonds will mature and it plans to do this.

From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.

Next up is the issue of the ECB being backed by so many different national treasuries ( 20 now with Croatia). Profits and losses are usually 18% for the collective numbers and 82% for the national central bank. So eyes will sooner or later be on Italy again.

Doe the moment the flow of money from Euro area central banks to their national treasuries is over.

The Federal Reserve

Last July the Fed told us this.

The need for the Fed to increase the policy rate expeditiously to address inflationary pressures is projected to result in the Fed’s net income turning negative temporarily.

Ah “temporarily” we know what that means! But there was more.

The associated increase in market interest rates has also led to an unrealized loss position of the SOMA portfolio, which could become larger in the near-term

It has. Anyway back then they argued this.

As a result, remittances are suspended for three years in the baseline and a deferred asset is recorded on the Fed’s balance sheet, While the deferred asset reaches a peak of about $60 billion in the baseline projection, the tail risk in these projections, represented by the upper edge of the dark-blue area, indicates that the deferred asset could reach as high as about $180 billion.

Deferred assets are the new euphemism for losses by the way.

For the US taxpayer the issue is that the flow of money from the Fed is over.

The Fed transferred back $109 billion for 2021, the central bank said in March. That was well over the $86.9 billion in so-called remittances handed back in 2020. ( Reuters )

At the moment the account at the Fed is – US $20.5 billion.


The biggest irony of the present situation is that central banks have enforced losses on themselves. The cost of QE is their own short-term interest-rate which they have raised quite a bit in 2022 and likely will do more in 2023. Even worse in their orgy of bond buying after the Covid pandemic they paid such high prices for bonds that there is little yield in return. So the cash flow situation is awful.

Next up is the issue of the capital situation which is even worse. If you pay 130 for a bond which matures at 100 there will eventually be a problem. But active QT or bond sales means you have to take some form of loss as you are selling for less than you paid and for the reasons explained above there is little income to cover this. Ditto for bond maturities.

Why did they not plan ahead? Well I did because if we go back to September 2013 I wrote a piece in City-AM suggesting the Bank of England take advantage of a better economic period to shrink its holding and thus potential for losses. Instead Governors Carney and Bailey did more not less.

So now they emerge blinking in the sunlight singing along with Sweet.

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 wayTo blockbuster

This is not the end of the financial world because central banks can always print more money. But as the money printing fed the inflation we are now experiencing it would be logically inconsistent to print more right now.





Borrowing for the energy crisis has become much more expensive for Euro area governments

If we look across the English Channel or perhaps La Manche there is a lot going on. Last week we saw a shift in interest-rate policy which has been backed up this morning. This is from Vice Presidebt de Guindos in Le Monde.

First, increases of 50 basis points may become the new norm in the near term. Second, we should expect to raise interest rates at this pace for a period of time. And third, our interest rates will then enter into restrictive territory. The steps we have taken so far are going to have an impact on inflation, but we still need to do more.

As you can see this is a continuation of the rhetoric which suggests the Deposit Rate will rise from the present 2% to 3% over the next couple of meetings, and led some to think it could go as high as 4%.

Today I want to look at a consequence he himself mentions.

Admittedly, raising interest rates means an increase in funding costs for governments.

It is a little tucked away in his interview probably because there was another big shift announced last Thursday. But let us now look at that colliding with the problems created by the energy crisis.

Borrowing for energy needs

Bloomberg has taken a look at what the energy crisis has cost so far and the numbers are not pretty.

Europe got hit by roughly $1 trillion from surging energy costs in the fallout of Russia’s war in Ukraine, and the deepest crisis in decades is only getting started.

The International Monetary Fund has looked at it another way.

European governments have up to now used a wide range of policies to lessen the effects of high energy prices, including various forms of price suppression. In some countries the fiscal cost of the energy crisis response is set to exceed 1.5 percent of GDP in the first year alone—with more than half of that in costly non-targeted measures

In the IMF piece I note something which is rather familiar from the inflation issue.

Most measures were meant to be temporary, but they have already been extended, expanded, or both in many places.

That does of course fit with the definition of temporary in my financial lexicon for these times.

Actually European government’s have spent this so far.

Europe’s massive tab for securing energy supplies and cushioning consumers from price spikes soared past €700 billion by end-November

This includes the UK which does not count for Euro borrowing purposes but 600 billion Euros is still a lot and there is more to come according to Bloomberg.

After this winter, the region will have to refill gas reserves with little to no deliveries from Russia, intensifying competition for tankers of the fuel. Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. That means no respite from high prices.

So high levels of borrowing could be with us for a while. This would only be added to by this reported by Politico last month.

The EU is in emergency mode and is readying a big subsidy push to prevent European industry from being wiped out by American rivals, two senior EU officials told POLITICO…….The European Commission and countries including France and Germany have realized they need to act quickly if they want to prevent the Continent from turning into an industrial wasteland. According to the two senior officials, the EU is now working on an emergency scheme to funnel money into key high-tech industries.

We something familiar in this as we see perhaps another SPV or Special Purpose Vehicle being set up for it.

The tentative solution now being prepared in Brussels is to counter the U.S. subsidies with an EU fund of its own, the two senior officials said. This would be a “European Sovereignty Fund,”

So countries can simultaneously borrow and claim they are not doing so. Actually Eurostat has done a pretty good job over time of pegging them back. But in the year it may take it to do it politician’s attention has usually moved on.

Let us move on with Europe preferring the IMF version above as it has lower numbers although in another piece they too mention 1 trillion Euros as a worst case scenario. But before I do let me point out that Bloomberg have been cheerleading for a green revolution which has morphed into quite a crisis.

ECB Policy

Previously the ECB would have hoovered up the bond issuance implied by the changes above. After all it is the only central bank I can think of that ran two QE bond buying plans at once as it added the PEPP to its existing one. That is the road which saw its balance sheet head for 9 trillion Euros. This has led to an interesting comparison from Robin Brooks.

Relative to the outstanding issuance, the ECB is as big a holder of government debt as the BoJ…

As of the third quarter they had bought some 40% of bond issuance. But as David Bowie would put it we are about to see some ch-ch-changes.

From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.

This is the beginning of Quantitative Tightening or if you prefer reverse QE for the Euro area. It is not going to be actively selling bonds like the US Federal Reserve or the Bank of England. But it will no longer be oiling the wheels of bond issuance by reinvesting maturities. So others will have to find an extra 15 billion Euros a month to replace it. They will still be oiling the bond issuance wheels just less so.

It represents roughly half the redemptions over that period of time.  ( President Lagarde )

All this is happening whilst the economy is weak. Back to Vice-President de Guindos.

The indication for the fourth quarter of 2022 is that we are perhaps in negative territory, but not very deep, with GDP expected to contract by 0.2%. The lead indicators we have are not good. Our projections therefore expect the euro area to fall into a mild recession in the last quarter of this year and in the first quarter of 2023, when GDP is expected to contract by 0.1%.


There is something of a perfect storm on the way for government borrowing costs.

  1. The energy crisis means they will be borrowing more and probably a lot more.
  2. The economy is likely in a recession which does not help
  3. The major bond buyer in recent years which is the ECB is planning to reduce its purchases to a relative dribble.
  4. The ECB plans to push short-term interest-rates above 3% and maybe towards 4%

It is not my purpose to say bond yields will go higher. Well apart from shorter term ones as Germany will not have a two-year yield of 2.5% should the Deposit Rate go above 3%. But to point out this change which has already taken place. Over the pandemic borrowing period Italy was able to borrow for ten-years at a cost of less than 1% and ay times for around 0.5%. As I type this it is 4.4%

Such a move happens in slow motion as countries issue new bonds and refinance existing ones. But it is also happening with a quicker move as inflation linked bonds have been very expensive in 2022.

The Bank of Japan cracks meaning the Widowmaker springs to life

This morning has brought some pretty significant economic news out of Nihon or Japan. It started in an area I mentioned in a reply to yesterday’s comments because bond yields had pushed higher making me suspicious. Overnight if we stay with that theme we saw this.


That takes me back to my days out in Tokyo, but in the modern era that did not happen because the Tokyo Whale otherwise known as the Bank of Japan was hoovering up ten-year Japanese Government Bonds at a yield of 0.25%. A bit like Gandalf in The Lord of the Rings when he cried “Thou shalt not pass!”

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to modify the conduct of yield curve control in order to improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative
financial conditions.

So we have a need to maintain what is called “face” in Japan so something significant is coming. Especially as we see that foreigners or “gaijin” are being blamed.

Since early spring this year, volatility in overseas financial and capital markets has increased and this has significantly affected these markets in Japan.

A rise in short-term interest-rates? No not that one.

The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate
Balances in current accounts held by financial institutions at the Bank.

Instead we find a move they have been forced to do once before. That is loosen the terms of Yield Curve Control. It came with a sort of denial

The long-term interest rate:
The Bank will purchase a necessary amount of JGBs without setting an upper limit
so that 10-year JGB yields will remain at around zero percent.

But then we got there.

While significantly increasing the amount of JGB purchases, the Bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points.

So we get to it. They are shifting Yield Curve Control from 0.25% to 0.5% which they then confirm.

The Bank will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted.

If we just for the moment stay in the bond market we see that the short Japanese Government Bond trade has turned in a profit as the March futures contract fell by 1.35 points. The yield has only moved to 0.4% so far because some will take profits and others may buy knowing they can sell to the Bank of Japan at 0.5% in the worst case. 

Also the Bank of Japan was in making sure the falls were not too large ( back to the issue of loss of face)


Japanese Yen 

We have been following this all year due to the significance of the moves which initially was a large depreciation. This morning, however.

 The Japanese yen strengthened by more than 3% against the U.S. dollar to 132.56, marking its strongest levels in over three months. ( CNBC )

There are quite a few consequences here of which the simplest is that some traders will have singed fingers as others wake up with a smile. Next the Japanese Ministry of Finance will be having a celebratory glass of sake as its currency intervention now looks really rather clever. Also the new stronger phase for the Yen will mean that Japan will be paying less for its large energy imports so there will be an improvement there.

For international players there is the issue of the Carry Trade. We have been observing this for more than a decade now. For newer readers one of the factors into the credit crunch was that people borrowed Japanese Yen as interest-rates were low and then panicked out as the credit crunch hit. Well this year Japan has been the last (wo)man standing on the issue of negative interest-rates. Technically it still is but you are now being hit on exchange rates and borrowing via bonds is now more expensive. 

Also the stereotypical Japanese investor Mrs. Watanabe faces the prospect of getting some interest on her money in Yen. This is a big deal when you consider how much Japanese money has gone abroad chasing yield.

The Tokyo Whale

There is another reason for the Bank of Japan to be supporting the JGB market today. Imagine prices falling when you have this position.

TOKYO — The share of Japanese government bonds held by the Bank of Japan has topped 50%, hitting a record high as the central bank has accelerated its government debt purchases to hold down long-term interest rates. ( Nikkei in June)

In fact things in some bonds could get pretty spectacular.

TOKYO, Nov 2 (Reuters) – The Bank of Japan’s ownership of newly issued 10-year Japanese government bonds (JGBs) exceeds the amount sold at auction,

Let me put it another way as it holds some 563,738,252,674,000 Yen of Japanese Government Bonds on which it is in the process of taking a bath. It has another 10.7 trillion of Corporate Bonds and the like on which it will also be taking a bath.

I stopped counting when Japan was on its nineteenth version of QE partly because they changed the name to QQE. But this must be about version 30 now in old money.


The Bank for International Settlements looked at this in a Working Paper earlier this year.

From the onset of the program in December 2010, the total amount of ETFs purchased by the BOJ has continued
to increase and reached about 35 trillion yen, or 5% of the total market value of all listed stocks in Japan. 

Actually it is now 36.9 trillion Yen and this is the real reason for The Tokyo Whale moniker. Plenty of other central banks have bought bonds ( although not on the same scale) but no-one else has ploughed into the equity market in such a manner.

Oh and returning to the BIS paper this is how they explain an equity put option.

In the ETF purchase program, the BOJ does not randomly purchase ETFs, but instead only purchases ETFs when the stock market faces negative price pressure.

So we see another set of holdings which have had a bad day.

The Nikkei 225 fell 2.46% to 26,568.03, leading losses in the region, and the Topix fell 1.54% to 1,905.59. ( CNBC )

It did not buy any this morning. Perhaps it was mulling its recent losses although the overall programme has a mark to market profit. The only catch is who do you sell sych a large position too?


We have seen two major central bank moves in the past few days. First the ECB and its promise of more 0.5% interest-rate hikes and now the Bank of Japan has creaked. We may see more from the Bank of Japan as you know what I think about official denials.


Let me remind you that he introduced negative interest-rates only a Beatles week ( 8 days) after denying any such intention. A Christmas present as the Japanese like to move when us Gaijin are on holiday? Probably not but…

This also shows another end to central bankers being “masters of the universe” as we see another one in retreat. What little was left of Modern Monetary Theory went too. Not the grand collapse of the Swiss National Bank in January 2015 but a significant move. The Bank of Japan will be seeing larger and larger losses on what are enormous positions.

Let me leave you with Governor Kuroda who loves to tease.

BoJ’s Kuroda: Won’t Hesitate To Ease Monetary Policy Further If Necessary



The ECB has set itself up for a disastrous policy error with echoes of 2011

Yesterday turned out to be quite a day in central banking terms. There is much to say about my home one as in the Bank of England, but the truth is that even the extraordinary fantasy world that a couple of its policymakers apparently live in was quickly gazumped a couple of hours later by European Central Bank ( ECB) President Christine Lagarde. That has echoes of both 2011 and her “shock and awe” comments about a claimed Greek economic recovery that rapidly turned into a depression.

Things started calmly enough and were what we expected from the official announcement.

The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.50%, 2.75% and 2.00% respectively, with effect from 21 December 2022.

The one that is especially relevant is the deposit facility as it is the main player as you might expect fro its name. So the benchmark is now 2%. We also got something that is both a central banking standard and a little curious.

 In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictiveto ensure a timely return of inflation to the 2% medium-term target. 

At this point “steady pace” could mean quite a few things, but the curious point is that we were being guided forwards not even 2 months after Forward Guidance had been formally abandoned. 

 So we are very much and deliberately turning our back to forward guidance, which is not helpful in the current circumstances given the level of uncertainty that we have pretty much all around. ( President Lagarde 27th of October)

Actually yesterday’s statement very quickly contradicted itself.

Our future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

So maybe not the steady pace we had just been told then. 

The Press Conference

Things got much more heated here. 

One of them is that we, at this point in time, expect and judge that we will have to raise interest rates significantly. Now, what does that mean? 

Then steady pace was back.

 You have to read it together with the steady pace.

Then it came back with what Americans call the money shot and the emphasis is mine.

It is pretty much obvious that, on the basis of the data that we have at the moment, significant rise at a steady pace means that we should expect to raise interest rates at a 50-basis-point pace for a period of time.

That went off like a bomb in financial markets with the only delay coming from people who could not believe we had just been told that several further 0.5% interest-rate increases could be expected. Some delayed hoping for something of a rebuttal or correction like what happened after she told us that the ECB was not there to “close bond spreads” which sent the Italian bond market into a tailspin back in the day.

Indeed the point got rammed home.

The second element that you have in this paragraph is the reference to a steady pace, so it’s significant, and it has to be a steady pace, which means that we have made progress over the course of the last few months, but we have more ground to cover. We have longer to go, and we are in for a long game.

As you can see the “steady pace” was the theme of the day which of course contradicts the “data-dependent” point. But it combined with the “long game” meany thoughts switched to how high ECB interest-rates were now expected to go. It provoked a question.

Investors currently expect a terminal rate of about 3%. Does that sound reasonable to you? 

To which President Lagarde replied.

Our staff projections, that embed and incorporate the market expectations of our terminal rate, do not certainly allow a return to the 2% inflation target that we have in a timely manner. 

So higher than a 3% interest-rate then. That has an issue because the ECB has guided people towards 2% being a “neutral rate” which led to the 3% expectations in the markets. Now we were being told this.

We are showing determination and resilience in continuing a journey where we have, if you compare – comparisons are odious, but if you were to compare with the Fed – we have more ground to cover. We have longer to go, and that is the reason why we have very specifically added messages in our monetary policy statement to reflect that fact.

So what does that mean?

that implies markets should price at least a 4.5% nominal ECB terminal rate. ( @MacroAlf )

I think that is a bit racy as it relies on the core inflation forecast being accurate but we were guided to 4%. As the Fresh Prince put it.

Boom! shake-shake-shake the roomBoom! shake-shake-shake the roomBoom! shake-shake-shake the room


I described the ECB procedure for this on twitter before the event.

Next up is the ECB which I expect to increase interest-rates by 0.5% to 2%. Again I am expecting dissent but it is not as transparent as the Bank of England so we may have to wait until “sauces” leak to the media tomorrow…..

In fact they were quick off the mark.

ECB sources: More than one-third of ECB officials wanted to hike by 75 bps ( forexlive.com)

So rather than reigning back they added to it. This morning they have continued with the same theme.




Financial Markets

Here is Alvise Armellini of Reuters with a response from the obvious impact point.

“I don’t understand the Christmas present President Lagarde has decided to give Italy,” Defence Minister @GuidoCrosetto

tweeted alongside a chart showing a widening yield spread between Italian and German government bonds.

In terms of numbers the ten-year yield of Italy gas risen by 0.5% to 4.4%. This is especially significant as I note this from a couple of days ago.


With their other hand they have just made it harder.

Even Germany was hit and in essence fiscal policy across the Euro area just tightened. Germany for once will be especially hit if the story that it needs to borrow around 500 billion Euros to smooth its energy crisis turns out to be true.

As to equity markets well they took a dive too. The Dax of Germany has fallen by around 3%.

There should be relief on the Euro front and there was to some extent as it rose by 1% versus the UK Pound £ for example. But it still drifted lower versus the US Dollar as the change in expected interest-rate differentials was offset by the likely consequences.


The first point is the simply awful timing of the ECB and President Lagarde.

Lagarde December 2021: we see inflation as a hump & a hump eventually declines… inflation will decline over the course of 2022. ( @WalkerAmerica )

On that road she thought interest-rate rises were very unlikely where in reality she has ended up increasing them by 2.5%. Whereas now she is ramping up the rhetoric as there are signs inflation might be slowing.

The outlook for inflation is especially encouraging, with
supply chains now improving for the first time since the
pandemic began and firms’ costs growing at a sharply
reduced rate, feeding through to lower rates of increase for prices charged for both goods and services.  ( S&P PMI )

That is backed up by a lower oil price for example and other supply costs. 

So we have a classic central banking timing error which has exacerbated the inflation crisis and looks set to make next year;s slow down worse. This was what making central banks independent was supposed to avoid! But then they appointed politicians to the ECB…..

Next up is the issue of ramping bond yields just as Euro area countries have to borrow more because of the energy crisis. I can add in the future plans for QT bond sales although at the moment they are minor. It is rather a self-inflicted wound to add to the energy crisis and again to next year’s slow down. 

I suppose though all of this is in keeping with someone who has a conviction for negligence.




We are in the midst of quite an interest-rate party

Today finds us in the middle of something of an interest-rate party. We can start with last night and the move by what is the leader of the pack in this regard, the US Federal Reserve.

In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. 

So we got the 0.5% increase that we were expecting as it chases the US inflation rate. One perspective is that it is still around 2% below the inflation rate as whilst Tuesday’s CPI reading was 7.1% the PCE ( Personal Consumption Expenditure)number the Fed targets is usually lower than it.

Next up as we review actual moves brings us to the Swiss National Bank. 

The SNB is tightening its monetary policy further and is raising the SNB policy rate by 0.5 percentage points to 1.0%.

We are establishing something of a 0.5% standard here and the lower policy rate of the Swiss reflects their superior inflation performance.

Inflation has declined somewhat in recent months, and stood at 3.0% in November. However, it is still clearly above the range the SNB equates with price stability……..The new forecast puts average annual inflation at 2.9% for 2022, 2.4% for 2023 and 1.8% for 2024.

Perhaps there was a gain from a strong Swiss Franc after all. That is really rather awkward though for a Swiss National Bank that has spent the last decade or so trying to weaken it. All those US equities and European bonds it bought. Anyway for now the Swiss have inflation quite a bit lower than their peers.

Also if you set a standard you then wait for someone to break it and Norway has just done so.

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate by 0.25 percentage point to 2.75 percent.

So that is where we stand and let me add that by the end of the day I expect the Bank of England and the European Central Bank to join the 0.5% increase club. I expect the Bank of England vote to be split with a couple of members voting for 0.25% for example.

Forward Guidance

The issue of what happens next will be on everyone’s mind? That is more than a little awkward when central banks have formally abandoned Forward Guidance and in some cases ( yes I am looking at you Australia apologised for it being so wrong). But the Federal Reserve statement appeared unable to stop itself.

The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. 

Indeed the press conference sent this message according to the Financial Times.

The Fed sent a clear signal of more such pain to come on Wednesday with a new set of economic projections that showed the benchmark rate hitting a higher level than previously projected and sitting at that threshold for an extended period. 

Things got rather specific later.

Most officials now see the fed funds rate topping out at 5.1 per cent, with a large cohort of the view that it may need to exceed 5.25 per cent. Powell also warned that he could not “confidently” say the Fed would not again move up its estimates.

So there is the message which is that the Fed is guiding people towards higher interest-rates than before. About 0.5% higher. So in terms of Forward Guidance we have a case of something sung about by The Who.

Meet the new boss
Same as the old boss

In fact we can move on in my opinion to other lyrics from that song.

Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no

This is because even the new “mouth” for the Federal Reserve Nick Timiraos of the Wall Street Journal had to admit this.

The Federal Reserve has raised rates to levels this year that didn’t fit on the Summary of Economic Projections y-axis scale nine months ago. Today, the FOMC projected raising rates next year to levels that didn’t fit on the SEP y-axis six months ago.

If they were in an archery competition they would have the crowd ducking as their arrows flew well wide of the target.

Therefore it was refreshing in a way to see a sort of honesty from the Norges Bank of Norway this morning.

If the pressures in the economy persist, and signs emerge that inflation will remain high for longer than currently projected, a higher policy rate may be needed than currently envisaged. If inflation falls faster or unemployment rises more than projected, the policy rate may be lower than projected.

So we are back to the concept of the two-handed economist ( on the one hand…..but on the other hand)


The US bond market took my sort of view on the supposedly hawkish guidance.

In afternoon trading, the yield on 10-year Treasury notes US10YT=RR was down 2.9 bps at 3.473%.

The U.S. 30-year Treasury bond yields US30YT=RR was flat at 3.526%.

On the shorter end of the curve, the two-year US2YT=RR U.S. Treasury yield, which reflects step interest rate expectations, slipped 1.1 bps to 4.217% ( Nasdaq.com)

Both the longer-term yields are around 3.5% which means they are looking ahead of the promised rises and expecting cuts after that. Switching to the two-year we see that it has matched the interest-rate rises so far but is not dipping its toe into beginning to price in further ones. At best for the Fed we are getting so Blood, Sweat & Tears.

What goes up must come downSpinnin’ wheel got to go ’round

It could take a little more solace from the US Dollar which rallied and moved the Japanese Yen a couple of big figures from 134.75 to 136.75. But the big picture here has been the move lower from above 150 so it has not broken the overall trend.


There are various perspectives on this. We can start with the view that our worries that we could not take interest-rates above 3% were a little overdone. Although we have bit had them for long and something may yet break! Indeed we do see issues such as the previous plunge in the crypto world. I see the rally in Bitcoin to US $18,000 as being part of a hope the rises will soon be over move and thus confirming that. Plus I was right to warn for all those years about the risks of higher interest-rates for central banks themselves.

Unrealized losses on Fed‘s balance sheet now exceed $1.125 TRILLION. ( @TheCarfangGroup)

They do not account for it in that way as they do not mark to market. However as they sell bonds via QT they will be creating losses which they put on the balance sheet as deferred assets. That is a euphemism and a half. As the creators of money they can create more but that is awkward. Because the policy now is responding to the money supply creation in the pandemic so doing more of that will create more inflation.

Also the US Treasury had got used to a stream of remittances oiling its fiscal wheels and that is now over. So you count the profits but put the losses as “deferred assets”? The US Treasury is also under pressure from the higher bond yields and inflation so ironically it will welcome bond markets expecting a pivot on interest-rates.

France looks to be falling into recession as the economy shrinks

Yesterday brought us an example of tempting fate as we were told this by the Governor of the Bank of France.


That struck a chord after the news from France on Friday. The statistics office told us this.

In October 2022, production fell again over one month in manufacturing industry (-2.0% after -0.5%) as in industry as a whole (-2.6% after -0.9 %).

So we have a picture of a decline at the end of the third quarter which accelerated in October and as economic growth back then was only 0.2% there is an increasing possibility that the economy is declining. Also the falls were widespread.

In October 2022, production fell again in the extractive industries, energy, water (-5.6% after -2.8%) and “other industrial products” (-1.6% after -0.2%) . It fell back into capital goods (-3.5%, after +0.7%). It fell sharply in coking-refining (-46.3% after -6.5%) due to the strike movement which affected the refineries. Production fell again in transport equipment (-1.9% after -3.2%): it fell in automobiles (-5.8%, as in September) but rebounded in other transport equipment ( +1.3% after -1.0%).

We can reduce the decline a bit to allow for the strike in the coking industry. However the fall in the energy category reminds us of the struggles that Edf has had this year with France’s nuclear output. That looks to be in play this morning with the UK exporting some 2.5 GW of electricity to help out. The decline in this area looks to havebeen added to by the services sector last month.

The seasonally adjusted S&P Global France Services PMI®
Business Activity Index fell beneath the vital 50.0 threshold
in November for the first time since March 2021, indicating
a decrease in activity levels across the French service
sector. At 49.3, this was down from 51.7 in October, ending a 19-month sequence of continued expansion. ( S&P PMI)

The services fall is marginal but we now that production is struggling so we are now looking like the decline is on. That is also the impression given by S&P Ratings on Friday night.

We reduced our 2023 GDP growth forecast for France to 0.2% from 1.7% in our July 2022 review and increased our budget deficit forecast to 5.4% of GDP from 4.0%, with the latter averaging 4.9% over 2023-2025 versus 3.6%, and general government debt rising to 112% of GDP by 2025.

I will return to the public finances issue but if we stick to the growth point the significant factor here is the 1.5% fall in the GDP forecast in a mere 5 months or so. As their forecasts are not accurate to 0.2% they are saying there will be no growth in 2023. That is significant because they were very unlikely to switch to predicting a recession as that would embarrass their previous forecast too much. Plus I note that they think there will be the wrong sort of Euro area solidarity.

The economic slowdown in Europe will constrain French growth.

This morning the wider PMI survey gave us an update on that.

Output levels across the euro area shrank once again in
November, extending the downturn into a fifth month.
Although the rate of contraction eased for the first time over
this sequence due to a slower fall in manufacturing
production, this masked an accelerated decline in the
eurozone’s dominant services sector. Excluding months hit
by COVID-19 restrictions, November’s contraction was the
second-sharpest since May 2013.

According to it France at 48.7 is doing relatively well compared to the Euro area 47.8 although another way of putting it is that it is in the group of countries doing better than Germany which is particularly weak.


This is a developing issue as I looked at last Wednesday. Today has its issues for France because someone at Edf got their calculations wrong.

On a highly observed day EDF Trading accidentally sold 1500MW too much on EpexSpot day-ahead auction ==> price is artificially too low. Let’s see what happens on intraday market ( @Emericdevigan )

That is why France is taking 2.5 GW from us. The issue is added to by it getting colder and also that systems are more stressed with less margin. The impact so far is this according to Emeric.

Intraday markets up around 50€/MWh this morning vs day-ahead clearing price. Day is not over, and for once real-time demand is above forecasts…

On a broader scope I see him noting some research pointing out the issue with French nuclear in that a capacity of 61 GW has faded into an expected 40 GW. This led on Thursday to plans reported by RFL.

The  French government is putting a plan in place to deal with the looming energy crisis as fears rise of electricity power cuts. A directive will be sent to regional police chiefs to anticipate scheduled power cuts, which could affect 60 percent of the population in the  worst-case scenario.

In terms of the nuclear fleet the use of the word temporary already has echoes of what happened with inflation.

“Historically, France is an exporter because of its very large nuclear fleet, however, now it turns out that it has temporary difficulties … (which) will be resolved but it will take a few years,” he told France Info on Thursday.

The issue with the import numbers below is that France will be hoping for power from the UK via the interconnectors whilst the UK is hoping for power from France. 

He said France would turn to European neighbours to import up to 15 GW, which represents “a useful amount” to cope with a peak in electricity consumption of around 90 GW, and “contributes to being able to avoid cuts”

She will also have to look elsewhere as due to the fire at one the present capacity is 3.5 GW. It will require some luck for cold days in France to be windy ones in the UK so we can help out.

Switching back to the impact on industry I note this in the article.

Electricity consumption in France fell by 6.7 percent last week compared to the average for previous years (2014-2019), a drop “largely concentrated in the industrial sector”, according to RTE’s latest report on Tuesday.

A clear hint of output and it also raises a wry smile as we used to look at electricity production in China as a guide to the economy and it seems the worm has turned.

I am not sure this about gas is the triumph the Financial Times is trying to present it as either.

“Industry is proportionally driving the biggest reductions in gas consumption, and this is entirely the result of clear market pricing,” said Tom Marzec-Manser, lead European gas analyst at ICIS. The high gas price has “disincentivised” use, he added.


To the slowing situation we can return to the the Governor of the Bank of France.

The ECB should raise interest rates by 50 basis points this month to tame surging consumer prices, said Governing Council member Francois Villeroy de Galhau. ( Bloomberg)

So they interest-rates will be 2% assuming he gets his way making them 2.5% higher this year. Plus he wants more.

expects rate hikes will continue after that meeting, and says he is unable to forecast when they would stop ( Forexlive)


Everything seems to be heading south at once with the economy struggling. I have made the point many times that central banks are now increasing interest-rates out of phase and the ECB has been one of the worst. The delaying means that the impact of the rises is arriving as the economy was weak anyway in the exact opposite of what monetary policy is supposed to do.

Looking at France’s situation there is also one with the public finances which is linked to inflation. She chose to switch some of her inflation to the public finances ( and some of it to Edf that has also hit the public finances). If we return to the S&P negative outlook it is here.

France’s headline inflation remains the lowest in the euro area, partly thanks to government support measures. These include caps on gas and electricity price increases and fuel rebates, which should help reduce headline inflation more than 2 percentage points (pp) on average in 2022, according to the government. The government expects an extension to caps on gas and electricity prices will reduce headline inflation more than 3 pp in 2023.

That is how France has an inflation rate of 7.1% which is relatively low. But it impacts here.

We now expect the budget deficit to average 4.9% over 2023-2025, versus 3.6% previously, with general government debt to GDP rising over our forecast horizon.

That will impact on real wages which on pre tax terms will look relatively good until taxes rise to pay for this.

As to the debt situation there are risks as the numbers rise but it looks contained for now.

Nevertheless, because the average maturity of French government debt is long dated (above 8.5 years) and the average interest rate on outstanding debt is low (above 1.5%), a pass through of market rates into the cost of total debt would likely be very gradual. ( S&P)

A possible X-Factor is this.


The ECB selling French government bonds will add more to the mix, if it happens/


Is Blackstone the canary in the commercial property coal mine?

Overnight we have perhaps seen a signal of something that worried us for some years. What I mean by that is that all the years of low interest-rates and of course negative ones in Japan and the Euro area would mean that interest-rate rises were likely to prove more difficult. I recall 3% being suggested as a level which as Taylor Swift would put it might cause “Trouble,Trouble, Trouble”. The situation was exacerbated by the way that central banks bought bonds and slashed interest-rates in some cases even lower in response to the Covid pandemic. So this from the Financial Times provides some food for thought.

Blackstone has limited withdrawals from its $125bn real estate investment fund following a surge in redemption requests, as investors clamour to get their hands on cash and concerns grow about the long-term health of the commercial property market.

The first point is that pressure has been applied in two ways. Firstly higher interest-rates raise borrowing costs with the Federal Reserve charging just under 4% and as it happens bond yields if we exclude the short-end being similar. So borrowing is more expensive and that leads to the second effect where we expect property prices to fall. Only yesterday we looked at the recent falls in the Case-Schiller index for US property and for our purposes today this is the relevant part.

“Despite considerable regional differences, all 20 cities in our September report reflect these trends of
short-term decline and medium-term deceleration. Prices declined in every city in September, with a
median change of -1.2%”

This is because this fund holds quite a lot of rental housing.

A majority of the fund is in apartments (about 55%) ( @GRDecter )

So we quickly are on alert as we note that it is expected further falls which are the real issue here. What has happened so far?

Back to the Financial Times.

The private equity group approved only 43 per cent of redemption requests in its Blackstone Real Estate Income Trust fund in November, according to a notice it sent to investors on Thursday. Shares in Blackstone fell as much as 8 per cent.

So the problem had in fact been building but was in the shadows until the declaration. These things always have a first mover advantage which is one of the reasons why they are in fact rather risky. In a sense it is like a run on a bank in that they only have a certain amount of cash and liquidity available so in any crisis there is an incentive to run for the hills. Also the environment has not only darkened in residential property.

In the US, commercial property is under pressure from rising inflation and interest rates, according to a recent report from the National Association of Realtors. Globally, the mood in property has darkened and some high-profile investors have warned of a lack of finance in parts of the sector. ( FT)

So the outlook is dark and there is a problem with leviathans like this.

The withdrawal limit underscores the risks wealthy individuals have taken by investing in Blackstone’s mammoth private real estate fund, which — after accounting for debt — owns $69bn in net assets, spanning logistics facilities, apartment buildings, casinos and medical office parks.

I think we can safely say that the $69 billion net asset value has been assigned to history. Also these sort of funds are not exactly nimble so in general you should only have a a small proportion in them. Did these all remember that?

About 70 per cent of redemption requests have come from Asia, according to people familiar with the matter, an outsized share considering non-US investors account for only about 20 per cent of Breit’s total assets. One partner in the fund told the Financial Times that the poor recent performance of Asian markets and economies may have put pressure on investors, who now need cash to meet their obligations.

That is a clear fail in itself because if you thought you might need cash you should not be in this sort of fund, or to be more specific put a tranche in one where you can get cash reliably. Maybe there has been an additional factor in that if people did that and say used a bond fund presumably a US Dollar one then they would have lost money in 2022. In spite of the recent improvements the US 30-year yield at 3.63% is more than double what it was at this time in 2021. So perhaps things looked better in the commercial property fund ironically putting it under pressure.

On that road we have perhaps a rather familiar “mark to model” issue where the bet asset value does not fully reflect the real world and thus has made withdrawals more likely. That is reinforced by this.

 The fund has returned more than 9 per cent in the nine months to the end of September because of rising rents from the properties and dividend payments.

Getting the cash

To be fair to Blackstone their system has worked well in two ways here.

The surge in redemption requests come as Blackstone announced the sale of its near 50 per cent interest in the MGM Grand Las Vegas and Mandalay Bay Resort casinos in Las Vegas for $1.27bn. Including debt, the deal valued the properties at more than $5bn. Proceeds from the sale, which was agreed at a premium to the carrying values of the properties, will help with liquidity for Breit as it meets redemption requests — or be reinvested in faster-growing property assets, said a person familiar with the matter. ( FT)

The first point is the simplist which is that they had something they could sell relatively quickly which is far from always the case. Also in this instance it seems to was valued fairly. Care is needed as that may be why it was the one sold but initially their procedures are holding up. But in the end this sort of fund will always have to cap any flow.

The Breit fund allows for 2 per cent of assets to be redeemed by clients each month, with a maximum of 5 per cent allowed in a calendar quarter.

The private fund managers should have been emphasising that.

Private capital managers have increasingly turned to retail investors, arguing wealthy investors should have the same ability as pension and sovereign wealth funds to diversify away from public markets. Part of the pitch money managers make is that, by giving up some liquidity rights, higher returns can be achieved. ( FT)

How many times have we seen something like this play out? It is like an oddly declining verb in that liquidity is only relevant when you badly need it, which of course is when it may be a case of South Park’s “And it’s Gone”


On a tactical level things are holding up pretty well as Blackstone set clear rules for withdrawals and has been able to realise a sold tranche of cash both promptly and without dilution. That leads to the question of can they keep it up? But so far so good.

On a more strategic level there is the issue that new borrowing is more expensive now and property values are falling. Also I worry about this from JP Morgan in FT Alphaville.

What may be a bit more concerning is that performance does not appear to be directly driving outflows given returns are excellent in 2022TD with the fund up ~9% through October.

With even the best other funds losing more than 10% and some over 30% how has Blackstone made a profit here? Even the best fund managers seem unlikely to have been that good. It also provides an irony because if you have several commercial property funds you will only have one making money and so will most likely withdraw from it. Not necessarily logical but human nature.

Also whilst they have the ability to effectively close the fund it would send out a dreadful message.

Blackstone can basically just turn it into a closed property trust at will, and reopen for redemptions when they want.

We return to the twin issues of ZIRP making investors search for yield and commercial property where the investment vehicle always allows in but not always outs.


The US Federal Reserve changes tack in response to lower house prices

Today’s title is a little tongue in cheek but there is also quite a lot of truth in it. The Chair of the US Federal Reserve has had particular influence over foreign interest-rates this year via the “King Dollar” period that exacerbated inflationary pressure for other countries. Although some of the other central banks especially ones in Europe were rather slow on the up take and Japan decided to ignore it entirely. Last Night he spoke at the Brookings Institute in Washington DC and financial market ears were alert for any hint of policy moves they could figure out. They had to wait until the last paragraph for the key section.

Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.


I am pleased to see him make the lags point which needed reinforcing. The second sentence rather ignores the fact that they accelerated the pace and have been making the largest rises most recently an issue I will return to. But then we get what Americans would call the money sentence. As the Federal Reserve mouthpiece at the Wall Street Journal puts it.

What to watch: Beyond the pre-FOMC table-setting around the likely step-down to a 50-bps hike in December ( Nick Timiraos )

So are also now wondering about the possibility of the rise being only 0.25% this month.

House Prices

As someone who has long argued these are one of the main priorities of central bankers it was hard to miss this bit in his speech.

Housing services inflation measures the rise in the price of all rents and the rise in the rental-equivalent cost of owner-occupied housing.

As readers of my work will know that is a very odd way of measuring owner-occupied housing costs as he is forced to admit.

Housing inflation tends to lag other prices around inflation turning points, however, because of the slow rate at which the stock of rental leases turns over.

Actually it is good to see that beginning to get out into the mainstream. But the crucial bit is below and the emphasis is mine.

Measures of 12-month inflation in new leases rose to nearly 20 percent during the pandemic but have been falling sharply since about midyear 

We then get back to the issue of lags.

overall housing services inflation has continued to rise as existing leases turn over and jump in price to catch up with the higher level of rents for new leases. This is likely to continue well into next year. But as long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year.

It is kind of him to confirm my type of analysis.

Indeed, a decline in this inflation underlies most forecasts of declining inflation.

It is a little convoluted because we all know that what would have been at the back of the mind and maybe the front too would have been this.

Before seasonal adjustment, the U.S. National Index posted a -1.0% month-over-month decrease in
September, while the 10-City and 20-City Composites posted decreases of -1.4% and -1.5%,
After seasonal adjustment, the U.S. National Index posted a month-over-month decrease of -0.8%, and
the 10-City and 20-City Composites both posted decreases of -1.2%.
In September, all 20 cities reported declines before and after seasonal adjustments. ( Case-Shiller)

The overall picture in the UK housing market was summarised in the report as well.

“As has been the case for the past several months, our September 2022 report reflects short-term
declines and medium-term deceleration in housing prices across the U.S.,” says Craig J. Lazzara,
Managing Director at S&P DJI…..For all three composites, year-over-year gains, while still well above their historical
medians, peaked roughly six months ago and have decelerated since then.

The reality is that the impact of the rises in US mortgages have a way to go. This is for two reasons and the first is structural with the US tending to have fixed-rate mortgages for the long ( 15 years) and the very long-term (30 years). So the impact of changes in rates is slow. Also the way that the Federal Reserve started slowly with its interest-rate rises and then made much larger ones means that such moves have yet to impact. From the lows of just under 5% for the thirty-year ( Freddie Mac August 4th) we saw a push up to 7.3% in late October and early November and that is yet to be fully in play. Even now after the “pivot” thoughts it is 6.6%.

Inflation Problems

We get an early nod to the issue.

The report must begin by acknowledging the reality that inflation remains far too high. My colleagues and I are acutely aware that high inflation is imposing significant hardship, straining budgets and shrinking what paychecks will buy. This is especially painful for those least able to meet the higher costs of essentials like food, housing, and transportation.

The issue of a change of view really matters due to the existence of lags in monetary policy and if we use those and look back to we were told this.

But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.

In fact the Federal Reserve had undertaken a particularly sophisticated analysis to confirm this.

These include trimmed mean measures and measures excluding durables and computed from just before the pandemic. These measures generally show inflation at or close to our 2 percent longer-run objective

How did that work out? It was of course a disaster for their credibility although if we come back to yesterday’s speech we see that they just cannot stop themselves.

For purposes of this discussion, I will focus my comments on core PCE inflation, which omits the food and energy inflation components, which have been lower recently but are quite volatile.


 But core inflation often gives a more accurate indicator of where overall inflation is headed.

That is an interesting way of saying they have just failed us as he goes onto confirm.

But forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways.

Not Federal Reserve members though, especially those who have been successfully trading the stock market. From Fortune in February.

The Federal Reserve formally adopted tough, sweeping restrictions on officials’ investing and trading, aiming to prevent a repeat of the ethics scandal that engulfed the U.S. central bank last year.

Labour Market

This bit was interesting as in a way it echoes the skill shortages point I noted in France yesterday.

Comparing the current labor force with the Congressional Budget Office’s pre-pandemic forecast of labor force growth reveals a current labor force shortfall of roughly 3-1/2 million people. This shortfall reflects both lower-than-expected population growth and a lower labor force participation rate.

Something has changed across many Western labour markets which is one of the reasons I have less confidence in official unemployment rates as a measure.


Overall I think that this is a welcome development from the Federal Reserve. Whilst their interest-rate of just under 4% is still some way from the inflation rate which even with their torturing of the numbers is 5%. But they have back loaded the rises due to their inability to look at the real world rather than their models as inflation picked up. So in a case of bad timing they have ended up like a doctor who treats the symptoms after ignoring the causes. Thus they are reducing the dangers of an economic crunch next year.

For the rest of the world we see another route to a reduction in inflationary pressure as the US Dollar eases with the UK Pound at US $1.21 as I type this and the Japanese Yen through 137. Plus the easing of bond yields will feed through over time into lower mortgage rates. Interest-rate rises will be lower as well although some do not seem to have got the memo.

SGH Macro on the ECB: As things stand, our base case outlook is for a 75-basis point hike in December, to bring rates up to 2.25%, a January start to balance sheet reduction, followed by 50 bps on February 2, with rates ending up sometime in 2023 between 3.5% and 4% ( @AdamLinton1)

As a final point Chair Powell may have been looking at the trend for his own balance sheet.

Federal Reserve’s weekly earnings remittances due to the US Treasury – $10.6 billion
*All time record low, data series started 2002.
Instead of check, a bill is sent as the Fed realizes losses on its nearly $9 trillion balance sheet. ( @joosteninvestor )

Christine McVie

As a big Fleetwood Mac fan I was especially sad to hear last night’s news. Rest in peace Christine and thank you for the music.