The ECB is creating Euros even faster than Wirecard can lose them

The focus shifts today to the Euro area as there has been action on a number of fronts. Firstly the world’s second most notable orange person has been speaking at the online Northern Lights Summit. The Orangina Christine Lagarde seems to have upset the folk at ForexLive already.

Lagarde reaffirms that government debt will eventually have to be repaid

No. Just no. Governments will never run surpluses just with a snap of a finger and what is happening to the world and their debt levels now is basically what we have seen with Japan over the past two decades.

Actually before the pandemic Germany was running surpluses but the majority were not. We also got some classic Christine Lagarde as she waffled.

FRANKFURT (Reuters) – The euro zone is “probably past” the worst of the economic crisis caused by the coronavirus pandemic, European Central Bank President Christine Lagarde said on Friday, while urging authorities to prepare for a possible second wave.

“We probably are past the lowest point and I say that with some trepidation because of course there could be a severe second wave,” Lagarde told an online event.

At least she is not declaring success as Greeks and Argentinians have learnt to be terrified of what happens next after painful experience.

Also there has been this.

FRANKFURT (Reuters) – It is better for the European Central Bank to be safe than sorry when it decides whether to withdraw aggressive stimulus measures deployed to combat the fallout from the coronavirus pandemic, ECB policymaker Olli Rehn said on Friday.

“It’s better to be safe than sorry,” Rehn said. “Recall the premature rate hikes of 2011 during the euro crisis.”

This is a classic strategy where a policymaker suggests things may be reduced (yesterday) and today we have the good cop part of this simple Good Cop,Bad Cop pantomime.

Money Supply

Back on the 29th of May I pointed out that the blue touch paper had been lit on the  money supply boom of 2020. Well the rocket is lifting off.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 12.5% in May from 11.9% in April.

That compares with the recent nadir of an annual rate of 6.2% in January of 2019. Another comparison is that the rate of annual growth was around 8% before the latest phase of monetary action such as the extra Quantitative Easing of the PEPP. The weekly reporting does not exactly match a month but we saw an extra 116 billion Euros in May from it.

You will not be surprised to learn that the surge above pushed broad money growth higher as well.

Annual growth rate of broad monetary aggregate M3, increased to 8.9% in May 2020 from 8.2% in April (revised from 8.3%).

Indeed it is mostly a narrow money thing.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 8.4 percentage points (up from 8.0 percentage points in April), short-term deposits other than overnight deposits (M2-M1) contributed 0.2 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.3 percentage point (as in the previous month).

The pattern here is not quite the same as whilst the January 2019 reading at 3.8% was low the nadir is 3.5% in August of 2018. That provides some food for thought because if you apply the expected response to this the Euro area economy should have been slowing further about now. Of course the pandemic has created such a fog we cannot see one way or another about whether that held true.

There is another way of analysing this and here is a balance sheet style view.

credit to the private sector contributed 5.3 percentage points (up from 4.8 percentage points in April), credit to general government contributed 3.6 percentage points (up from 2.3 percentage points), net external assets contributed 1.0 percentage point (down from 1.4 percentage points), longer-term financial liabilities contributed 0.0 percentage point (as in the previous month), and the remaining counterparts of M3 contributed -0.9 percentage point (down from -0.3 percentage point).

I counsel caution about reading too much into this as back in the day such analysis when spectacularly wrong in the UK. Accounting identities are all very well but they miss the human component as well as some of the actual numbers. But we see growth from the government sector and the private-sector here. Also the external component has faded a bit in relative terms which provides a counterpoint to another piece of news.

Grandstanding?

From yesterday when all our troubles apparently not so far away.

Eurosystem repo facility for central banks (EUREP) introduced as precautionary backstop to address pandemic-related euro liquidity needs outside euro area….EUREP to allow broad set of central banks to borrow euro against euro-denominated debt issued by euro area central governments and supranational institutions….New facility to be available until June 2021.

These things are invariably badged as temporary but last time I checked the “temporary” income tax in the UK to pay for the Napoleonic War is still here. But as to what good it might do in a world where nobody seems to actually want Euros in this manner I am not sure. Perhaps it is a protection against another outbreak of the “Carry Trade” as this bit hints.

The provision of euro liquidity to non-euro area central banks aims at alleviating euro liquidity needs in the respective countries in a stressed market environment. The
potential beneficiaries are banks that need euro funding and are not able to obtain such funding in the market or get it only at prohibitive prices.

Although there is no real link at all to this.

Overall, these arrangements aim to facilitate a smooth transmission of monetary policy in the euro
area to the benefit of all euro area citizens

Let me help out bu suggesting replacing “all euro area citizens” with “The Precious! The Precious!”.

Here is what is presumably the official view from former ECB Vice-President Vitor Constancio. You may recall that Vitor’s job was to respond with technical questions at the ECB presser with a long involved answer that would send everyone to sleep. But at least he had a role unlike his replacement.

The ECB, reflecting awareness about the international role of the euro, just announced a new repo facility for other central banks to get euros against collateral.The FED dit it recently ..In general, the EU is finally aware of its geo-political interests.

The Fed saw demand of over US $400 billion at the peak whereas I suspect the Euro interest may be more like 0. Maybe someone will request a million or two as a test?

Comment

The relevance of the money supply changes is as follows. Narrow money supply impacts in the next 6 months and broad money in around two years. So assuming there is no Covid-19 second wave the push will impact as economies are picking up anyway. That is awkward as there is a clear inflation danger from this. There are signs of it already as we see the oil price pick up which even the neutered official inflation numbers will record. They of course miss the bit described by Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world

Although we do see evidence of a type of money destruction.

Germany’s Wirecard collapsed on Thursday owing creditors almost $4 billion. ( Reuters )

The regulators are now on the case but.

All the money’s gone, nowhere to go ( The Beatles )

The Chinese way of economic stimulus has started already in 2020

Firstly welcome to the new year and for some the new decade ( as you could argue it starts in 2021). The break has in some ways felt long and in other ways short but we have begun a new year with something familiar. After the 733 interest-rate cuts of the credit crunch era the People’s Bank of China ( PBOC ) has started 2020 with this.

In order to support the development of the real economy and reduce the actual cost of social financing, the People’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on January 6, 2020 (excluding finance companies, financial leasing companies, and auto finance companies).

This is a different type of monetary easing as it operates on the quantity of money ( broad money) rather than the price or interest-rate of it. By increasing the supply ( with lower reserves banks can lend more) there may be cheaper loans but that is implicit rather than explicit. As to the size of the impact Reuters has crunched the numbers.

China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.

Care is needed here as we see some copy and pasting of the official release. This is because that is the maximum not the definite impact and also because the timing is uncertain. No doubt some lending will happen now but we do not know when the Chinese banks will use up the full amount. That is one of the reason’s we in the West stopped using this as a policy option ( the UK switched in the 1970s) as it is unreliable in its timing or more specifically more unreliable than interest-rate changes, or so we thought.

Speaking of timing there is of course this.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China’s financial system.

The PBOC said it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year. ( Reuters).

Although for context this is the latest in what has become a long-running campaign.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

You could argue the number of RRR cuts argues against its usefulness as a policy but these days interest-rate changes have faced the same issue.

The translation of the official view is below.

The People’s Bank of China will continue to implement a prudent monetary policy, remain flexible and appropriate, not flood flooding, take into account internal and external balance, maintain reasonable and adequate liquidity, and increase the scale of currency credit and social financing in line with economic development and stimulate the vitality of market players. High-quality development and supply-side structural reforms create a suitable monetary and financial environment.

I would draw your attention to “flood flooding” but let’s face it that makes a similar amount of sense to what other central banks say and write!

I note that it is supposed to help smaller companies but central banks have plugged that line for some time now. The Bank of Japan gave it a go and in my country the Bank of England introduced the Funding for Lending Scheme to increase bank lending to smaller and medium-sized businesses in 2012. The reality was that mortgage lending and consumer credit picked up instead.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses.

The banks

Having said that this was different to policy in the West there is something which is awfully familiar.

The PBOC said lower reserve requirements will reduce banks’ annual funding costs by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms. Last week, it said existing floating-rate loans will be switched to the new benchmark rate starting from Jan. 1 as part of a broader effort to lower financing costs. ( Reuters ).

I guess central banks are Simon and Garfunkel fans.

And I’m one step ahead of the shoe shine
Two steps away from the county line
Just trying to keep my customers satisfied,
Satisfied.

The Chinese Economy

There is something of an economic conundrum though if we note the latest economic news.

BEIJING, Dec. 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector stood at 50.2 in December, unchanged from November, the National Bureau of Statistics (NBS) said Tuesday.

A reading above 50 indicates expansion, while a reading below reflects contraction.

This marks the second straight month of expansion, partly buoyed by booming supply and demand as well as increasing export orders, said NBS senior statistician Zhao Qinghe.

“booming supply and demand”. Really? Well there is growth but hardly a boom/

On a month-on-month basis, the sub-index for production gained 0.6 points to 53.2 in December,

Even it is not backed up by demand.

while that for new orders fell slightly to 51.2, still in the expansion zone.

The wider economy is recorded as doing relatively well.

Tuesday’s data also showed China’s composite PMI slid slightly to 53.4, but was 0.3 points higher than this year’s average, indicating steady expansion in the production of China’s companies.

Stock Market

According to Yuan Talks it as ever liked the idea although it is only one day.

#Shanghai Composite index extends gains to 1.5% to approach 3100 mark. #Shenzhen Component Index and #Chinext index are surging near 2%.

Still President Trump would be a fan.

Yuan or Renminbi

Here we see that we have been on a bit of a road to nowhere over the past year. After weakening in late summer towards 7.2 versus the US Dollar the Yuan at 6.96 is up 1.2% on a year ago. So there have been a lot of column inches on the subject but in fact very little of them have been sustained.

Comment

It would appear that the PBOC does not have much faith in the reports of a pick up in the Chinese economy as it has already stepped up its easing programme. There are other issues in play such as the trade war and these next two so let us start with US Dollar demand.

China’s big bang opening of its $45 trillion financial industry begins in earnest next year — a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms.

Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth. ( Insurancejournal.com )

Will it need a dollar,dollar? We will have to see. Also this issue continues to build.

WARSAW (Reuters) – Bird flu has been detected in turkeys in eastern Poland, authorities said on Wednesday, and local media reported that the outbreak could require up to 40,000 birds to be slaughtered.

China has a big issue with this sort of thing and like in banking and economics the real danger was always possible contagion. So far it has had limited effect on UK pork prices for example as the annual rate of inflation is 0.7% but it is I think a case of watch this space.

Meanwhile according to Yuan Talks the credit may not flow everywhere.

Regulators in the city of Beijing warned financial institutions about risks in the lending to property developers with “extremely high leverage”, indicating the authority is not relaxing financing rules for the cash-starved sector as many anticipated.

Looking at it in terms of money supply growth an annual rate of 8.2% for broad money ( M2) may seem fast in the west but it has not changed much recently in spite of the easing and is slow for China.

 

 

Good news for the UK economy on the wages and broad money front less so on consumer credit

Today I feel sorry for whoever has to explain this at the Bank of England morning meeting.

“Annual house price growth remained below 1% for the 11th
month in a row in October, at 0.4%. Average prices rose by
around £800 over the last 12 months, a significant slowing
compared with recent years – for example, in the same
period to October 2016, prices increased by £9,100.”

That was from the Nationwide Building Society which has brought news to spoil a central banker’s breakfast. After all they have done their best.

“Moreover, mortgage rates remain close to all-time lows –
more than 95% of borrowers have opted for fixed rate deals
in recent quarters, around half of which have opted to fix for five years.”

The irony here is that they have made their own Bank Rate changes pretty impotent. I recall in the early days of this decade noting that nearly all mortgages in Portugal were fixed-rate ones and thinking we were different. Well not any more!

But unlike Governor Carney I consider this to be a good news story because of this bit.

the unemployment rate remains close to 40 year lows and real earnings growth (i.e. after taking account of inflation) is close to levels prevailing before the financial crisis.

So houses are becoming more affordable in general terms and the Nationwide is beginning to pick this up as its earnings to house price ratio has fallen from 5.2 to 5. Although the falls are concentrated in London ( from 10 to 8.9) and the outer London area ( 7.2 to 6.7). Both Northern Ireland ( now 4) and the West Midlands ( now 4.7) have seen small rises.

UK Wages

We can look at the wages position in more detail because this morning has brought the results of the annual ASHE survey.

Median weekly earnings for full-time employees reached £585 in April 2019, an increase of 2.9% since April 2018….In real terms (after adjusting for inflation), median full-time employee earnings increased by 0.9% in the year to April 2019.

So we see something of a turning in the situation for the better although sadly the situation for real wages is not that good, as it relies on the Imputed Rent driven CPIH measure of inflation. So maybe we had 0.5% growth in real wages.

Even using the fantasy driven inflation measure we are still worse off than we once were.

Median weekly earnings in real terms are still 2.9% lower (£18 lower) than the peak in 2008 of £603 in 2019 prices.

These numbers conceal wide regional variations as highlighted here.

In April 2019, the City of London had the highest gross weekly earnings for full-time employees (£1,052) and Newark and Sherwood had the lowest (£431).

Also the way to get a pay rise was to change jobs.

In 2019, the difference in growth in earnings for full-time employees who changed jobs since April 2018 (8.0%) compared with those who stayed in the same job (1.6%) was high, suggesting stronger upward pressure on wages compared with other years.

Tucked away in the detail was some good news for part-time workers.

Median weekly earnings for part-time jobs increased at a greater rate. In 2019, earnings increased by 5.2% in nominal terms, which translates to a 3.1% increase in real terms. The median weekly earnings for part-time employee jobs of £197 is 6.5% higher than in 2008 in real terms.

It seems that the changes in the national minimum wage have had a positive impact here.

Meanwhile far from everyone has seen a rise.

The proportion of employees experiencing a pay freeze or a decrease in earnings (in real terms) in 2019 (35.7%) is lower than in 2018 (43.3%) and in 2011 (relative to 2010) when it was 60.5%.

Mortgages

From the Bank of England today.

Mortgage market indicators point to continued stability in the market. Net mortgage borrowing by households was little changed at £3.8 billion in September. The stability in the monthly flows has left the annual growth rate unchanged at 3.2%. Growth rates have now remained close to this figure for the past three years. Mortgage approvals for house purchase (an indicator for future lending) were also broadly unchanged in September, at 66,000, and remained within the narrow range seen over the past three years.

As you can see this was a case of what Talking Heads would call.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

Although there is a nuance in that the longer-term objective of the Bank of England is still in play. The true purpose of the Funding for Lending Scheme of the summer of 2012 was to get net mortgage credit consistently positive. That was achieved as there have been no monthly declines since ( unlike in 2010 and 2011) and over time the amount has risen. Nothing like the £9 billion pluses of 2007 but much higher than post credit crunch.

Consumer Credit

The credit impulse provided by the Funding for Lending Scheme was always likely to leak into here.

The annual growth rate of consumer credit was 6.0% in September. This growth rate has now been falling steadily for nearly three years. Revisions to the data this month, however, mean that the annual growth rate has been revised up slightly over the past two and a half years.

Let me give you an example of how the rate of consumer credit growth has been falling from last month’s update.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%.

The “revised up slightly” means it is now being reported as 6.1%. This is really poor as we can all make mistakes but this is a big deal and needs a full explanation as something has gone wrong enough on a scale to change the narrative.

Assuming this number is correct here is the detail for September itself.

The extra amount borrowed by consumers in order to buy goods and services fell slightly to £0.8 billion in September, and for the second month in a row was below £1.1 billion, the average since July 2018.

Broad Money

There was some good news in this release for the UK economy.

Total money holdings in September rose by £10.9 billion, broadly flat on the month, and remaining above the average of the past 6 months.

The amount of money held by households rose by £5.5 billion in September, primarily driven by increased holdings of interest bearing sight deposits. NIOFC’s money holdings rose by £4.3 billion, while the amount held by PNFCs rose by £1.0 billion.

I am a little unclear how a rise of just under £11 billion is “broadly flat”! But anyway this continues the improvement in the annual growth rate to 3.9% as opposed to the 1.8% of both January and May. Individual months can be erratic but we seem to have turned higher as a trend.

Comment

There have been several bits of good news for the UK economy today. The first is the confirmation of the improvement in the trajectory for real wages and some rather good growth for those working part-time. This feeds into the next bit which is the way that houses and flats are slowly becoming more affordable albeit that much of the progress has been in London and its environs. Looking ahead we see that the improvement in broad money growth is hopeful for the early part of 2021.

The higher trajectory for consumer credit growth is mixed,however. Whilst it will have provided a boost it is back to the age old UK economic problem of borrowing on credit and then wondering about the trade gap. It is especially poor that the Bank of England has been unable to count the numbers correctly. Also it is time for my regular reminder that the credit easing policies were supposed to boost lending to smaller businesses. How is that going?

while the growth rate of borrowing by SMEs rose slightly to 1.0%.

Woeful and a clear misrepresentation of what they were really up to.

NB

I later discovered that the Bank of England revised Consumer Credit higher by some £6.1 billion in August meaning that as of the end of September it was £225.1 billion.

 

 

 

The plunge in UK car finance will make the Bank of England nervous

This week has brought another example of part of the famous Abraham Lincoln phrase when he pointed out that you can fool some of the people all of the time. This is the financial media and in this instance Reuters who on Monday told us this.

A six-month delay to Brexit gives Britain’s central bankers space to take a broader view of the economy this week, but persistent uncertainty over leaving the European Union makes them unlikely to raise interest rates any time soon.

There are various issues with this including the fact that in a month’s time it will be five years since Governor Carney gave us this Forward Guidance.

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

In the coded language of central bankers that was seen as not only a green light but a double green. Yet he did nothing for two years before then cutting interest-rates in August 2016 and of course promising another cut in November of that year. Net he has managed a 0.25% rise to 0.75% in the six years of his tenure yet the financial media still write articles as if he is itching to raise interest-rates as he did not back in the days when Brexit seemed unlikely, to him anyway.

Last night was especially unkind to the Reuters views as the man who has tightened his grip on US monetary policy gave us his view.

Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go ….up like a rocket if we did some lowering of rates, like one point, and some quantitative easing.

So there you have it President Trump would like US interest-rates 1% lower ( as well as more QE to help finance his fiscal deficit) and the story of the last six months or so is that he has got what he wants. I doubt he will get it tonight at the Federal Reserve announcement but the sands feel like they are shifting.

As to the media predicting interest-rate increases I think they are singing along with Manfred Mann.

Well she was
Blinded by the light
Revved up like a deuce
Another runner in the night

House Prices

This is something else confirming my theme of today as we note this from the Nationwide.

UK house price growth remained subdued in April, with
prices just 0.9% higher than the same month last year….Prices rose 0.4% month-on-month, after
taking account of seasonal factors

So there is not much of a spring boost going on here. The Nationwide does a sterling job in spinning the line that houses are affordable to first-time buyers but even it has to admit this.

The exception is in London and parts of the south of
England where affordability pressures are more acute, and the monthly cost of servicing a mortgage, as well as raising a deposit, poses a greater challenge.

It is London that has pulled down the rate of house price growth and let me welcome the fact that whilst there are many different micro markets overall we now have real wage growth of around 2% per annum.

The Bank of England thinks differently and this is highlighted by the Nationwide chart which shows the average house price being around £160,000 in April 2013 as opposed to £214,920 now. That ladies and gentlemen has been the effect of its Funding for Lending Scheme which it argued reduced mortgage rates by around 2%. Of course we can never look at anything in outright isolation but it was a big player and the stopping of the rises will not be good news for any researcher there explaining this to Governor Carney.

Anyway it would appear that mortgage providers are ignoring the Forward Guidance rhetoric too. From MoneySavingExpert.com.

On top of that, there’s currently fierce mortgage competition, so the cheapest 5yr fixed-rate mortgage is 1.79%, which is seriously cheap, and 2yr fixes are as low as 1.39%.

As ever, the Nationwide numbers are flawed as they only cover its customer base but they do add to our total darabase.

Car Finance

This is an area which regularly concerns us and the quote below from the UK Financing & Leasing Association shows why.

In 2018, members provided £46 billion of new finance to help households and businesses purchase cars. Over 91% of all private new car registrations in the UK were financed by FLA members.

That amount continues to rise as I recall it being 86% not so long ago. So if you purchase your car outright you are now a rarity. Also this gives us a direct link between credit and what most regard as unsecured credit ( Governor Carney argues it is secured) and the real economy.

The Bank of England is usually reticent about its data on this subject ( I have asked….) but look at this from earlier.

The fall in net lending on the month was due to weaker net borrowing for other loans and advances, which fell from £0.8 billion in February to £0.2 billion. Within this, new borrowing for car finance fell sharply, alongside weaker car registration numbers in March 2019 than in previous years.

If we stay with unsecured finance the impact was as follows.

The extra amount borrowed by consumers to buy goods and services fell to £0.5 billion in March (Chart 1). This was the lowest monthly flow since November 2013 and well below the average of £0.9 billion since July 2018……The annual growth rate of consumer credit has continued to slow, reflecting the relatively weak flows of consumer credit over the past twelve-months. It fell to 6.4% in March, well below its peak of 10.9% in November 2016.

As you can see some context is needed as that overall rate of growth is still around double the rate of growth of wages and around quadruple economic growth. But as we have expected car finance has changed from being the engine for this to a brake on it.

Is anybody still expecting a Bank of England interest-rate increase?

Business Lending

This is rather eloquent as I remind you that the Funding for Lending Scheme was supposed to boost this.

Annual growth in lending to SME’s remains weak at -0.1%.

Six years of economic growth as well has made little or no difference as opposed to mortgage lending.

 The annual growth rate of mortgage lending was 3.3%. It has been around 3% since the beginning of 2016,

Actually the Bank of England thinks that the latter is “modest” so I dread what it really thinks of lending to smaller businesses.

Comment

Those believing the Forward Guidance mantra have three main problems from today’s data if we look at things from the Bank of England’s point of view. Firstly there are few wealth effects from house price inflation fading to less than 1%. Next there is the sharp slow down in car finance and what that implies. Thirdly there is this from the Markit Manufacturing PMI.

The headline seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to 53.1 in April, down from March’s 13-month high of 55.1. Alongside weaker growth in production, new orders and stocks of purchases, the lower PMI level also reflected job losses in the sector.

Actually this number worked beautifully with the estimate that stockpiling had raised the index by 2.0. But care is needed as the Bank of England does not think like that and is presumably now afraid of further falls. None of that suggests an interest-rate rise and nor does the rate of economic growth and of course inflation is below target.

Moving onto the money supply data it is hard to read on a couple of counts. Sadly the Bank of England in another mistake stopped publishing narrow money data some years back. All we have is broad money and that looks like it is improving a little. I say looks like because the Gilt Market has two big flows in March. The Operation Twist style QE I have been reporting on added £9 billion but a large Gilt matured ( £36 billion) and will have sucked much more out. Thus I think we should focus on M4 lending at 3.7% that the total M4 growth at 2.2% but we will only really know when we get the April and May data and the maturity gets replaced.

 

Welcome news from UK Money Supply growth

Today brings UK credit growth especially unsecured credit growth and the Bank of England into focus so let me open with the market view on interest-rate prospects.

Interest rate swap markets have cut expectations of a quarter-point rate hike from the Bank of England by the end of 2019 to 52 percent on Wednesday, compared to a previous 64 percent expectation.

The latest leg down in market expectations of a rate hike comes after overnight political developments that has sown fresh uncertainty for the British economy in the near term. ( Reuters)

Personally I find that rather odd as I think a cut is about as likely as a rise. Indeed with slowing world economic growth in ordinary circumstances people would be looking for a cut. I can understand those who think that in a disorderly Brexit the Bank of England might be forced to raise interest-rates to defend the value of the UK Pound £. But the catch is that when the Pound fell after the EU Leave vote Governor Carney and his colleagues decided to cut rather than raise Bank Rate. So it would require a collapse in the Pound for the Bank of England to raise rates.

Gold

There is a curious situation about the gold that is stored by the Bank of England but belongs to Venezuela. Reuters explains.

It is a decision for the Bank of England whether to give Venezuelan President Nicolas Maduro access to gold reserves it holds, British junior foreign office minister Alan Duncan said on Monday.

Venezuelan opposition leader and self-declared president Juan Guaido has asked British authorities to stop Maduro gaining access to gold reserves held in the Bank of England, according to letters released by his party on Sunday.

As that is an official denial from Alan Duncan we immediately suspect the government has applied pressure on the Bank of England. But it is left in an awkward position and so far it has refused to return the gold to Venezuela which begs more than a few questions as it holds quite a lot of gold for foreign countries.

If we look into the situation the Bank of England holds some 165,377,000 troy ounces.

 A troy ounce is a traditional unit of weight used for precious metals. It is different in weight to an ounce, with one troy ounce being equal to 1.0971428 ounces avoirdupois.

It has been falling recently but rose quite a bit in the latter part of 2016 and 2017. In terms of gold bars it is a bit over 413,000. Contrary to what some claim the UK still has some gold ( worth £9.41 billion in the 2017/18 accounts) as pert of its foreign exchange reserves.

Returning to the issue of Venezuela I see George Galloway has got rather excited on RT.

The bank’s decision to seize – a polite word for steal – more than a billion dollars’ worth of Venezuelan gold was reportedto have been ordered by the governor after a call from US National Security Advisor John Bolton and Secretary of State Mike Pompeo – not even the president himself.

Apart from that being hearsay they have not seized it as they already had it but they are currently refusing to return it. I have some sympathy at the moment as who should they return it too in a country which is in turmoil? A lot of other markets concerning Venezuela have seen changes as for example the market in bonds of the state oil company PDVSA has dried up.

So to my mind the current position of the Bank of England has a weakness ( fears you might not be able to get your gold back) but also a strength ( it will question who is reclaiming it). Also as to how much of the gold at the Bank of England is actually gold here is John Stewart with a different perspective.

People out there turnin’ music into gold
People out there turnin’ music into gold
People out there turnin’ music into gold

Money Supply and Credit

These are hot topics on two counts. Firstly slowing money supply growth proved to be a reliable indicator of weak economic growth in 2018 and secondly soaring unsecured credit growth showed vulnerabilities in the UK economic structure.

So we first observe a welcome move.

The total amount of money held by the UK private sector (broad money or M4ex) increased by £11.5 billion in December. Within this, money held by households increased £5.5 billion, significantly above the £3.2 billion average over the past six months. This increase was driven by deposits in interest-bearing instant access savings accounts. Money held by UK private non-financial corporations (PNFCs) increased £1.5 billion, in line with the recent average.

This means that the annual rate of growth has risen from 2.2% to 2.5%. This is still weak but a more hopeful sign emerges if we look at the latest three months because they show an annualised rate of growth of 4.3%.

If we switch to a lending side style analysis we see this.

Households borrowed £4.1 billion secured against property in December, slightly above the average of the previous six-months……The amount businesses’ borrowed from UK banks………. Borrowing from banks remained robust in December at £2.3 billion.

If we add in unsecured credit and the other components we see that lending growth rose to 3.7% from the recent nadir of 3.1% in September.

Unsecured Credit

Here are the numbers.

The extra amount borrowed by consumers to buy goods and services fell to £0.7 billion in December . Within this, credit card borrowing was particularly weak at only £0.1 billion, compared to an average of £0.3 billion since July. The overall consumer credit monthly flow was slightly below the £0.9 billion monthly average since July, and significantly below the average between January 2016 and June 2018 of £1.5 billion.

We need to take care with phrases like “particularly weak” as credit card borrowing has been on something of a tear in the UK meaning that at £72.2 billion it is 7.1% higher than a year ago. Perhaps Deputy Governor Dave Ramsden wrote that but as he of course described 8.3% growth as “weak” not so long ago.

The annual growth rate of consumer credit has been slowing gradually since its peak of 10.9% in November 2016, falling further to 6.6% in December.

So we have a nuanced view here which is threefold. Firstly it is welcome to see a decline in the rate of growth. A catch though is that this rate of growth is on inflated levels and is still far higher than other numbers in the UK economy at around quadruple the rate of economic growth and double wage growth. Lastly the peak of November 2016 suggests it was puffed up by the “Sledgehammer QE” and Bank Rate cut of August 2016 a subject the Bank of England would rather not discuss.

Comment

There is a fair bit to consider here but let us start with a welcome improvement in the UK money supply trajectory.  I realise this is against the rhetoric we hear from elsewhere but the numbers are what they are. At a time when the world outlook is weak we need to grab every silver lining. The situation is more complex with unsecured credit because whilst the annual rate of growth is slowing some of that is due to it being on a larger amount ( £215.6 billion). Also some of it is due to a slowing of car loans as we see that sector slow due to technical reasons such as the diesel debacle. According to the UK Finance & Leasing Association car finance had 0% growth in November as falls in new car finance were offset by higher used car finance. This is at a time where we continue to pivot towards a rental/lease model as opposed to an outright purchase one.

The percentage of private new car sales financed by FLA members through the POS was 91.2% in the twelve months to November.

Let me end with some good news and a compliment for Governor Mark Carney. It comes from a disappointingly downbeat comment from Katie Martin of the Financial Times.

There’s more trade in the renminbi in London than there is in the euro vs sterling, which is weird/interesting.

Actually that is good news and confirms a conversation I had a while back with one of the managers of the Chinese state body in the City. It is an area of strength for the UK economy and I believe the Bank of England has supported this. Not all areas of banking are bad just some.

UK annual unsecured credit growth “slows” to 8.1%

Today brings us to the latest UK data on both the money supply and the manufacturing sector. Both of these are seeing developments. If we start with something which has boosted the UK money supply by some £445 billion there is of course the QE bond purchases of the Bank of England. Having given my thoughts on Friday here is David Smith of the Sunday Times who seems to have bought the Bank of England rhetoric hook,line and sinker. Firstly let me correct an early misconception.

At first, as in America, the process of running off QE assets is being achieved by not reinvesting the proceeds of maturing bonds.

That implies that the UK is no longer reinvesting its maturing Gilt holdings and if it were true would be a policy I support having originally suggested it some five years ago. This would, however be news to the Monetary Policy Committee.

The Committee also voted unanimously to maintain the stock of UK government bond purchases,

Moving back to how things might play out the musical theme is “Don’t Worry Be Happy” by Bobby McFerrin.

We are still, of course, some way away from the unwinding of the Bank’s £435bn of QE. It will not happen until interest rates reach 1.5%, and they are currently only half that level. It remains possible that, in the event of a rocky, no-deal Brexit, the Bank will think it is obliged to launch a further tranche of QE. But it will eventually be reversed. And there is no reason why we should be unduly worried about that.

So suddenly we are no longer reversing it, and we will not do so until Bank Rate reaches 1.5%. In case you are wondering if there is something especially significant about 1.5% there is not apart from the fact that the associated higher Gilt yields will mean a lower value for the holdings. Oh and we might get more! But don’t worry “it will eventually be reversed”  although using the strategy suggested, which of course has not started, it would not be until 2065.

As to what good it has done? We seem to just have to accept the line it has saved us.

any marginal increase in wealth inequality looks like a small price to pay for avoiding more serious economic damage and deflation.

Money Supply

This month’s data was a little bit of a curate’s egg but let us start with something that has become very familiar. From the Bank of England.

The annual growth rate of consumer credit slowed further in August, to 8.1%, reflecting weaker monthly lending flows. The annual growth rate was the lowest since August 2015, and well below the peak of 10.9% in November 2016. Within this, and consistent with lower monthly net flows over the past few months, other loans and advances growth fell to 7.7%, the lowest since December 2014. Credit card growth has been broadly stable for the past 18 months at close to 9%.

The official view can be seen quite clearly here, and if we take the £838 million of July and the £1118 million of August that is lower than the circa £1500 million previously. The catch is the annual growth rate of 8.1% as can anybody thing of anything else in the UK economy growing at that sort of rate? After all it compares with real wage growth which is somewhere around zero and an annual rate of economic growth of between 1% and 2%. Although I am reminded that Sir Dave Ramsden of the Bank of England called an annual growth rate of 8.3% “weak” earlier this year.

Also if you look at the date of the peak you see that the “Sledgehammer QE” and Bank Rate cut of August 2016 did seem to achieve something, which was a peak in unsecured borrowing. Oddly we do not see the Bank of England trying to bathe itself in this particular piece of glory…..

Mortgage Lending

This has been fairly stable for a while now. The Funding for Lending Scheme got net monthly lending positive in 2013 and since then both the banks and our central bank have been happy. At the moment we mostly see net lending of around £3 billion per month.

Lending to business

There are two clear trends here.Let me open by pointing out the impact of the Funding for Lending Scheme on the metric it was loudly proclaimed to influence.

Annual growth in lending to small and medium-sized businesses remained close to zero for the eighth consecutive month.

This has been the pattern since it began which is why the central banking version of the  nuclear deterrent or the word “counterfactual” has been deployed. It tells us that however bad things are they would have been worse otherwise, so things are in fact a success. If we look at the breakdown we see that of the £166 billion or so, some £50 billion is for real-estate as opposed to the £10 billion for manufacturing, which tells us something about the way the UK economic wind blows.

Another is that businesses are shifting away from banks which is a trend which would make my late father very happy if he was still with us.

Businesses can raise money by borrowing from banks or from financial markets (in the form of bonds, equity and commercial paper). The total amount outstanding of businesses’ borrowing from these sources increased by £3.2 billion in August. Within this, net finance raised from banks remained positive, but weak, at £1.0 billion.

Over the past six months the average raised from banks has been £1 billion but £1.5 billion has been raised from other sources of credit.

Money Supply

These are the curate’s egg part this month. This is because the actual monthly data was better.

The total amount of money held by UK households, businesses and non-intermediary other financial corporations (NIOFCs) (Broad money or M4ex) rose by £6.9 billion in August. This was above the £0.7 billion in July and the £2.6 billion average of the previous six months.

However the annual rate of M4ex fell to 2.8% which is poor and a further slowing. But if we look for perspective the problem months were July as you can see above and even more so June where it shrank by £2.6 billion. So we know the overall trend has been weak but we are a bit unsure about what is about to take place.

Manufacturing

There was some rather welcome news from this sector today as Markit published its PMI business survey.

Domestic market demand strengthened, while increased orders from North America and Europe helped new export
business stage a modest recovery from August’s
contraction. Business confidence also rose to a three-month
high.

The reading of 53.8 following an upwardly revised 53 for August shows some welcome growth and is rather different to the media perspective and coverage. Let us hope it bodes well.

Comment

The UK money supply data have been weak for a while now and on Friday we noted again that so has the economy.

Compared with the same quarter a year ago, the UK economy has grown by 1.2% – revised down slightly from the previously published 1.3%.

That makes the Bank Rate rise in August look even odder to me. Of course there is an exception which is unsecured credit which is charging along albeit not quite a fast as before. The total has now reached £214.2 billion.

We are left hoping that the better manufacturing surveys will add to the GDP data for July and give us if not the economic equivalent of the long hot summer at least some solid growth. After all clouds are gathering around at least some of Europe (Italy) if not its golfers.

Meanwhile our official statistician rather than working on known problems seem determined to produce numbers which are meaningless in my opinion.

In 2017, the UK’s real full human capital stock was £20.4 trillion, equivalent to just over 10 times the size of UK gross domestic product (GDP).

Perhaps there is a clue telling us where the author lives.

the average real human capital stock of those living in West Midlands fell the most, by 5% in 2017 to £568,168, the biggest drop in six years, reflecting negative real earnings growth. By contrast, the average real human capital stock of those living in East Midlands with a degree or higher qualification rose by 9% in 2017 to £564,790.

 

 

 

Both money supply growth and house prices look weak in Australia

The morning brought us news from what has been called a land down under. It has also been described as the South China Territories due to the symbiotic relationship between its commodity resources and its largest customer. So let us go straight to the Reserve Bank of Australia or RBA.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

At a time of low and negative interest-rates that feels high for what is considered a first world country but in fact the RBA is at a record low. The only difference between it and the general pattern was that due to the commodity price boom that followed the initial impact of the credit crunch it raised interest-rates to 4.75%, but then rejoined the trend. That brought us to August 2016 since when it has indulged in what Sir Humphrey Appleby would call masterly inaction.

Mortgage Rates

However central bankers are not always masters of all they survey as there are market factors at play. Here is Your Mortage Dot Com of Australia from yesterday.

The race to raise interest rates is on as two more major lenders announced interest rate hikes of up to 40 basis points across mortgage products.

According to an Australian Financial Review report, Suncorp and Adelaide Bank have raised variable rates of investor and owner-occupied mortgage products to compensate for increasing capital costs.

Adelaide Bank is hiking rates for eight of its products covering principal and interest and interest-only owner-occupied and investor loans.

Starting 07 September, the rate for principal and interest mortgage products will increase by 12 basis points. On the other hand, interest-only mortgage products will bear 35-40 basis points higher interest rates.

 

This follows Westpac who announced this last week.

The bank announced that its variable standard home-loan rate for owner occupiers will increase 14 basis points to 5.38% after “a sustained increase in wholesale funding costs.”

A rate of 5.38% may make Aussie borrowers feel a bit cheated by the phrase zero interest-rate policy or ZIRP. However a fair bit of that is the familiar tendency for standard variable rate mortgages to be expensive or if you prefer a rip-off to catch those unable to remortgage. Your Mortgage suggests that the best mortgage rates are in fact 3.6% to 3.7%.

Returning to the mortgage rate increases I note that they are driven by bank funding costs.

This means the gap between the cash rate and the BBSW (bank bill swap rate) is likely to remain elevated.

That raises a wry smile as when this happened in my home country the Bank of England responded with the Funding for Lending Scheme to bring them down. So should this situation persist we will see if the RBA is a diligent student. Also I note that one of the banks is raising mortgage rates by more for those with interest-only mortgages.

Interest Only Mortgages

Back in February Michele Bullock of the RBA told us this.

Furthermore, the increasing popularity of interest-only loans over recent years meant that by early 2017, 40 per cent of the debt did not require principal repayments . A particularly large share of property investors has chosen interest-only loans because of the tax incentives, although some owner-occupiers have also not been paying down principal.

So Australia ignored the view that non-repayment mortgages were to be consigned to the past and in fact headed in the other direction until recently. Should this lead to trouble then there will be clear economic impacts as we note this.

As investors purchase more new dwellings than owner-occupiers, they might also exacerbate the housing construction cycle, making it prone to periods of oversupply and having a knock on effect to developers.

In central banking terms that “oversupply” of course is code for house price falls which is like kryptonite to them. Indeed the quote below is classic central banker speak.

 For example, since it is not their home, investors might be more inclined to sell investment properties in an environment of falling house prices in order to minimise capital losses. This might exacerbate the fall in prices, impacting the housing wealth of all home owners.

What does the RBA think about the housing market?

Let us break down the references in this morning’s statement.

Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.

Sadly we only have official data for the first quarter of the year but it makes me wonder why Sydney and Melbourne were picked out.

The capital city residential property price indexes fell in Sydney (-1.2%), Melbourne (-0.6%), Perth (-0.9%), Brisbane (-0.6%) and Darwin (-1.1%) and rose in Hobart (+4.3%), Adelaide (+0.5%) and Canberra (+0.9%).

You could pick out Sydney on its own as it saw an annual fall, albeit one of only 0.5%. Perhaps the wealth effects are already on the RBA’s mind.

The total value of residential dwellings in Australia was $6,913,636.6m at the end of the March quarter 2018, falling $22,498.3m over the quarter. ( usual disclaimer about using marginal prices for a total value)

As to housing credit growth if 5 1/2% is low then there has plainly been a bit of a party. One way of measuring this was looked at by Business Insider back in January.

The ABS and RBA now estimate total Household Debt to Disposable Income at 199.7%, up 3% on previous estimates,

The confirmation that there has been something of a party in mortgage lending, with all the familiar consequences, comes from the section explaining the punch bowl has been taken away! Lastly telling us there is competition for higher credit quality mortgages tells us that there is not anymore for lower quality credit.

Comment

If we look for unofficial data, yesterday brought us some house price news from Business Insider.

Australian home prices fell for an eleventh consecutive month in August, led by declines in a majority of capital cities.

According to CoreLogic’s Hedonic Home Value Index, Australia’s median home price fell 0.3%, adding to a 0.6% drop recorded previously in July.

That took the decline over the past three months to 1.1%, leaving the decline over the past year at 2%.

That is not actually a lot especially if we factor in the price rises which shows how sensitive this subject is especially to central bankers. If we look at the median values we perhaps see why the RBA singled out Sydney ( $855,000) and Melbourne ($703,000) or maybe they were influenced by dinner parties with their contacts.

This trend towards weaker premium housing market conditions is largely attributable to larger falls across Sydney and Melbourne’s most expensive quarter of properties where values are down 8.1% and 5.2% over the past twelve months.

Another issue to throw into the equation is the money supply because for four years broad money growth averaged over 6% and was fairly regularly over 7%. That ended last December when it fell to 4.6% and for the last two months it has been 1.9%. So there has been a clear credit crunch down under which of course is related to the housing market changes. This is further reinforced by the narrower measure M1 which has stagnated so far in 2018.

Much more of that and the RBA could either cut interest-rates further or introduce some credit easing of the Funding for Lending Scheme style. Would that mean one more rally for the housing market against the consensus? Well it did in the UK as we move into watch this space territory.

Also this slow down in broad money growth we have been observing is getting ever more wide-spread,

 

 

Dear Bank of England how is 8.8% consumer credit growth “weak” please?

This morning has brought better news for the UK economy from the manufacturing sector as this from the SMMT ( Society of Motor Manufacturers and Traders) highlights.

UK car manufacturing rises 5.2% in April, with 127,952 vehicles rolling off British production lines.

However this is in comparison to last April which was a particularly poor month so we need to look for context of which we get a little here.

Growth, however, was also buoyed by production ramp up at several plants to deliver a number of key new and updated models.

Let us hope so as whilst the 3.9% fall in production in the year so far is better than the -6.3% in March the numbers remain weaker. We export 80% of the cars we make and production there is 2.2% lower in 2018 so far but whilst the home market is a mere 20% production for it has fallen by 10.3%.

This links us in to today’s subject of monetary trends in the UK because domestic car demand is so dependent on finance these days with around £44 billion lent last year and involved in 88% of purchases according to the Finance and Leasing Association. So Bank of England Governor Mark Carney will have noted today’s data as we mull whether he is more interested in the implications for consumer credit and the finance industry or car manufacturing?

House Prices

This from the Nationwide Building Society will have gone straight to the top of Mark Carney’s Bloomberg screen.

“UK annual house price growth slowed modestly in May to
2.4%, from 2.6% in April. House prices fell by 0.2% over the
month, after taking account of seasonal factors.”

So pretty much what we have come to expect as most private-sector measures have house price growth around 2%. The official numbers are higher which sadly means they being a more recent construction are more likely to be in error. However the next bit might have Mark Carney spluttering his coffee onto his screen.

Overall, we continue to expect
house prices to rise by around 1% over the course of 2018.

Oh and this provides some perspective on us not building houses.

“Data from the Ministry of Housing, Communities and Local Government shows that, over the last 20 years, the total housing stock in England has increased from 20.6 million to 24 million dwellings, a rise of 16%

Families have got smaller but we are left wondering about how much the population has grown?

Just for context the index fell from 424.1 in April to 423.4 in May. If you want a real bit of number crunching then the 1952 index set at 100 is now at 11201.6 and whilst methodology changes have been made the numbers speak for themselves.

Money Supply

There was another weakening in the broad money data in April.

Broad money increased by £0.5 billion in April . Within this, the flow of households’ M4 was -£3.1 billion , the lowest monthly flow for at least 20 years. The flow of private non-financial corporations’ (PNFCs’) M4 was £5.5 billion.

 

The net flow of sterling credit was -£5.3 billion in April (Table A). Within this, the flow for households increased to £4.3 billion 

So the growth impulse is weak and the number for households is eye-catching so let us stick with that for a moment. One area which signalled something is total mortgage lending which fell by £1.6 billion to £1373.3 billion in spite of net lending being £3.9 billion.

Moving wider let us look at the trend which shows that broad money lending growth ( M4L) has so far in 2018 grown at an annual rate of 4.5%,3.8%,3.7% and now 3.2%. So we remain in a situation where it is fading as we are reminded of the rule of thumb that it represents economic growth plus inflation. It is always hard to figure out when it will apply and it is hopeful that inflation has been fading but nonetheless it implies continuing weak economic growth.

Consumer Credit

There was a return to what might be called normal service this month as Governor Carney reaches for a celebratory Martini.

Net lending for consumer credit was £1.8 billion in April, up from £0.4 billion in March . Within this, net lending on credit cards was £0.6 billion and net lending for other loans and advances was £1.3 billion.

If we look at the breakdown we see that credit card growth and the rest of consumer credit are now growing at similar percentage rates. This gives us a clue that car finance has indeed dipped in response to the issues we looked at above as the “other” category had been growing consistently more quickly in the past three years and peaked around 12% in the autumn of 2016 in response to the Bank Rate cut and Sledgehammer QE of August 2016. But we do not get any sort of break down.

This brings us to the annual rate of growth.

The 12-month growth rate of consumer credit was 8.8% in April, compared to 8.6% in March

Now this is over treble wage growth and a larger multiple of economic growth as it seems to be a bit over 1% and of course is far higher than real wages which are in a broad sweep flat. This reminds me of something from the Bank of England that I challenged at the time.

This is something that I challenged at the time as frankly there have been few stronger series of anything n the UK than consumer credit growth. A policymaker should be able to distinguish between one weaker month in numbers that can be erratic from what is as we noted above at least a three-year trend of up, up and away.

This brings me to a deeper issue which is the take over of so many bodies which are claimed to be independent by HM Treasury. Sir David Ramsden CBE was there for decades rising to Director General and this means that all of the Deputy Governors involved in monetary policy have been in the past at HM Treasury. This is sadly true of the Office of National Statistics which has an HM Treasury “minder” in the shape of Nicholas Vaughan who in my opinion has been the main driving the use of rental equivalence in the CPIH inflation measure.

Comment

We find ourselves noting that 2018 has seen a weakening of the monetary impulse to the UK economy. Some of this will be from the return to a 0.5% Bank Rate last November and the end of the flow of liquidity from the Term Funding Scheme in February. But it is also true that this seems to be a wider move as we note fading in the Euro area monetary data too. Meanwhile it is boom time for consumer credit which of course means the lending we have is very unbalanced and as I feared at the time the banks through a big curve ball to the Bank of England’s credit surveys beginning last August. This sort of data gets ignored by many but actually often provides a useful leading indicator for the economy.

Meanwhile there is some good news to welcome but as we do let us note that somehow or other the “precious” seems to have been missed out again. From the BBC.

“Rent-to-own” shops that sell appliances and furniture for small weekly payments will face a price cap similar to limits on payday loans.

However, the financial regulator will not rush to impose the same restrictions on bank overdrafts.

Me on Core Finance TV

 

UK unsecured credit surges whilst the Bank of England is “vigilant”

There is much to consider about the UK economy right now as we get updated on both economic sentiment and money supply data. Before we narrow down to the UK situation there was an intriguing view on the importance of money supply last night from Madame Le Pen. She seems to be suggesting that the French people as individual’s could switch back to the French France whilst businesses could use the Euro ( she seemed also to confuse the Euro with the Ecu). So how would they be paid wages and at what exchange rate? I guess there would be a boom in shops which do foreign exchange transactions as you could hardly have a fixed exchange rate! Oh well……

Meanwhile on Tuesday there was a meeting to celebrate 20 years of Bank of England independence. It has not got much publicity presumably on the grounds that so many think that there is little to actually celebrate. Even the heavily pro establishment Financial Times reports in such a fashion.

The Bank of England will be sorely tested as the guardian of Britain’s economic and financial stability in another crisis, the architects of the current system have warned.

Indeed there was an implied criticism of the current Governor Mark Carney.

Nick Macpherson, Gordon Brown’s private secretary in 1997 and later the most senior civil servant at the Treasury, said that appointing capable governors was a particular problem.

That sentence is like something I read in Yes Prime Minister 30 years ago as i marvel one more time at its insight and humour. When Sir Frank Gordon is asked about appointing a Governor who is both honest and intelligent he replies.

Although an innovation, it should certainly be tried….

There was also another reverse for Charlotte Hogg ( who apparently has now left rather than working her notice as was the claimed plan and thanks for pointing this out) who you may recall claimed there was no groupthink at the Bank of England.

“There was a terrible tendency towards groupthink,” said Kate Barker, who sat on the bank’s Monetary Policy Committee for nine years. “That the BoE emerged from the crisis with more power I think is very surprising.”

Also this from Rupert Harrison seems to contradict the official view that the FPC is “vigilant”.

Giving the Financial Policy Committee an explicit mandate to secure stability was extremely important, he told the audience: “If there is another financial crisis, we will know who to blame.”

The best reply suggest that the Bank of England may be the cause rather than the solution to the next financial crisis. Ooops!

Would that be the crisis precipitated by the BoE extreme interest rate policy and experimental QE program? ( Neil at Home)

Money Supply

This is something that the Bank of England really gave a shove to last August. We got another £60 billion of UK Gilt purchases, £10 billion of Corporate Bond purchases as well as £57.5 billion so far of the bank subsidy called the Term Funding Scheme. Oh and a cut in Bank Rate below the supposedly emergency level of 0.5%. So what is happening?

Broad money, M4 excluding intermediate other financial corporations, increased by £10.1 billion in March (Table A), with positive flows for all sectors.

This means that it grew by 0.5% on the month and 6.7% on a year before. If we take a broad sweep of the situation the Bank of England increased the annual growth rate from ~4% to ~7%. The old rule of thumb for this is to take GDP growth off this to get an idea of inflationary pressure so if we subtract 2% from that we are left with inflation heading above 4%. The inflation measure used for this was the Retail Price Index which is currently running at an annual rate of increase of 3.1%.

Unsecured credit

This continues on its own merry way as you can see.

The flow of consumer credit was in line with its recent average in March, at £1.6 billion

That is a very neutral way of describing quite a surge is it not? The monthly rate of growth was 0.8% and the annual and 3 monthly growth rates were 10.2%. So we see that the Bank of England has created quite a boom in unsecured credit about which it tells us it is being “vigilant”. In case you are wondering there is now some £197.4 billion of it.

In terms of a break down we see that credit card debt is rising at an annual rate of 8.6% with other loans and advances growing at 11%. For comparison purposes let us remind ourselves of real wage growth which is now around 0% and GDP or economic growth which is around 2%.

Looking at it another way I have written many times about the impact of easy UK monetary policy on mortgage lending. If we look back to the start of the Funding for Lending Scheme then the  annual growth rate of the “other loans and advances” part of unsecured credit was  3% as opposed to the current 11%.

Mortgage lending

It took a fair bit of effort but the Bank of England finally got net mortgage lending positive and now here is the state of play.

Lending secured on dwellings rose by £3.1 billion in March, similar to the recent average

It would be higher but the net figure is reduced by the scale of monthly repayments which are usually of the order of £17 billion.

Comment

There is much to consider here as we see that the UK monetary taps remain wide open. In the past the usual response to this is a combination of higher inflation and often a lower exchange-rate. Sounds familiar doesn’t it? The exact situation for the value of the UK Pound £ is complex because of course there are international influences as well as the vote last June. Also movements tend to happen before a policy move as they move on expectations of it so all measurements are awkward in terms of precision.

Also there is the issue of increased indebtedness at a time of real wage stagnation. On that road they are in the “spiders web” sung about by Coldplay in the song aptly named Trouble  as how can they increase interest-rates on any scale now? If we move to growth it would appear that the UK economy has regained some momentum in the second quarter if the Markit business survey is accurate.

UK service providers experienced a sustained rebound in business activity during April, supported by the fastest upturn in new work so far in 2017…….“The upturn in the services PMI rounds off a hattrick of good news after upside surprises to both the manufacturing and construction PMIs. The three surveys collectively point to GDP growing at a rate of 0.6% at the start of the second quarter.

The Bank of England will try to bask in the credit for this but the truth is that it maybe added a little to the powerful effect of the lower UK Pound £ that was already in place but at the cost of this.

The PMI surveys also show average prices charged for goods and services rising at the fastest rate since September 2008

Let us hope that the lower trajectory for some commodity prices and especially the price of crude oil continues to help in that respect.

Chocolate

The chocoholics amongst you may have noticed that the price of cocoa has fallen by about 40% over the past year. Has there been any sign of cheaper chocolate or perhaps an extra Toblerone triangle?

 

 

 

The surge in the UK Money Supply is more important than the future of Mark Carney

Let me open by wishing you all a happy or perhaps scary and ghoulish Halloween. There were quite some sights in South London over the weekend although as I am about to describe the Governor of the Bank of England Mark Carney managed with the media to add elements of an April Fool as well. On Saturday Mark Gilbert of Bloomberg headlined a piece as follows.

Bank of England’s Mark Carney Prepares His Own Brexit

This rather extraordinary claim was based on this.

during testimony to a House of Lords committee this week, he dropped an enormous hint that he’s already decided to go. Asked about the central bank’s attitude to a particular policy path, Carney had this to say:

I don’t want to bind … (long pause) … the Bank of England two years’ hence.

I’d bet my lunch money that he hit the pause button because he was about to use the time-honored phrase “I don’t want to bind my successor.” Which in turn suggests he expects to have a successor within two years.

Why might this be?

Carney was at pains to stress that should he leave it will be an “entirely personal decision.”

Like so much of the media Bloomberg could not wait to pander to the establishment line on this.

Yet the predictions in the chart, from economists in the private sector, reinforce Carney’s pessimism about the U.K. economic outlook. The accusation that his despondency is somehow part of a “Project Fear” to reverse the referendum decision is unfounded.

The authors opinion as well as forecasts are presented as  facts and actual facts are missed out. For example that Governor Carney was part of a UK establishment that forecast that the quarter just past would see the UK economy shrink by between 0.1% and 1% when in fact it grew by 0.5%. Also the 25 or so forms of his Forward Guidance when he hinted at interest-rate rises and thereby misled those remortgaging or taking out business loans do merit a mention but there is no apparent criticism.

Back then, the economy was humming at a sufficient pace for Carney to warn in June 2014 that interest rates might have to rise. Post-Brexit, he’s presided instead over an emergency rate cut.

Oh and the man who cut Bank Rate and eased monetary policy into an exchange-rate depreciation is presented like this.

For the rest of the day, the pound held steady.

Ah one day! Now let me refer to the post-referendum day as on it Governor Carney did his job in terms of offering a back stop for matters such as liquidity at a time when the UK political establishment went missing.

So an extraordinary burst of media speculation which made me suspicious and I made my views known yesterday morning.

Has it occurred to anyone else that these rumours might be the way Bank of England Governor Carney extends his term from 2018 to 2021?

Last night the news that he was in fact staying came from a media organisation which seems to have become an adjunct to the Bank of England Public Relations department.

Mark Carney, governor of the Bank of England, is ready to serve a full eight-year term, facing down Brexiter critics campaigning for him to resign ahead of time.

Rather grand language from the economics editor of the Financial Times don’t you think? After all both the Chancellor and the Prime Minister had offered public support for him. Also Mario Draghi of the ECB and Governor Kuroda of the Bank of Japan must consider him to be very thin-skinned after what they have received. Added to this the establishment line on the independence of the Bank of England was pushed hard.

the BoE’s independence…….Friends say that Mr Carney is determined to defend the Bank of England’s independence.

In my opinion the way that QE style policies require the approval of the Chancellor means that the Bank of England has cast policy independence aside as fiscal and monetary policies merge. You could also argue that the Bank of England has been able to ease monetary policy even more than any politician would have been allowed to. If you throw in the way that HM Treasury appoints the Monetary Policy Committee members and gives them a remit to follow it gets ever harder to claim independence.

Overall the situation is summed up well by a reply to the Financial Times. From British Summer.

Mark Carney has today managed to groom himself into the roll of a media celebrity….. Leaking stories about whether you are staying or going in your position is bad banking in most folks books.

Monetary Policy

Meanwhile there is something of a critique of Bank of England policies being provided by its own money supply data. Back on the 29th of September I pointed out this.

There is much to consider in the money supply data for the UK. There is always a caveat emptor with it as the effects from it can be long and variable and we have just had an economic change. However if you brought a Martian economist to Earth and asked he/she/it to offer a view in monetary policy they would be more likely to recommend a tightening than an easing. My view is that as the UK was already receiving a large boost from the lower level of the UK Pound it should have waited for more data.

So as you can imagine I was waiting for today’s update.

UK broad money, M4ex, is defined as M4 excluding intermediate other financial corporations (OFCs). M4ex increased by £15.9 billion in September, compared to the average monthly increase of £13.0 billion over the previous six months. The three month annualised and twelve-month growth rates were 10.0% and 7.7% respectively.

So the annual growth rate accelerated and if we add that to the fall in the UK Pound we can see that quite a monetary stimulus is being provided. Meanwhile we can see this too.

Consumer credit increased by £1.4 billion in September, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.6% and 10.3% respectively.

Thus it is no great surprise that the UK economy continues to grow as we sing along to Diana Ross.

I’ve got the sweetest hangover
I don’t wanna get over
Sweetest hangover

Comment

There is much to consider here as the UK is being given quite a monetary boost. I counselled caution after the first one of two numbers as the EU leave vote was bound to have effects which might wash out. But broad money growing at 7.7% is quite a surge and unless we grow quite fast it will be inflationary. If you subtract our current annual growth rate from this the rule of thumb is that inflationary pressure is running at 5%. Now this has leads and lags and works better for RPI than CPI but it poses a clear critique of the monetary policy of a Bank of England which will no doubt claim next year that any inflation was nothing to do with it.

Meanwhile so much of the media is busy feeding a silly Public Relations exercise where the term of Bank of England Governor Carney the “star central banker” is apparently more important than the money supply data.