The ECB now considers fiscal policy via QE to be its most effective economic weapon

Yesterday saw ECB President Christine Lagarde give a speech to the European Parliament and it was in some ways quite an extraordinary affair. Let me highlight with her opening salvo on the Euro area economy.

Euro area growth momentum has been slowing down since the start of 2018, largely on account of global uncertainties and weaker international trade. Moderating growth has also weakened pressure on prices, and inflation remains some distance below our medium-term aim.

In the circumstances that is quite an admittal of failure. After all the ECB has deployed negative interest-rates with the Deposit Rate most recently reduced to -0.5% and large quantities of QE bond buying. No amount of blaming Johnny Foreigner as Christine tries to do can cover up the fact that the switch to a more aggressive monetary policy stance around 2015 created what now seems a brief “Euro boom” but now back to slow and perhaps no growth.

But according to Christine the ECB has played a stormer.

 The ECB’s monetary policy since 2014 relies on four elements: a negative policy rate, asset purchases, forward guidance, and targeted lending operations. These measures have helped to preserve favourable lending conditions, support the resilience of the domestic economy and – most importantly in the recent period – shield the euro area economy from global headwinds.

It is hard not to laugh at the inclusion of forward guidance as a factor as let’s face it most will be unaware of it. Indeed some of those who do follow it ( mainstream economists) started last year suggesting there would be interest-rate increases in the Euro area before diving below the parapet. There seems to be something about them and the New Year because we saw optimistic forecasts this year too which have already crumbled in the face of an inconvenient reality. Moving on you may note the language of of “support” and “helped” has taken a bit of a step backwards.

Also as Christine has guided us to 2018 we get a slightly different message now to what her predecessor told us as this example from the June press conference highlights.

This moderation reflects a pull-back from the very high levels of growth in 2017, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level, as well as weaker impetus from external trade.

As you can see he was worried about the domestic economy too and mentioned it first before global and trade influences. This distinction matters because as we will come too Christine is suggesting that monetary policy is not far off “maxxed out” as Mark Carney once put it.

For balance whilst there is some cherry picking going on below I welcome the improved labour market situation.

Our policy stimulus has supported economic growth, resulting in more jobs and higher wages for euro area citizens. Euro area unemployment, at 7.4%, is at its lowest level since May 2008. Wages increased at an average rate of 2.5% in the first three quarters of 2019, significantly above their long-term average.

Although it is hard not to note that the level of wages growth is worse than in the US and UK for example and the unemployment rate is much worse. You may note that the rate of wages growth being above average means it is for best that the ECB is not hitting its inflation target. Also we get “supported economic growth” rather than any numbers, can you guess why?

Debt Monetisation

You may recall that one of the original QE fears was that central banks would monetise government debt with the text book example being it buying government bonds when they were/are issued. This expands the money supply ( cash is paid for the bonds) leading to inflation and perhaps hyper-inflation and a lower exchange-rate.

What we have seen has turned out to be rather different as for example QE has led to much more asset price inflation ( bond, equity and house prices) than consumer price inflation. But a sentence in the Christine Lagarde speech hints at a powerful influence from what we have seen.

 Indeed, when interest rates are low, fiscal policy can be highly effective:

Actually she means bond yields and there are various examples of which in the circumstances this is pretty extraordinary.

Another record for Greece: 10 yr government bonds fall below 1% for the first time in history (from almost 4% a year ago)  ( @gusbaratta )

This is in response to this quoted by Amna last week.

 “If the situation continues to improve and based on the criteria we implement for all these purchases, I am relatively convinced that Greek bonds will be eligible as well.” Greek bonds are currently not eligible for purchase by the ECB since they are not yet rated as investment grade, one of the basic criteria of the ECB.

Can anybody think why Greek bonds are not investment grade? There is another contradiction here if we return to yesterday’s speech.

Other policy areas – notably fiscal and structural polices – also have to play their part. These policies can boost productivity growth and lift growth potential, thereby underpinning the effectiveness of our measures.

Because poor old Greece is supposed to be running a fiscal surplus due to its debt burden, so how can it take advantage of this? A similar if milder problem is faced by Italy which you may recall was told last year it could not indulge in fiscal policy.

The main target in President Lagarde’s sights is of course Germany. It has plenty of scope to expand fiscal policy as it has a surplus. It would in fact in many instances actually be paid to do so as it has a ten-year yield of -0.37% as I type this meaning real or inflation adjusted yields are heavily negative. In terms of economics 101 it should be rushing to take advantage of this except we see another example of economic incentives not achieving much at all as Germany seems mostly oblivious to this. There is an undercut as the German economy needs a boost right now. Although there is another issue as it got a lower exchange rate and lower interest-rates via Euro membership now if it uses fiscal policy and that struggles too, what’s left?

Mission Creep

If things are not going well then you need a distraction, preferably a grand one

We also have to gear up on climate change – and not only because we care as citizens of this world. Like digitalisation, climate change affects the context in which central banks operate. So we increasingly need to take these effects into account in central banks’ policies and operations.

Readers will disagree about climate change but one thing everyone should be able to agree on is that central bankers are completely ill equipped to deal with the issue.

Comment

This morning’s release from Eurostat was simultaneously eloquent and disappointing.

In December 2019 compared with November 2019, seasonally adjusted industrial production fell by 2.1% in the
euro area (EA19)……In December 2019 compared with December 2018, industrial production decreased by 4.1% in the euro area……The average industrial production for the year 2019, compared with 2018, fell by 1.7% in the euro area

The index is at 100.6 so we are nearly back to 2015 levels as it was set at 100 and we have the impact of the Corona Virus yet to come. Actually we can go further back is this is where we were in 2011. Another context is that the Euro area GDP growth reading of 0.1% will be put under pressure by this.

In a nutshell this is why the ECB President wants to discuss things other than monetary policy as even central bankers are being forced to discuss this.

 We are fully aware that the low interest rate environment has a bearing on savings income, asset valuation, risk-taking and house prices. And we are closely monitoring possible negative side effects to ensure they do not outweigh the positive impact of our measures on credit conditions, job creation and wage income.

But central bankers are creatures of habit so soon some will be calling for yet another interest-rate cut.

Let me finish with some humour.

Governors had to stop trashing policy decisions once taken and keep internal disputes out of the media, presenting a common external front, 11 sources — both critics and supporters of the ECB’s last, controversial stimulus package — told Reuters.

Yep, the ECB has leaked that there are no leaks….

 

 

 

Even the UK consumer can not always spend “more more more”

The issue of retail sales is one that has become a signal of our times in various ways. It has long been considered a support for economic growth especially in my home country the UK. However there are places where economics would like more of it such as in the surplus countries Germany and Japan which would then help with rebalancing world trade via higher imports. In more recent times the green agenda clearly implies lower retail sales although something which is likely to be as unpopular is that tends not to get much publicity. Finally there is the issue of the decline of the high street and the rise of online shopping. It is hard for shops to compete with companies willing to deliver even at 9 o’clock on a Sunday evening as I have observed recently.

Measuring such things is complex and let me illustrate with a story which starts well. From the US Census Bureau.

Advance estimates of U.S. retail and food services sales for December 2019, adjusted for seasonal
variation and holiday and trading-day differences, but not for price changes, were $529.6 billion, an
increase of 0.3 percent (±0.4 percent)* from the previous month, and 5.8 percent (±0.7 percent) above
December 2018

I have highlighted the bit which shows that these are turnover or nominal rather than real figures. But there is more to it than meets the eye as whilst these look good there were downwards revisions I gather which mean that the Atlanta Fed GDP Nowcast thinks this.

 After this morning’s retail sales release from the U.S. Census Bureau, the nowcast of fourth-quarter real personal consumption expenditures growth declined from 2.3 percent to 1.6 percent.

As Avril Lavigne pointed out.

Why’d you have to go and make things so complicated?

The UK

The background has been provided by the British Retail Consortium.

Total sales for 2019 decreased by 0.1%, compared with 1.2% growth in 2018. This is the worst year on record…………Taking November and December together to iron out the Black Friday distortions, Total sales declined 0.9% compared with the same period in 2018…….Taking November and December together to iron out the Black Friday distortions, Like-for-Like sales declined 1.2% compared with the same period in 2018.

This is what produced the headlines which were copied across social media that this had been the worst year for UK retail since 1995. This was not the media’s finest hour as this was plainly rubbish to anyone who has any knowledge of the official data. Let us be generous and say that such a view is true for some of the department stores and so on struggling to compete with the virtual world.

Today’s data

We have been observing a slowing of the rate of growth as 2019 had developed and this continued in December.

Comparing the three months to December 2019 against the same three months a year ago, growth in the quantity bought increased by 1.6% in December 2019, despite a strong decline of 2.2% for department stores.

Along the way we get a reminder that department stores are essentially in a depression, which is backed up by this next bit,

Online sales as a proportion of all retailing was 19.0% in December 2019, compared with the 18.6% reported in November 2019.

Actually whilst we still have annual growth if we look more recently we have moved into a decline.

Looking at the three-month on three-month growth rate, the quantity bought in retail sales has not experienced growth for three consecutive months. The three months to October 2019 remained flat, while the three months to November and December fell by 0.5% and 1.0% respectively.

Indeed and it was a case of and the beat goes on if we look at December itself.

The quantity bought in December 2019 fell by 0.6% when compared with the previous month; the fifth consecutive month of no growth.

I am not quite sure why they say/write “no growth” when there is a perfectly useful word like decline available. Anyway we get very little detail for December but do from the three-monthly detail get more of a grip about what has happened in 2019.

Declines were seen across most sectors except for household goods stores and fuel. The strong decline of 3.2% in non-store retailing was largely because of a fallback from very strong growth in the previous three months for September at 4.0%, this included large monthly growth in July of 7.3%, which was attributed to large promotions in the sector. The quantity of goods bought in non-store retailing increased on the latest month by 1.0%.

This is a sort of a doppelganger of the situation in the US we observed earlier. There we saw December misleading as the trend whereas in the UK it was the surge in July and subsequent associated fall back which has muddied the water.

Also if we widen our perspective from pure economics perhaps the pressure on providers and sellers of cheap fashion clothing is having an impact.

Clothing experienced strong declines both on the month at negative 2.0% and in the three months to December at negative 2.3%. This is the sixth consecutive month of no growth for clothing stores for the three-month on three-month movement.

Comment

The situation regarding UK Retail Sales has been “slip-sliding away” as Paul Simon put it in the latter part of 2019. Care is needed as it had previously been very strong and it cannot keep surging. Even the UK consumer must tire eventually. But there are consequences from the apparent shift and clear food for thought is provided by the fact that an already weak last quarter of 2019 will have a downwards pull on its GDP of the order of 0.05%.

That then turns eyes to Threadneeedle Street and the Bank of England which told us this earlier this week. From Monday.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

The Retail Sales release is likely to have him at least singing along with Prince.

She’s never satisfied (She’s never satisfied)
Why do we scream at each other
This is what it sounds like
When doves cry

In a more sophisticated world where they are supposed to look forwards they should be noting that the sentiment reports have shown a post election rally. But back in the real world they have an itchy-finger for interest-rate cuts if the summer of 2016 is any guide. Although the Governor’s focus has changed.

Mark Carney said: “It’s an honour to be supporting the Prime Minister as the UK invites almost 200 countries to Glasgow in November to address the climate threat. This COP 26 Summit will be a critical moment for climate action.”

Will they fly in so that they can tell the rest of us not to fly?

If we return to the “worst year since 1995” release then even today’s weak numbers have scotched that. The lust for clickbait so often trumps reasoning and thought.

 

 

 

 

Has there been a more unreliable boyfriend than Mark Carney?

After looking this week at the trend toward negative interest-rates and the establishment lust for higher inflation today we can take a look at some of the case for their defence. It comes from Bank of England Governor Mark Carney and he will be relaxed as he has been able to do so in its house journal the Financial Times. Although I note that even it does not label him as a “rock star” central banker anymore and there does not seem to be any mention of film star good looks. Mind you film stars I guess are not what they were after this from Stella McCartney after the Golden Globes.

This man is a winner… wearing custom Stella because he chooses to make choices for the future of the planet. He has also chosen to wear this same Tux for the entire award season to reduce waste. I am proud to join forces with you… x Stella #JoaquinPhoenix
#GoldenGlobes

Saving the planet one tux at a time.

Monetary Policy

Governor Carney opens with this.

The global economy is heading towards a “liquidity trap” that would undermine central banks’ efforts to avoid a future recession, according to Mark Carney, governor of the Bank of England.

As ever he is trying to lay a smoke screen over reality so let us break this down. Actually we have been in a type of “liquidity trap” for quite some time now. A major driver of it has in fact been central banking terror of a future recession which means that zombie companies and especially banks have been propped up. There has been little or none of the “creative destruction” of Josef Schumpeter where capitalism clears up many of its failures. Bad at the time but it also provides some of the fertile ground for new companies and growth. The deflection element is that by claiming a liquidity trip is in the future it deflects from his role in where we are now.

Er, who fired the ammunition?

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

If we look at it we see that if we just look at interest-rates there is 0.65% left according to Governor Carney. That is the current 0.75% Bank Rate to his view of the lower bound which was 0.5% but is now 0.1%. Sadly he is not challenged on this allowing him to imply this is a worldwide problem.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” he said.

An opportunity was missed here to expose the Governor’s rather odd thinking. The blanket view that there is less ammunition has sub-plots. For example the European Central Bank or ECB has an interest-rate of -0.5% and considered -0.6% and yesterday we looked at the Swiss National Bank with its -0.75% official interest-rate. So suddenly we have up to an extra 0.85% compared to his “lower bound”. Also the ECB and SNB could cut further.

I am not sure the explanation about a liquidity trap helps much as it describes a situation we have been in for some time.

A liquidity trap occurs on the rare occasions when monetary policy loses all effectiveness to manage economic swings and looser policy does not encourage any additional spending.

Somehow the editor of the FT Lionel Barber and its economics editor Chris Giles seem to have missed that the credit crunch era has seem many examples of a liquidity trap as highlighted by the use of “rare occasions”

Alternatives

Is there any other sphere where people who have asked for tools used them far more than expected but with little success would be given even more powers?

That meant there was a need to look for supplements to monetary tools, including interest rate cuts, quantitative easing and guidance on future interest rates, he said. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space.”

It is nice that the FT below confirms the central banking group think or if you prefer they borrow the same brain cell.

Mr Carney echoed other central bankers, such as the European Central Bank’s Mario Draghi and his successor, Christine Lagarde, in recommending that governments consider fiscal policy tools, such as tax cuts or public spending increases when tackling a downturn. However, he accepted “it’s not [central bankers’] job to do fiscal policy”.

Also this is something that Paloma Faith sang about.

I’ll tell you what (I’ll tell you what)
What I have found (what I have found)
That I’m no fool (that I’m no fool)
I’m just upside down (just upside down)

Central banks were supposed to be independent and run monetary policy yet a confession of failure seems to make them think they can tell elected politicians what to do. I would call it mission creep but it is more of a leap than a creep.

But I’m a creep, I’m a weirdo
What the hell am I doing here?
I don’t belong here
I don’t belong here ( Radiohead )

Mind you the unreliable boyfriend seems to be having doubts about his commitment to his own statement.

The governor said monetary policy was not yet a spent force internationally, with US and eurozone interest rate cuts last year encouraging borrowing and spending. “We’re starting to see that stimulus flow to the global economy.”

Indeed suddenly we find that his successor has loads of room.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

“The Precious! The Precious!”

Oh and weren’t we raising the banks capital requirements to make the system safer? The unreliable boyfriend does seem to enjoy a U-Turn.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

Being the FT the failures of his initial period of tenure get skated by.

Demand returned in 2013, just as he took up his position.

The 7% unemployment rate debacle gets a new spin.

how many people could be employed without inflation

I am sure that readers think it is really unfair that the Bank of England had to deal with a changing situation.

The monetary policy committee also had to grapple with structural difficulties

I like the use of “grapple” to describe confusion and inertia as it would be hard to be more misleading. The reality is that the chance to raise interest-rates around 2014 was missed and the boat sailed with the Governor still on the shore dithering over whether to buy a ticket.

Comment

It is perhaps most revealing that the Governor sets out the challenges for the Bank of England without mentioning monetary policy at all.

Amid these economic uncertainties, the main task of the BoE, according to the governor, was to finish core reforms to the global financial system and react appropriately to the political upheavals of the Scottish and Brexit referendums and the challenges of climate change. Mr Carney insists that rather than be too political, as his predecessor Mervyn King has suggested, the BoE had to get involved because it now had a duty to preserve financial stability.

Also there seems to be some form of amnesia about the fact that Governor Carney got into trouble for playing politics when he was at the Bank of Canada.

But frustrations of UK life in the crosshairs of polarised political debate will also haunt him in the search of a new job. “This role is just much more public than the same role in Canada,” said Mr Carney.

Oh and did I mention mission creep?

But he was clear that the financial sector could not mitigate global warming alone and without wider agreements to limit global warming and action to enforce targets.

The Investing Channel

Climate change is on Mark Carney’s agenda as he ignores the rise in consumer credit

As November ends and we move into December there is a fair bit for the Bank of England to consider.Only a week ago we were told this by the new “flash” Markit PMI business survey.

“The weak survey data puts the economy on course for a 0.2% drop in GDP in the fourth quarter, and also pushes the PMI further into territory that would normally be associated with the Bank of England adding more stimulus to the economy”

Poor old Markit never seem to question why more stimulus is apparently nearly always needed, But this was quite a different outlook to what the Bank of England had told us earlier this month.

The MPC expected continued subdued growth, of 0.2%, in 2019 Q4.

Another factor to add in is that the Bank of England has in an example of being once bitten, twice shy lost a bit of faith in the Markit PMIs since the day the absent-minded professor Ben Broadbent so lauded them.

Although business survey indicators, taken together, pointed to a contraction in GDP in Q4, the relationship between survey responses and growth appeared to have been weaker at times of uncertainty and some firms may have considered a no-deal Brexit as likely when they had
responded to the latest available surveys/

Even central bankers must realise that the panicky hints of a 0.1% Bank Rate based on the post EU Leave vote PMIs was a complete failure.

The UK Pound £

This has been in a stronger phase and was noted in the monetary minutes.

The sterling exchange rate index had
increased by around 3% since the previous MPC meeting, and sterling implied volatilities had fallen back
somewhat, although they remained significantly higher than their euro and dollar counterparts.

If we look now we see that the broad effective or trade weighted exchange rate fell to around 73.5 in mid August but is now 79.3. Under the old Bank of England rule of thumb that was considered to be nearly equivalent to a 1.5% interest-rate rise. Even if we reduce the impact as times have changed I think and trim the effect we are still left in my opinion with say a 1% rise.

We can look at that in two ways.Firstly it has a material impact and secondly it has hard not to have a wry smile. After all who can actually see the present Bank of England raising interest-rates by 1%?! Events would have to have taken over.

Broad Money

We can also look at the likely outlook via the money supply numbers. This morning the Bank of England has told us this.

Broad money (M4ex) is a measure of the amount of money held by households, non-financial businesses (PNFCs) and financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs). Total money holdings in October rose by £1.6 billion, this was weak compared to both September and the average of the previous six-months.

That is a slowing after three better months. This is an erratic series and we see that this month businesses were responsible.

The amount of money held by households rose by £3.7 billion in October, primarily driven by increased holdings of interest bearing sight deposits. NIOFC’s money holdings fell by £2.4 billion, while the amount held by PNFCs rose by £0.4 billion.

If we switch to what does this mean? Well broad money impacts nominal output around 18 months to 2 years ahead.  So with an annual rate of growth of 3.6% we would expect economic growth of 1.6% assuming the Bank of England hits its 2% inflation target. That’s the theory as reality is usually not so convenient so please take this as a broad brush.

The good news is that the last 6 months or so have seen a pick-up so we may see one in 2021.The problem is that the numbers had been falling since the impact of the “Sledgehammer QE” of the summer/autumn of 2016. So it is no great surprise to those who look at the monetary data that economic growth has been weak and using it suggests similar as we head into 2020.

Mortgage Lending

We cannot look into the mind of a central banker without noting the large area taken up by the housing market.From that perspective this is good news below.

Net mortgage borrowing by households was £4.3 billion in October, £0.4 billion higher than in September. The recent stability in the monthly flows has left the annual growth rate unchanged at 3.2%, close to levels seen over the past three years. Mortgage approvals for house purchase (an indicator for future lending) fell slightly in October, to 65,000, but remained within the narrow range seen over the past two years.

Indeed their hearts must have been racing when they read this in the Guardian yesterday.

House price growth in the UK has picked up

Only to be dashed when they read further down.

The average price of a home rose by 0.5% in November to £215,734, according to Nationwide building society. This is the biggest monthly rise since July 2018, and up from 0.2% in October. The annual growth rate picked up to 0.8% from 0.4%, the highest since April.

Whilst we welcome the relative improvement in affordability from the point of view of the Bank of England this will lead to head scratching. They went to a lot of effort with the Funding for Lending Scheme back in the summer of 2012 to get net mortgage lending back into positive territory. But it and real wage growth have lost their mojo for now in this area.

Consumer Credit

By contrast this has lifted off again.

The extra amount borrowed by consumers in order to buy goods and services rose to £1.3 billion in October, above the £1.1 billion average since July 2018. Within this, net borrowing for both credit cards and other loans and advances rose, to £0.4 billion and £1.0 billion respectively.

The annual growth rate of consumer credit was 6.1% in October, up from 5.9% in September.

Is there anything else in the UK economy rising at an annual rate of 6.1%? Also there is an element of being economical with the truth below.

This is the first increase in the annual growth rate since June 2018, but it remains considerably lower than its post-crisis peak of 10.9% in November 2016.

You see last month they revised the figures by adding an extra £6.1 billion or around 5 months worth of growth at the current rate. Anyway the total is now £225 billion.

Comment

For the moment the Bank of England is in a type of purdah period which the Governor is using to expand into other areas.

The world needs a new, sustainable financial system to stop runaway climate change…….A new, sustainable financial system is under construction. It is funding the initiatives and innovations of the private sector and amplifying the effectiveness of governments’ climate policies—it could even accelerate the transition to a low-carbon economy. ( IMF )

Those worried about the future of the planet should be terrified at the present march of the globetrotting central bankers onto their lawns.Just look at their track record! But I guess Governor Carney is in need of a new job.

Returning to his present job we see that an interest-rate cut on the 19th of next month is looking increasingly likely. After all they are seldom much bothered by issues such as consumer credit rising although these days they seem to be having ever more trouble simply counting.

Some statistics on the outstanding amount of lending and deposits within the banking sector have been revised for September. In the first vintage of September’s statistics, some of this data was reported using an approach that was inconsistent to previous data, and reduced the total amounts outstanding. The current vintage of data corrects for this.

Even less reason for them to be involved in the future of the planet and that is before we get to their forecasting record….

The Investing Channel