“All bets are off” as the Bank of England holds a “secret” press conference

Today is the turn of the Bank of England to take centre stage. On a personal level it raises a wry smile as when I was a market maker in UK short sterling options (known as a local) on the LIFFE floor it was the most important day of the month and often make or break. At other times it has been a more implicit big deal. Actually there is no likely change to short-term interest-rates on the cards. Perusing my old stomping ground shows that in fact not much action is expected at all with a pretty flat curve out to March 2024 when maybe a rise to the giddy heights of 0.25% is expected. Personally I think there is a solid chance we will see negative interest-rates first but that is not how the market is set this morning. Also I note that volumes are not great suggesting they are not expecting much today either.

If course some may be “more equal than others” to use that famous phrase as the Monetary Policy Committee voted last night following one of the previous Governor’s ( Mark Carney) “improvements”. He was of the opinion that getting his Minutes and PR prepared was more important than the risk of the vote leaking. Whereas the reality is that central banks are in fact rather leaky vessels.

Nationwide

There will have been consternation at the Bank of England when this news arrived at its hallowed doors. From the BBC.

The UK’s biggest building society has tripled the minimum deposit it will ask for from first-time buyers. The Nationwide will lower its ceiling for mortgage lending to new customers in response to the coronavirus crisis.It said the change, from Thursday, was due to “these unprecedented times and an uncertain mortgage market”.

I do not know if the new Governor Andrew Bailey has the same sharp temper as his predecessor Mark Carney but if he does it would have been in display. After all policy is essentially to get the housing market going once we peer beneath the veneer. Nearly £118 billion of cheap funding ( at the Bank Rate of 0.1%) has been deployed via the Term Funding Scheme(s) to keep the housing market wheels oiled. Also the news looks timed to just precede the MPC meeting.

In terms of detail there it is aimed at first-time buyers which is only likely to anger the Governor more.

First-time buyers are likely to be the most significantly affected because they often have smaller amounts saved to get on the property ladder.

Nationwide has reduced the proportion of a home’s value that is willing to lend from 95% to 85%.

So for example, if a property costs £100,000, a new buyer would now need a £15,000 deposit rather than a £5,000 deposit.

If we look back in time this is a familiar feature of house price falls. As mortgage borrowing becomes more restrained that by its very nature tends to pull house prices lower. For larger falls then it usually requites surveyors to join the party by down valuing some properties which as they are pack animals can spread like wildfire. The quote below shows that the situation is complex.

Some lenders, such as HSBC, still have mortgages with a 90% loan-to-value ratio. However, there is more demand for that type of mortgage than many banks have the capacity to deal with at the moment, he said.

Policy

We have already seen an extraordinary set of moves here. We have a record low interest-rate of 0.1% which is quite something from a body which had previously assured us that the “lower-bound” was 0.5%. There is a link to today’s news from this because it was building societies like the Nationwide and their creaking IT systems which got the blame for this, although ironically I think they did us a favour.

Next comes a whole barrage of Quantitative Easing and Credit Easing policies. The headliner here is the purchases of UK bonds ( Gilts) which by my maths passed the £600 billion mark just before 2 pm yesterday as it progresses at a weekly rate of £13.5 billion. This means that they are implicitly financing the UK public-sector right now, something I pointed out when the Ways and Means issue arose. We see that as I note that the UK Debt Management Office has issued some £14.4 billion of new UK bonds or Gilts this week. Whilst the Bank of England did not buy any of these it did oil the wheels with its purchases which means that the net issuance figure is £900 million which is rather different to £14.4 billion. On that road we see how both the two-year yield ( -0.07%) and the five-year yield ( -0,02%) are negative as I type this. Even the fifty-year yield is a mere 0.38%.

There has also been some £15 billion of Corporate Bond buying so far. This policy has not gone well as so desperate are they to find bonds to buy that they have bought some of Apple’s bonds. Yes the company with the enormous cash pile. Also I sure the Danes are grateful we are supporting their shipping company Maersk as it appears to need it, but they are probably somewhat bemused.

As to credit easing I have already noted the Term Funding Scheme and there is also the Covid Financing Facility where it buys Commercial Paper. Some £16.3 billion has been bought so far. Those who like a hot sausage roll may be pleased Greggs have been supported to the tune of £30 million, although North London is likely to be split on tribal lines by the £175 million for Spurs.

Comment

These days central banks and governments are hand in glove. Operationally that is required because the QE and credit easing measures require the backing of the taxpayer via HM Treasury. More prosaically the Chancellor Rishi Sunak can borrow at ultra low levels due to Bank of England policies and will do doubt raise a glass of champagne to them. Amazingly some put on such powerful sunglasses that they call this independence. Perhaps they were the ones who disallowed Sheffield United’s goal last night.

However the ability to help the economy is more problematical and was once described as like “pushing on a string”. This is not helped by the issues with our official statistics as we not inflation has been under recorded as I explained yesterday as has unemployment ( it was 5% + not the 3.9% reported) and the monthly drop of 20.4% in GDP has a large error range too. Because of that I have some sympathy for the MPC but I have no sympathy for the “secret” press conference it is holding at 1 pm. Then its “friends” will be able to release the details at 2:30 pm with no official confirmation until tomorrow.

So there are two issues. That is a form of corruption and debases what is left of free markets even more. Next it is supposed to be a publicly accountable institution with transparent policy. Along the way it means that the chances of a more aggressive policy announcement have just risen or as the bookie says in the film Snatch.

All bets are off

The Tokyo Whale is hungry again!

A new week has started with something which we will find awfully familiar although not everyone will as I will explain. But first let me give you something of a counterpoint and indeed irony to the news.

SINGAPORE (Reuters) – Oil prices fell on Monday on signs that worldwide oil storage is filling rapidly, raising concerns that production cuts will not come fast enough to fully offset the collapse in demand from the coronavirus pandemic.

U.S. oil futures led losses, falling by more than $2 a barrel on fears that storage at Cushing, Oklahoma, could reach full capacity soon. U.S. crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017. [EIA/S]

In ordinary times this would be a case of let’s get this party started in Japan. This is because it is a large energy importer and thus it would be getting both and balance of payments and manufacturing boost. In itself it would have been extremely welcome because you may recall that its economy had seen a reverse before the present pandemic.

The contraction of Japan’s 4Q 2019 GDP was worse than expected, coming in at -1.8% q/q (- 7.1% annualized rate) versus the first estimate of -1.6% q/q (-6.3% annualized rate) as the contraction in business spending was deeper than what was first reported in February, ( FXStreet )

So the land of the rising sun or Nihon was already in what Taylor Swift would call “trouble, trouble,trouble”, The raising of the Consumption Tax ( what we call VAT) had in an unfortunate coincidence combined with the 2019 trade war. The former was rather like 2014 as we mull all the promises it would not be. Also let me give you a real undercut, Japan acted to improve its fiscal position just in time for it to be considered much less important.

The Tokyo Whale

Let me open with something which for newer readers may come as a shock.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

Yes the Bank of Japan is buying equities and has just suggested it will double its annual purchases of them. Those who follow me will be aware it has been buying more as for example it is now buying around 120 billion Yen on the days it buys ( nine so far in April) as opposed to the previous 70 billion or so having bought over 200 billion when equity markets were hit hard. The detail is that it buys via Exchange Traded Funds ( ETFs) to avoid the embarrassment of having to vote at AGMs and the like.

Oh and in another familiar theme upper limits are not always upper limits.

With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amount of purchases depending on market conditions.

Also the ,you may note that the limit for commercial property purchases has been doubled too. I do sometimes wonder why they bother with the commercial property buys although now we have an extra factor which is that in so many places around the world commercial property looks under a lot of pressure. For example if there is more working from home as seems likely.

The Precious! The Precious!

Japan has an official interest-rate of -0.1% but not for quite everybody.

(3) apply a positive interest rate of 0.1 percent to the outstanding balances of current accounts held by financial institutions at the Bank that correspond to the amounts outstanding of loans provided through this
operation.

For whom?

Twice as much as the amounts outstanding of the loans will continue to be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank.

Yes the banks and as you can see they will be a “double-bubble” gain from lending under the new Bank of Japan scheme. I wonder if the Japanese taxpayer has noted that extension of operations to the private debt sphere as well?

expand the range of eligible collateral to private debt in general, including household debt (from about 8
trillion yen to about 23 trillion yen as of end-March 2020),

Corporate Bonds and Commercial Paper

I have highlighted another risk being taken on behalf of the Japanese taxpayer.

The Bank decided, by a unanimous vote, to significantly increase the maximum amount
of additional purchases of CP and corporate bonds and conduct purchases with the upper
limit of the amount outstanding of about 20 trillion yen in total. In addition, the maximum amounts outstanding of a single issuer’s CP and corporate bonds to be purchased will be raised substantially.

Should there be a default there might be trouble.

The Bank will increase the maximum share of the Bank’s holdings of CP and corporate
bonds within the total amount outstanding of issuance by a single issuer from the current
25 percent to 50 percent and 30 percent, respectively.

Surely at any sign of trouble everyone will simply sell to the Bank of Japan which will then be a buyer of more like first than last resort.

Who will provide the grand design?
What is yours and what is mine?
‘Cause there is no more new frontier
We have got to make it here ( The Eagles )

Japanese Government Bonds

This is something we have been expecting and just as a reminder the previous target was between 70 and 80 trillion Yen a year.

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

It is hard to get too worked up about that as we have been expecting it to be along. In theory the plan remains the same, although there is a slight shuffle as in the past they have indicated a range between 0% and -0.1%.

Comment

The first issue is that the Japanese economy is doing extremely badly. It already had problems and the PMI business survey suggested a GDP decline of the order of 10%. With its “face” culture that is likely to be an underestimate. In response there has been this.

The Japanese government has outlined details of its plan to hand out 100,000 yen, or more than 900 dollars, in cash to all residents as part of its economic response to the coronavirus outbreak.

The cash handouts will go to every person listed on Japan’s Basic Resident Register, regardless of nationality. ( NHK)

They tried something like this back in the 90s and I remember calculating it as £142 as compared to £752 this time. As to adjusting for inflation well in the Lost Decade era Japan has seen so little of that.

So we see that the Bank of Japan is underwriting the spending plans of the Japanese government which of course is the same Japanese government which underwrites the bond buying of the Bank of Japan! It seems set to make sure that the Japanese government can borrow for free in terms of yield as I note this.

In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

In fact just like a parent speaking to a child you can indulge in the JGB market but only if you play nicely.

While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

You will find many cheering “Yield Curve Control” although more than a few of those will be hoping that there claims that the Bank of Japan will need to intervene less have been forgotten. Actually there have been phases where it has kept yields up rather than down.

In the future will the Bank of Japan own everything?

The Express

I have done some interviews for it recently and here is one on the benefits of lower oil prices

https://www.express.co.uk/finance/city/1272278/coronavirus-news-oil-prices-negative-inflation-uk-wages-spt

Podcast on central bank equity purchases