The energy crisis leaves the ECB wanting to cut and also raise interest-rates….

Today we can link several of our themes and we can start with the subject that is on so many minds which is energy. The place that is most exposed is Europe via its reliance on gas from Russia.

Europe is developing contingency plans in case of a complete breakdown in Russian gas imports, the EU’s energy commissioner said, as she warned that any country was at risk of being cut off by Moscow.
Kadri Simson said the EU was racing to store as much gas as possible and could replace most of Russia’s deliveries this year but would have to do more if there were any “full disruption” of supplies. ( Financial Times)

We have discussed the next issue but the rationing we had observed was via price as it become uneconomic to operate if you were in an industry that used large amounts of energy resources that were/are rocketing in price.

The plans being drawn up by the European Commission would include measures to ration gas supplies to industry, according to people familiar with the proposals, while sparing households. ( FT )

This would come on top of the price rationing described in the Markit PMIs earlier this week.

Although manufacturing output growth improved slightly in May, it remained very modest after production growth had slowed to a near stand-still in April. The second quarter so far has consequently seen the weakest manufacturing expansion since the pandemic-related shutdowns in the second quarter of 2020.

Personally I think that the bit feels more realistic anyway.

However, many other manufacturing industries reported
that supply chain delays, combined with increased caution
among customers and spending by households being
diverted from goods to services, led to weaker output
growth or even falling production.

After all we had a March PMI above 56 suggesting strong growth which turned into this.

In March 2022, the seasonally adjusted industrial production fell by 1.8% in the euro area and by 1.2% in the EU, compared with February 2022.

So there are challenges anyway before we get to the issue of industry being switched off.

Industry accounts for 27 per cent of EU gas use, with chemicals, ceramics, food and glass production the biggest consumers. The commission has said it would protect key supply chains for food, security, and health and safety products. ( FT)

Actually I would be interested to see if it is still 27% as we know some companies have stopped or reduced output.

Anyway here is the new energy plan for the European Union.

Shedding Russian gas is a massive task for the EU, which before the war with Ukraine got 40 per cent of its gas supplies from Russia. This has now fallen to around 26 per cent, the commission has said.
Simson said Europe was on target to reduce that to 13 per cent by the end of the year. By then member states will have opened or expanded fixed or floating LNG terminals to handle 19bn cubic metres annually. Russia supplied 155bn cubic metres of gas last year.The Estonian commissioner said Brussels expected more gas from the US and Norway and was talking to new suppliers ( FT)

Spain

This morning brought some news which initially looked good.

(Reuters) – Spanish retail sales rose 1.5% in April from a year earlier on a seasonally and calendar-adjusted basis, after falling 4.1% in March, the National Statistics Institute (INE) said on Friday.

The monthly surge of 5.3% was strong but it highlights an issue because if you look at the underlying deflated or real index it is at 99.7 so not quite back to 2015 levels. Also it is signalling quite a lot of inflation because in the four months of 2022 recorded nominal growth is 12% higher than real growth.

Money Supply

We can now look at things from the monetary perspective via this morning’s release from the ECB. Let us start with the short-term impact.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.2% in April from 8.8% in March.

It has fallen from the pandemic boost which saw growth accelerate above 16% but is still above pre pandemic rates of growth. We know that QE purchases have been cut so there should be a further slowing but the relationship is not as direct as the textbooks would make you believe ( it usually takes longer than you would think).

Next we can look further ahead ( 18-24 months) via broad money growth.

The annual growth rate of the broad monetary aggregate M3 decreased to 6.0% in April 2022 from 6.3% in March, averaging 6.2% in the three months up to April.

This is still a fair bit higher than what we saw pre pandemic as for example it fell below 4% in 2018. Also as we are not expecting much if any economic growth then this will flow into inflation and suggests the inflationary push is still continuing. As to any potential brake then that does not seem likely.

European Central Bank (ECB) President Christine Lagarde urged patience as the bank looks to pare back its now 8 trillion euro balance sheet in the face of galloping inflation ( Yahoo Finance)

She became rather vague too.

“It will come, it will come, in due course, yeah,” responded an at least a modestly uncomfortable Lagarde when presented with the sharp upward-and-to-the-right graph of the central bank’s balance sheet, and asked how she plans to bring it down. “How?” the questioner during an episode of the “College Tour” TV show pressed again. “In due course, it will come,” she assured. ( Yahoo Finance )

If we now switch to credit we see a hint that the economic slow down is leading to more borrowing.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) increased to 5.3% in April from 4.6% in March.

It looks to be businesses doing it.

while the annual growth rate of adjusted loans to non-financial corporations increased to 5.2% in April from 4.1% in March.

Comment

This week began with promises and hints of interest-rate rises by ECB President Christine Lagarde. The consensus is to expect a rise of 0.25% in July and then September to take the Deposit rate to zero. The problem with this to my mind comes from what we have looked at today.

We can start geographically with Spain where retail sales have yet to return to 2015 levels and remember we had the Euro area boom in this time. Next up is the issue of the deflationary impact of the energy price rises. We looked at the topic of the new deficit position in current account terms last week. Another way of looking at things is via the housing market.

The interest rate on loans for house purchase with a floating rate and an initial rate fixation period of up to one year increased by 5 basis points to 1.40%, mainly driven by the interest rate effect. The rate on housing loans with an initial rate fixation period of over one and up to five years rose by 4 basis points to 1.53%, driven by the interest rate effect. The interest rate on loans for house purchase with an initial rate fixation period of over five and up to ten years increased by 15 basis points to 1.54%.  ( March figures ECB)

Central bankers have long been in the game of pumping up house prices and this is potentially the beginning of a reversal. Will they carry it through? I have my doubts. They may start but how long will they keep it up for?

On the other side of the coin is inflation which so far the ECB has pretty much ignored. Quite a difference to the instant response in 2020 to the impact of the pandemic.

Euro area money supply growth suggests there is inflation ahead

This morning’s Euro area money supply numbers remind me of this from last Friday. The head of the German Bundesbank Jens Weidmann was interviewed by FAZ and dropped something of a bombshell.

Inflation rates will increase strongly, to begin with. For Germany, say, my experts are expecting rates to potentially go in the direction of the 5% mark towards the end of the year.

This brings me back to the point I have consistently made which is that the money supply push we have seen since last March will have inflationary consequences. In a nutshell higher broad money growth or M3 in the Euro area leads to a combination of higher economic growth and inflation. If we go back to the question we see that a message is being sent because it was implying a different view.

Eurozone inflation came to a mere 1.9% in June. For many experts, the latest increase is mainly the result of temporary factors that are expected to have petered out in the coming year. Is that an assessment you would disagree with?

He then switches to what we might call the ECB line.

But that is mainly because temporary effects are at play. These include energy and commodity prices and, in Germany, for example, the reversal of the temporary VAT reduction last year. Inflation rates will therefore undoubtedly decline again significantly after that. The future path is uncertain, however.

The VAT cut was estimated to have affected Euro area inflation by up to 0.6% depending on whether you think it was fully passed through or not.

Next came an area of inflation which the ECB has been desperate to ignore.

What is more, as part of the strategy review we decided, going forward, to incorporate the prices of owner-occupied housing into the consumer price index we use. At present, this raises the inflation rate in the euro area by between 0.2 and 0.3 percentage point.

Even now they are watering it down via the use of rents ( which is clearly being implied above). How much well take a look.

Over the period 2010 until the first quarter of 2021, rents increased by 15.3 % and house prices by 30.9 %.

Or if we look at the latest numbers.

Rents and house prices in the EU have continued their steady increase in the first quarter of 2021, going up by 0.4 % and 2.2 %, respectively, compared to the fourth quarter 2020.

As you can see from the numbers some of the money supply push is finding its way into house prices and the numbers below coincide with the era of negative interest-rates and ever more QE.

 house prices remained more or less stable between 2013 and 2014. Then, there was a rapid rise in early 2015, since when house prices have increased at a much faster pace than rents.

When we are told QE does not create inflation there is the clear issue of them ignoring where it does. Looking ahead adding Imputed Rents may well be better than nothing but misses out so much as well as being a fantasy as owners do not pay rent.

Today’s Data

The situation starts well from the ECB point of view.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 11.7% in June, compared with 11.6% in May.

This is because it has been trying to increase the amount of QE and hence M1 growth as this from the latest press conference shows.

Therefore, having confirmed our June assessment of financing conditions and the inflation outlook, we continue to expect purchases under the pandemic emergency purchase programme (PEPP) over the current quarter to be conducted at a significantly higher pace than during the first months of the year.

Whilst it is not explicitly stated they have been operating the higher purchases for a while. That will have been much of the 114 billion rise in M1 we saw in June which was nearly as much as the 2 previous months combined.

Going to broad money

Things are not going so well for the ECB here.

The annual growth rate of the broad monetary aggregate M3 decreased to 8.3% in June 2021 from 8.5% in May, averaging 8.7% in the three months up to June.

In plumbing terms the narrow money tap is on but there is a leak somewhere as we move into the banking sector response and by that I mean credit and lending.

credit to general government contributed 5.1 percentage points (down from 5.9 percentage points in May), credit to the private sector contributed 3.6 percentage points (as in the previous month), longer-term financial liabilities contributed 0.3 percentage point (down from 0.5 percentage point), net external assets contributed -0.3 percentage point (down from -0.2 percentage point), and the remaining counterparts of M3 contributed -0.4 percentage point (up from -1.3 percentage points).

So the mover was somewhat ironically the government sector which shows how far they have intervened in economies.

We can also look to see what was happening in the credit arena.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents decreased to 6.2% in June 2021 from 6.7% in the previous month. The annual growth rate of credit to general government decreased to 13.0% in June from 15.4% in May, while the annual growth rate of credit to the private sector stood at 3.5% in June, unchanged from the previous month.

We get the same message of reducing government involvement.

Another way of breaking down the loans data reinforces my earlier point about housing. Lending growth to households is higher than pre pandemic now but growth in lending to businesses is lower. Is the growth in mortgages?

Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 4.0% in June, compared with 3.9% in May, while the annual growth rate of adjusted loans to non-financial corporations stood at 1.9% in June, unchanged from the previous month.

Comment

We see that the narrow money or M1 push continues in the Euro area which hints at economic growth continuing in the short-term and this does coincide with the Markit PMI.

The eurozone is enjoying a summer growth spurt
as the loosening of virus-fighting restrictions in July
has propelled growth to the fastest for 21 years.

Central bankers avoid explicit mentions of the money supply these days but in this sense they are monetarists. But there is a payback because should the Bundesbank be correct then the broad money push from starting last March will drive inflation higher in the latter months of 2020. This will start to subtract from the growth push so there could be a fade. Maybe markets are staring to allow for that too.

MARKET GAUGE OF LONG-TERM EURO ZONE INFLATION EXPECTATIONS RISES TO 1.65%, HIGHEST SINCE LATE 2018 ( @Adamlinton1 )

Switching to the value of the Euro then raising the money supply would be predicted by the text books to weaken it, But of course so many are at the same game. But it has drifted a little lower recently.

 

 

 

UK house prices reach yet another record

Today I am reminded of the sequence in one of The Matrix series of films when the Frenchman tells us about cause and effect. That is because as I wait for another signal of the cause we have seen the effect already.

May saw a further acceleration in annual house price
growth to 10.9%, the highest level recorded since August
2014. In month-on-month terms, house prices rose by 1.8%
in May, after taking account of seasonal effects, following a
2.3% rise in April.  ( Nationwide )

As DJ Jazzy Jeff and the Fresh Prince put it.

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

In case you did not think that the next bit rams it home.

New record average price of £242,832, up
£23,930 over the past twelve months.

That means that the average UK house earned more than its owner over the last 12 months because in general ( for a first house or flat) gains are tax-free. So it needs to be compared to net rather than gross income.

We also know that the low level of transactions seen last year has also been replaced by a boom.

The market has seen a complete turnaround over the past
twelve months. A year ago, activity collapsed in the wake of
the first lockdown with housing transactions falling to a
record low of 42,000 in April 2020. But activity surged
towards the end of last year and into 2021, reaching a record high of 183,000 in March,

The Nationwide thinks that there is much more to it than the Stamp Duty holiday.

Amongst homeowners surveyed at the end of April
that were either moving home or considering a move, three
quarters (68%) said this would have been the case even if
the stamp duty holiday had not been extended. It is shifting
housing preferences which is continuing to drive activity,
with people reassessing their needs in the wake of the
pandemic.

The so-called race for space seems to also be in play. Also the pandemic seems to have given many the equivalent of itchy feet.

At the end of April, 25% of homeowners surveyed said they
were either in the process of moving or considering a move
as a result of the pandemic, only modestly below the 28%
recorded in September last year. Given that only around 5%
of the housing stock typically changes hands in a given year, it only requires a relatively small proportion of people to follow through on this to have a material impact.

Inflation

It looks as though all the activity has had a consequence here.

The UK’s biggest builders’ merchant has warned customers of “considerable” cost increases to raw materials amid an industry-wide shortage.
As first reported by the Times, Travis Perkins says the price of bagged cement will rise by 15%, chipboard by 10% and paint by 5% from Tuesday.

It comes as industry groups warn electrical components, timber and steel are also in short supply.

They blame surging demand as lockdown eases, as well as supply chain issues. ( BBC)

Much of the explanation will be familiar to regular readers.

The supply problems stem from a number of factors. Construction industry projects have surged since lockdown began easing which has led to skyrocketing demand for already scarce materials.

There are also issues hitting specific products, such as the warmer winter affecting timber production in Scandinavia while the cold winter weather in Texas affected the production of chemicals, plastics and polymer.

There has also been a sharp rise in shipping costs amid the pandemic.

Mortgage Rates and Credit

This gets a minor mention from the Nationwide.

especially given continued low
borrowing costs, improving credit availability.

In terms of credit availability I presume they mean this change highlighted by Moneyfacts.

May 2021 has seen a surge in the number of 95% loan-to-value (LTV) mortgages available. Our latest data (to May 25 2021) shows 174 mortgages are now available at 95% LTV. The growth of product availability followed the launch of the new Mortgage Guarantee Scheme (MGS) and there are now 49 mortgages available under the scheme.

Remember the days post credit crunch when politicians queued up on the media to say never again to this sort of thing? I guess we are not quite back to what had happened but we are back on that road. Still the banks will be pleased that the taxpayer is assuming a fair bit of the extra risk.

There is a lot going on.

The availability of mortgage deals at 95% LTV is changing daily as lenders launch and close new products due to high levels of borrower demand.

But the best deals as of the end of last week were 3.49% variable and 3.59% fixed-rate.

For those with higher equity ( 40%) May has seen offers of less than 1%.

TSB offers 0.99% (3.2% APRC) on a two year fixed deal, which is available at a 60% loan-to-value (LTV) and charges £1,495 in product fees. Hinckley & Rugby Building Society offers 0.99% (4.5% APRC) as a two year discounted variable, which is also available at a 65% LTV and requires a minimum loan of £100,000. It charges £699 in product fees.

That still feels rather extraordinary even in these times of zero interest-rate policy or ZIRP. Although the numbers are flattered by the fees involved.

Moneyfacts also suggest that there is something going on in the price of credit  for buy-to-let.

Landlords looking to lock into a fixed

Our research into the BTL mortgage market has found that since the start of this month, the average two year fixed BTL rate has fallen by 0.04%, down from 2.99% on the 1 May to 2.95% on the 21 May. Meanwhile, the average five year fixed BTL rate

has fallen by 0.05% during this same period, down from 3.35% to 3.30%.

A sign of what Nelly would call “its getting hot in here” would be borrowing spreading into other types of finance.

Data  from the Association of Short-Term Lenders (ASTL) shows the demand from consumers and businesses to get a bridging loan in the UK has increased at the start of 2021.  Applications have exceeded pre pandemic levels by just over a quarter and the value of these was up 18% comparing Q1 2021 to the same period in 2020.

Affordability

The record on the Nationwide series for this was 6.4 back in late 2007 and the first quarter of this year showed 6.3 so with the increases we look to be back to the highs. Frankly if we look at what has happened to wages I think there must be some heroic assumptions here to keep it at that.

There is a similar situation for first-time buyers except the numbers are 5.4 and 5.3 respectively.

Comment

We will find out more tomorrow about a major driver of this which is the credit easing and monetary expansionism of the Bank of England. I note that they are increasingly deploying open mouth operations on the subject. Today’s effort comes from Sir David Ramsden in the Guardian who is apparently monitoring things.

The Bank of England is carefully monitoring Britain’s booming housing market as it weighs up the possibility that a rapid recovery from the Covid-19 pandemic will lead to a sustained period of inflation, one of its deputy governors has said.

A career as a civil servant is an odd way to become the expert on financial markets you might think.

Ramsden, the deputy governor responsible for markets and banking, said: “There is a risk that demand gets ahead of supply and that will lead to a more generalised pick-up in inflationary pressure. That’s something we are absolutely going to guard against. We are looking carefully at the housing market and a raft of real-term indicators.”

Those looking at the rise in house prices might think that Dave ( as he prefers to be called) is not much of a guard dog. I wonder if he thinks anyone will be convinced by this?

Ramsden said the Bank would not be complacent about inflation. “If it is not temporary we know what to do about that. We can push bank rate up from its historically low level [0.1%] and we know what that will do to demand.”

Meanwhile we have learned over time that the road to ever easier monetary policy and lower interest-rates comes pre-loaded with denials of any such intention. It is a form off PR for central bankers.

From August the Bank’s monetary policy committee will have the ability to push bank rate below zero but Ramsden hinted strongly that he would be wary about such a groundbreaking step.

Podcast

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast129

 

Canada has quite a house price problem

Let us take a trip over the Atlantic to Canada where we see that a familiar issue is bubbling up again.

Bank of Canada Governor Tiff Macklem said he’s seeing “worrying” signs in Canada’s hot housing market, in which households are taking on increasing levels of debt to chase rising prices. ( Financial Post)

Perhaps the housing market is soaring because someone has done this?

The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week. ( March 10)

You could quite easily read the next bit as Governor Macklem saying to house buyers that he has their back. He has set policy to make borrowing as cheap and he can and also he has done his best to keep the quantity of credit flowing.

In the Bank’s January projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway.  As the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required.

We can look into this further because the Bank of Canada calculates a variable mortgage interest-rate. This came into the pandemic at 2.9% and now is at a record low of 1.42%. I raise this because the interview seems to have somehow missed it.

House Prices

These seem to have shot up for no reason at all.

The central bank had largely stayed quiet on the housing market until February, when Macklem said it was showing signs of “excessive exuberance” as national real estate prices jumped 25 per cent from the year before.

That is still continuing.

“Since then, the housing market has continued to run strong across a variety of dimensions; price increases have continued at a pretty high rate,” Macklem said in an interview with the Financial Post on Wednesday.

Indeed he is allowed to get away with a blame game

While the state of the market can be explained to some extent by a fundamental shift in demands, there are other factors, like speculation, at play, the governor said.

Considering his own behaviour and actions the bit below is breath-taking.

“What gets us worried is when you start to see extrapolative expectations, or people starting to speculate on this, and houses become assets as opposed to something we live in. There certainly are some signs of extrapolative expectations,” Macklem said.

“If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”

So people just turned up and started speculating all of their own accord in a pandemic?

Debt Issues

Apparently according to Governor Macklem the fact that people are borrowing seems to be like the economic equivalent of an out of body experience.

“If you look at the household indebtedness, you are seeing, on average, the loan-to-value ratios are getting higher, particularly in the uninsured space. That suggests that Canadians are stretching and that is worrying.”

If we take a look we can see a driving force here and the good Governor only needs to look at his own website. It calculates an effective household interest-rate which includes mortgages but also other borrowing. It has dropped from 3.7% to 2.57%. I suggest the Governor needs to launch an immediate investigation into who has done this?

If we look for the debt data we see a sign that they have been listening to Lyndsey Buckingham.

I think I’m in trouble,
I think I’m in trouble.

They have switched from the Bank of Canada to Canada Statistics so we can see that as of last September residential mortgage borrowing was growing at an annual rate of 5.7%. From September to January it grew from Canadian $ 1.61 trillion to $1.66 trillion or about 2.7%.

Here is the view of Canada Statistics.

By the end of January, households had added $7.0 billion in overall mortgage debt compared with the end of 2020—a year-over-year rise of 7.1%. Sales of existing homes remained strong into January, with overall sales volumes up 35.2% from the previous year. Non-mortgage debt declined 1.6% by the end of January, compared with the same month of the previous year, and has yet to reach the levels of 2019, after a year of moderation, including a notable decline in the first half of 2020.

Overall, the total credit liabilities of households reached $2,453.2 billion by the end of January. Real estate secured debt, composed of both mortgage debt and home equity lines of credit, stood at $1,925.7 billion.

House Prices

Early last month the New York Times took a look.

Instead, of course, Canada is talking again about whether most of the country is in a soon-to-burst real estate bubble. In Vancouver last month, the benchmark price for detached homes rose by 13.7 percent compared with a year earlier, reaching 1.6 million Canadian dollars. In the Toronto area, the average selling price for detached homes rose by 23.1 percent over the same time period, and a composite price that includes all kinds of housing topped 1 million dollars.

This was put another way by CBC yesterday.

In December, the Canadian Real Estate Association warned that the average house price in Canada is expected to hit $620,000 throughout 2021. By this month, the CREA reported that home sales in February were up 39.2 per cent compared with a year ago, and the average price had hit $678,091, up 25 per cent from a year earlier.

Comment

This is part of what has become familiar for central bankers but Governor Macklem has taken it to something of an extreme. In some ways I am a little surprised that he did not try to claim “Wealth Effects” from the house price rises. If we step back for a moment he was responding to this from a Bank of Canada survey.

In particular, focus group participants voiced concerns about the costs of urban housing:

• rising far beyond the 2 percent inflation target
• growing faster than wages

These growing costs, they said, make it much harder for people to become homeowners. As a result, they felt this widens the divide between the rich and the poor, which negatively affects social cohesion.

This was right at the top of the survey. He is in something of a trap because he has promised to continue easy monetary policy until 2023. The Bank of Canada has recently stopped some of its emergency programmes but if we return to the Financial Post raising interest-rates is considered like this.

Tal reiterated Macklem’s view.

“The housing market is one part of the economy,” he said. “As a society, we have never been so sensitive to the risk of higher interest rates…. Every small increase in the interest rate can have a significant impact on the housing market and therefore, (Macklem) would like to see the market slow down before we have to raise interest rates.”

It did not seem to bother him when he cut interest-rates!

Also let me add in an additional factor here which comes to some extent from fiscal policy and the furlough schemes.

Canadians recorded a similar amount of savings in 2020 as in the previous seven years combined. Some of this savings made its way into currency and deposits of Canadian households, with growth in this asset nearing $160.0 billion over the first three quarters of the year. The savings rate for the fourth quarter stood at 12.7%, while the savings rate for 2020 was 15.1%. ( Canada Statistics)

Perhaps some of these savings are finding their way into the housing market as well.

Let me finish by wishing you all a Happy Easter.

Euro area money supply is booming again

In ordinary times the 25 members of the Governing Council of the European Central Bank would be getting ready to go to Frankfurt. This time though, they may well be making sure their version of Zoom works properly.I do hope they are not using Zoom itself as it is not secure meaning that the hedge funds will be listening in again. As to there being 25 members it has an Executive Board of 6 as well as a representative of each country. Rather confusingly not all vote as there are too many to sit around the ECB table and around 4 drop out with the most significant being the Netherlands this time around. But as the main decisions have already been made and only perhaps some fine tuning in the offing that is a moot point this week.

Money Supply

This morning has brought news on past decisions however. In the melee it is easy to forget that before the pandemic the ECB had restarted QE and then fired something of a peashooter on the 12th of March.

A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes

So strong in fact that only 6 days later they announced this.

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

These will have fed into the March data because the PEPP began on the 26th and the original much more minor “strong contribution” will have been in play for around half of the month. So what impact did they have?

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 10.3% in March from 8.1% in February.

Putting it another way M1 increased by 273 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder. As an aside cash rose by 26 billion in March which backs up to some extent my argument of yesterday about it. A clear rise but of course only one month.

Broad Money

As you can see this soared as well.

Annual growth rate of broad monetary aggregate M3, increased to 7.5% in March 2020 from 5.5% in February.

If we take the advice of Kylie ( I’m breaking it down) we see this.

Looking at the components’ contributions to the annual growth rate of M3,, the narrower aggregate M1 contributed 7.0 percentage points (up from 5.5 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed 0.0 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.5 percentage point (up from 0.1 percentage point).

So we see that the QE push is such that this time around broad money is effectively narrow money. We can ignore M2 which is doing almost nothing but then we see marketable instruments are in the game as well albeit more minor at 34 billion Euros. Indeed this is almost entirely debt-securities with a maturity of up to two years. I am picking them out because their total is only 60 billion so they have seen more than a doubling in one month.

Counterparts

We can do this almost MMT style and do indeed learn a thing or two.

the annual growth rate of M3 in March 2020 can be broken down as follows: credit to the private sector contributed 4.5 percentage points (up from 3.7 percentage points in February), net external assets contributed 2.1 percentage points (down from 2.7 percentage points), credit to general government contributed 0.6 percentage point (up from -0.7 percentage point), longer-term financial liabilities contributed -0.2 percentage point (up from -0.5 percentage point), and the remaining counterparts of M3 contributed 0.4 percentage point (up from 0.3 percentage point).

Care is needed as this sort of application of mathematics to economics is invariably presented as a type of Holy Grail followed by the sound of silence when it then goes wrong. But we do see that the credit impulse is now much more domestic as the foreign flows decline in absolute percentage terms and then have a second effect of being compared to a larger number.

What about credit flows?

The initial impact is a swing towards the public sector as we see credit there taking quite a move.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 3.5% in March 2020 from 2.0% in the previous month. The annual growth rate of credit to general government increased to 1.6% in March from -2.0% in February, while the annual growth rate of credit to the private sector increased to 4.2% in March from 3.4% in February.

The growth rate had been negative since last June and I expect quite a surge now because it was 15.7% at its peak in the credit crunch and we see so much fiscal policy being enacted.

Switching to the private-sector we lack the detail to really take a look.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) increased to 5.0% in March from 3.7% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.4% in March from 3.7% in February, while the annual growth rate of adjusted loans to non-financial corporations increased to 5.4% in March from 3.0% in February.

We learn a couple of things. There will be a lag before we pick up the fall in mortgage lending and new business lending was a record.

New bank loans to euro area non-financial corporates in March: +€118bn. Previous record was €66bn in December 2007………French banks were the largest contributors (€38bn in new corporate loans out of €118bn total) but the rise was fairly broad-based: Germany €22bn; Italy €17bn; Spain €16bn. ( @fwred)

This goes as follows. Good as banks are lending to companies but then Bad as we think why they want it and can they pay it back?!

Comment

These numbers matter because they give us a good idea of what is coming around the economic corner. For example narrow money growth impacts the domestic economy in somewhere between a few months and six months ahead. We have not seen double-digit-growth for a while and when we last did we got the Euro boom of 2017/18. Except these are about as far from ordinary times as we have seen and we are seeing the carburetor being flooded with petrol and the economy stalling. Putting it back into monetary terms velocity seems set to collapse again.

Another perspective is provided by the “pure” broad money growth which is the monetary equivalent of incestuous. Why? Well those short-term securities look as if they might be designed to be bought by the PEPP programme.

To expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.

(3) To ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, we will expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector.

More recently there has been this.

ECB to grandfather until September 2021 eligibility of marketable assets used as collateral in Eurosystem credit operations falling below current minimum credit quality requirements

In case you are wondering why? I am thinking Italy and Renault but I am sure there are others.

Moving on let me highlight a catch in this Such programmes will help big business but what about the smaller ones? We are back to the zombie culture and perhaps zombie money supply growth.

 

What is the outlook for the US economy?

We see plenty of rhetoric about challenges and changes but the two biggest players in the world economy are the United States and the US Dollar. So it is time for us to peer under the bonnet again and let me open with the result from the third quarter.

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the third quarter of 2019 , according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( BEA )

There are several implications here of which the first is simply that this is better than we are seeing in most places with Germany and Japan reporting growth rates much lower in the last 24 hours. In general this is , however, weaker than last year although the last quarter of 2018 was particularly weak.

A supporting element for the US has been a strong labour market.

 Real disposable personal income increased 2.9 percent, compared with an increase of 2.4 percent.

Has the easier fiscal policy of President Trump been a factor? Yes but we simply get told this.

federal government spending,

If we shift to a potential consequence which is rising debt well actually the ability of the US to repay it looks strong too.

Current dollar GDP increased 3.5 percent, or $185.6 billion, in the third quarter to a level of $21.53 trillion. In the second quarter, GDP increased 4.7 percent, or $241.4 billion.

As you can see there has been an element of inflating away the debt in there.

What happens next?

The now cast system uses the latest official data to look ahead and just like last year it looks like being a weak end to the year.

The New York Fed Staff Nowcast stands at 0.7% for 2019:Q4.

News from this week’s data releases decreased the nowcast for 2019:Q4 by 0.1 percentage point.

Negative surprises from lower than expected exports and imports data accounted for most of the decrease.

Another factor in play is that the labour market is not providing the push it was.

Earnings growth is still below late 2018 levels……Payroll growth was moderate in October, but remained solid year-to-date.

Money Supply

Back on the 22nd February I posted my concerns about the prospects for 2019.

So we can expect a slowing economic effect from it as we note that some of the decline will be due to the QT programme…….So we move on with noting that a monetary brake for say the first half of 2019 has been applied to the economy.

Of course that was then and this is now as the reference to the now ended QT programme. For example this happened at the end of last month.

the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

Yesterday saw Repo operations from the New York Fed which provided some US $73.6 billion of overnight liquidity and US $30.7 billion of 13 day liquidity. Thus the cash is flowing rather than being reduced and like so many things what was presented as temporary seems to keep going.

In accordance with the most recent FOMC directive, the Desk will continue to offer at least $35 billion in two-week term repo operations twice per week and at least $120 billion in daily overnight repo operations.

The Desk will also offer three additional term repo operations during this calendar period with longer maturities that extend past the end of 2019.  ( NY Fed )

That is for the next month and there will be more to come as they catch up with something we have been looking at for a couple of years now which is the year end demand for US Dollars.

These additional operations are intended to help offset the reserve effects of sharp increases in non-reserve liabilities later this year and ensure that the supply of reserves remains ample during the period through year end.

Returning to the money supply data you will not be surprised to read that the numbers have improved considerably. The outright fall of US $42 billion in the narrow money measure in March has been replaced by growth and indeed strong growth as both the last 3 months and 6 months have seen growth at an annual rate of the order of 8%. Back in February I noted that cash growth was strong and it was demand deposits which were weak and it is really the latter which have turned around. Demand deposits totalled US $1.45 trillion in March but had risen to US $1.57 trillion at the end of October.

Talk of the demise of what Stevie V called

Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

continues which is rather the opposite of official rhetoric.

Thus a monetary stimulus has been applied and for those of you who like to look at this in real terms might now that the inflation measures in GDP have faded making the impetus stronger for say the opening and spring of 2020.

Have the Repo operations influenced this? If you look at the September data I think that they have. But this comes with a cautionary note as QE operations do not flow into the monetary data as obviously as you might think and at times in the Euro area for example have perhaps taken quite a while.

Credit

By contrast a bit of a brake was applied in September.

Consumer credit increased at a seasonally adjusted annual rate of 5 percent during the third quarter. Revolving credit increased at an annual rate of 2-1/4 percent, while nonrevolving credit increased at an annual rate of 6 percent. In September, consumer credit increased at an annual rate of 2-3/4 percent.

Those sort of levels would have the Bank of England at panic stations. It makes me wonder if fears over the financial intermediation of the banks was a factor in the starting of Repo operations?

If you are wondering if car loans are a factor here we only get quarterly data and as of the end of the third quarter the annual rate of growth was 4.3% so definitely, maybe.

The US Dollar

The official view is expressed like this.

NEW YORK (Reuters) – President Donald Trump on Tuesday renewed his criticism of the Federal Reserve’s raising and then cutting of interest rates, saying the central bank had put the United States at a competitive disadvantage with other countries and calling for negative interest rates.

He wants lower interest-rates and a lower US Dollar. What we have seen is a trade-weighted index which has risen from 116 in February of last year to above 129 as I type this. So not much luck for the Donald

Comment

As you can see things are better than some doom mongers would have us believe. The monetary situation has picked up albeit with weaker consumer credit and there is the fiscal stimulus. But that is too late for this quarter and there are ongoing issues highlighted by the weak data we have seen out of China this week which the New York Fed summarises like this.

China’s monthly economic activity data is steady at a lower level.

Then there is the ongoing sequence of interest-rate cuts around the world which rose by 2 yesterday as Mexico and Egypt got on the bandwagon. That makes 770 for the credit crunch era now.

Meanwhile for those who have equities the Donald thinks that life is good.

Hit New Stock Market record again yesterday, the 20th time this year, with GREAT potential for the future. USA is where the action is. Companies and jobs are coming back like never before!

 

 

 

 

 

 

The Australian house price crash of 2019 looks set to worsen

A feature of the credit crunch era has been policies which have been favourable for the housing market and house prices in particular. Central banks first cut official short-term interest-rates and then followed it up with Quantitative Easing and credit easing all of which reduced mortgage rates. As well as this the flows of liquidity created for the already wealthy by QE led to investment in property in the world’s capitals and major cities by foreigners. If we move to a land down under to my topic of the day this was added to by the resources boom which added to house prices in Western Australia and Perth in particular. From a central bankers point of view this was scene as a  type of paradise with higher house prices causing wealth effects and also boosting the asset holdings of banks via their mortgage book.

However the situation is seeing what David Bowie would call ch-ch-changes and perhaps a sleepless night or two at the Reserve Bank of Australia. Indeed it treated us to a full paragraph on the subject in last weeks monetary policy decision.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low. Credit conditions for some borrowers have tightened over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased over the past year. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

If you previously were unsure about the house price rise then central bankers calling it “large” settles it. They will be ruing the fact that this is taking place with mortgage rates being low but there is a clear hint that there is much less competition now for borrowers of lower credit quality.

Today’s News

Australia Statistics gave us an update about mortgage credit earlier.

“There were large falls in the value of lending for owner occupier dwellings in seasonally adjusted terms in both New South Wales (-5.7 per cent) and Queensland (-5.3 per cent) in March, after rises in both states the previous month” he said.

Nationally, lending for investment dwellings also contracted further in March, with the series down 25.9 per cent (seasonally adjusted) compared to March 2018. The level of new lending for investment dwellings is at its lowest level since March 2011.

The release picks out areas particularly hit in March but if we step back we see that over the past year it has been a general case of “ice,ice,ice, baby”. On a seasonally adjusted basis new mortgage lending at 16.9 billion Aussie Dollars was some 18.4% lower than a year ago.

This has helped pull down the overall level of credit.

The value of lending commitments to households fell 3.7% in seasonally adjusted terms. This follows a 2.2% rise in February 2019.

Overall the new trend of declining numbers began towards the end of 2017 and was 10.5% lower in March than a year before.

First-Time Buyers

Actually in lending terms at least they seem to be less affected by the  drop in credit as you can see below.

The number of lending commitments made to owner occupier first home buyers recorded a relatively small fall (down 0.5%) compared to the fall in the number of lending commitments made to non-first home buyers (down 3.3%) in March, seasonally adjusted.

However we are in an election campaign and something that will be awfully familiar to UK readers in particular hit the headlines yesterday. From the Sydney Morning Herald.

Prime Minister Scott Morrison will intensify warnings of a hit to property prices from a Labor election victory, after launching a $500 million scheme to help people buy their first home – a policy swiftly copied by Labor.

Ah “help” to buy which usually means help to take on even more debt. Let us look further at the details.

The centrepiece of the Coalition campaign launch, called the First Home Loan Deposit Scheme, would be available from January 1 for those who have saved at least 5 per cent of the value of the home.

The government would put $500 million into the existing National Housing and Investment Corporation to guarantee a portion of the home loans for single applicants earning up to $125,000 or couples with combined incomes of $200,000.

In essence the Australian government would top up such a deposit  to 20% of the purchase price, and here is an idea of the scale of it.

This means it would only be available to about one in every 10 of the 100,000 first-home buyers who take out loans each year.

It is no great surprise that this quickly became bipartisan policy. However the “help” element is really for the banks and their loan books who get a subsidy from the taxpayer. So the government listens to their song.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me, help me, help me, ooh?

The first-time buyer may well get a home but at the price of lots of debt and another line in John Lennon’s famous song.

My independence seems to vanish in the haze

House Prices

What we have looked at so far concerns future house price trends so let us bring ourselves up to date on current ones.

The national property market is enduring its biggest fall in values since the global financial crisis, being led down by double-digit drops in Sydney and Melbourne.

New analysis by CoreLogic shows house values in Sydney dropped 0.8 per cent in April to be down by 11.8 per cent over the past 12 months. The situation is worse in Melbourne where values fell by 0.7 per cent last month to be down 12.6 per cent over the past year…….

National dwelling values were down by 0.5 per cent in the month to be down by 7.2 per cent on an annual basis, the largest drop since the 12 months to February 2009.

That is the sort of thing that sends a chill down the spine of any central banker.

Comment

So far we have looked at the credit impulse in Australia and we can learn more by looking at broader economic data. For example narrow money supply measures have proven to be a good indicator of future economic activity. On April 2nd I pointed out this.

If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms

We can now update with a March figure of Aussie $357.5 billion but even it only represents an annual growth rate of 0.3% so we can see that the RBA lacks monetarists as they would have voted for an interest-rate cut last week.

There is also the international issue of the trade war and its impact on what we sometimes call the South China Territories. This morning’s signal is the way that the offshore version of the Yuan/Renminbi has fallen through 6.9 to the US Dollar as we wonder about the impact on imports of commodities and resources from the SCT.

Thus the outlook for house prices is for status quo.

Get down deeper and down
Down down deeper and down
Down down deeper and down
Get down deeper and down

Podcast

I am pleased to report that my weekly podcast is now available on both I-Tunes and @playerFM ( Android).

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast25

 

Why I am expecting a rise in Euro area economic activity

One of the fun parts of being a Notayesman is that such a mindset gives the ability to quickly get on the pace with potential changes in trend. This morning what has been our most reliable indicator over the past couple of years looks like it is providing such an opportunity so let us get straight to it.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 7.4% in March from 6.6% in February. ( European Central Bank or ECB).

This adds to what I reported on the 28th of last month.

Moving onto happier news for the ECB this morning’s money supply release provided a bit of relief.

 

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 6.6% in February from 6.2% in January.

As you can see the annual growth rate has now picked up quite a bit as we start our money supply journey in 2019. In isolation this indicates a strengthening of the Euro area economy and returning to my opening theme this represents a change on a consensus which has in many cases only just caught up with our previous narrow money supply trend which led to the Euro area economy singing along with Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

Whereas now we have an indicator that there are better prospects for the summer as narrow money supply data looks around 3 months or so ahead. For those of you wondering how this works? The mechanisms here were described by Anna Schwartz some years back.

Because money is used in virtually all economic transactions, it has a powerful effect on economic activity. An increase in the supply of money puts more money in the hands of consumers, making them feel wealthier, thus stimulating increased spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods.

In my view this works best for narrower measures of the money supply because as she points out it is.

M1, a narrow measure of money’s function as a medium of exchange;

In general it gets spent and boosts nominal GDP. As to the real GDP we really want that tends to go with it unless there is big shift in inflation prospects. That is less likely to happen when we have a shorter time span.

Some Perspective

If we look back on the data we see an annual rate of growth which was last at this level in June last year. Up to then it had been falling from the 9.7% of September 2017. So if sustained we have regained about a third of the decline.

War on Cash

With there being an apparent turn for the better in the narrow money supply this may prove to be a bit like of on the cunning plans of Baldrick from the TV series Blackadder. From Carolyn Look of Bloomberg on Friday.

Fun fact: today was the last day Germany & Austria issued the €500 note. All other € countries stopped in January. Us Germans need a little more time to say goodbye when it comes to cash (but don’t worry, you can still use the ones that are circulating).

Whether that will be something of a brake on the money supply only time will tell, But the official theme that this is to combat money laundering has been torpedoed by the reality of the enormous scale of such activity in the banking sector of the Baltics. As ever no-one is suggesting that part of “the precious” needs eliminating nor are those banks being called “Bin Ladens” as the notes once were.

Broad Money

This too has picked up but March had a disappointing kicker which is explained if we go straight to the detail.

Looking at the components contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 4.9 percentage points (up from 4.3 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed -0.1 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed -0.3 percentage point (down from 0.0 percentage point).

The broader elements of the money supply shrank with a small reduction as we move to M2 but a 0.3% one if we move to M3. The latter matters because if we move from the ECB description to the real impact we are looking at a view on bank lending and its prospects.

Thus more of this seems to be on the cards.

 Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.2% in March, compared with 3.3% in February, while the annual growth rate of adjusted loans to non-financial corporations decreased to 3.5% in March from 3.8% in February.

As you can see this weakened although to my mind this is usually a lagging indicator for economic activity which for a while has been reflecting the better economic growth of this time last year.

Comment

The obvious question is how much of a pick-up in economic activity is on the cards. We have just seen quarterly economic growth of 0.1% followed by 0.2% on the one hand which was quite a drop on the 0.7% of 2017. But a rally to a period of 0.3%/0.4% in terms of quarterly growth looks on the cards. We can look at that in two ways and the opening view is that it is an improvement. Ironically it is the ECB itself that undercuts this with its view.

In our latest staff projections, the euro area growth outlook for 2019 has been revised down substantially, to an annual growth rate of 1.1%.

Also in line with other central banks it thinks that an annual growth rate of 1.5% is as good as it now gets. I am not sure how that works with the US reporting an annualised growth rate of 3.2% as it did in Friday but Ivory Towers are seldom bothered by such matters.

Looking more specifically we can expect a boost for the Euro area domestic economies as we wait to see what happens on the trade front. To my mind this morning’s surveys for the Euro area mostly reflect the difficult period we have just seen.

Euro area economic confidence falls to its weakest level since September 2016. ( @forexlive)

Another way of looking at it can be provided by services doing okay whilst manufacturing which relies on exports is not doing okay.

Adding to the more upbeat theme is the way the Euro has been depreciating. It rather conveniently went to 100 at the end of September in trade-weighted terms or as Maxine Nightingale sang.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from
Love is good, love can be strong
We gotta get right back to where started from
A ha

It is now 96.5 which is certainly the equivalent of a 0.25% interest-rate cut and maybe a bit more.

My Podcast on QE

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast23

 

 

 

 

 

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.

Slowing money supply growth puts the ECB between a rock and a hard place

Sometimes life is awkward and this morning is an example of that for the central bankers of the Euro area at the European Central Bank or ECB. Let me open with the hard place which is a development we have been following closely in 2018 and comes direct from the ECB Towers.

The annual growth rate of the broad monetary aggregate M3 decreased to 3.5% in August 2018 from 4.0% in July, averaging 4.0% in the three months up to August.

This matters because if we look forwards the rule of thumb is that it represents the sum of economic growth and inflation. So we initially see that something of a squeeze is on. In fact it has been one of the guiding variables for ECB policy. Let me give you an example of this from the January press conference where Mario Draghi told us this.

Turning to the monetary analysis, broad money (M3) continues to expand at a robust pace, with an annual rate of growth of 4.9% in November 2017, after 5.0% in October, reflecting the impact of the ECB’s monetary policy measures and the low opportunity cost of holding the most liquid deposits.

Back then the garden looked rosy with the Euroboom apparently still continuing. But in the April press conference Mario Draghi had gone from bullish to nervous.

 It’s quite clear that since our last meeting, broadly all countries experienced, to different extents of course, some moderation in growth or some loss of momentum. When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators.

He did not specifically refer to the money supply data but we now know that in March the rate of M3 growth had fallen to 3.7% and that whilst he may not have had all the data warning signs would be there. In such circumstances always look for what they do not tell you about!

Since then the numbers have fluctuated somewhat as it their want but the trend is clear as they sing along to “Fallin'” by Alicia Keys. The big picture is that the 5.3% of March 2018 has been replaced by 3.5% now.

The Rock

This for the ECB is its inflation target as it is one of the central banks who really do try very hard to achieve it as opposed to the lip-service of say the Bank of England. I still recall Jean-Claude Trichet defining it as 1.97% in his valedictory speech, and whilst that contains some spurious accuracy you get the idea. So in a sense what we now have are happy days.

The euro area annual inflation rate was 2.0% in August 2018, down from 2.1% in July 2018. A year earlier, the rate
was 1.5%.

Except if you take my rule of thumb above and in a broad sweep the amount left over for economic growth has gone from ~3.5% to more like 1.5%. This morning has brought news which suggests the inflation collar may be getting a little tighter. We do not get the overall number for Germany until later today but the individual lander have been reporting higher numbers with Bavaria leading the charge at 0.5% monthly and 2.5% annually for its CPI. However we do now have what appears to be a leaked number as @fwred explains.

Yep, German CPI apparently leaked early once again @destatis_news. 0.4% MoM consistent with strong regional data, would push inflation rate to 2.3-2.4% YoY, way above expectations.

As the largest economy in the Euro area that will pull inflation higher directly and of course there is also the implicit influence that many inflation trends will be international within the shared currency. Returning to my rule of thumb there is even less scope for economic growth if this is an accurate picture of the inflation trend.

Narrow Money

If broad money growth gives us the general direction of travel then narrow money gives us the impulse for the next few months or so. How is that going?

The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, decreased to 6.4% in August from 6.9% in July.

This compares to the 9.9% of September last year which is the recent peak. So the short-term impulse has weakened considerably since then and in terms of quarterly GDP growth we have seen a drop from around 0.7% to 0.4% or so. Of course we are now left wondering if more is to come?

A significant part of this has been the actions of the ECB itself as the 9.9% growth of last September was a consequence of monthly QE purchases being ramped up 80 billion Euros per month in the year from April 2016. Now of course we are in a different situation with them about to drop from 30 billion to 15 billion. This suggests that the fall in M1 growth has further to go.

What about credit?

These have been in a better phase so we can expect the ECB and its area of influence to give them emphasis.

• Annual growth rate of adjusted loans to households stood at 3.1% in August, compared with 3.0% in July
• Annual growth rate of adjusted loans to non-financial corporations increased to 4.2% in August from 4.0% in July

However in my view there are two issues with this. The opening one is that they are  backwards as well as forwards looking as they represent a response to the better growth phase the Euro area was in. The next is that they are in the M3 numbers and in fact represent basically its growth right now ( 3.4%) as the other components net out.

Comment

Today’s news continues a theme of 2018 which is that money supply growth has been fading. In the Euro area this has been exacerbated by the winding down of the expansionary monetary policy of the ECB. Some of it is still there as it used to tell us that a deposit rate of -0.4% was a powerful influence here but much of the QE flow has gone. Thus in the period ahead we will find out if the Euro area economy was like a junkie sipping the sweet syrup of combined QE and NIRP. This morning’s economic sentiment data showing a drop of 0.7 to 110.9 might be another example of people and businesses getting the message.

Looking at the international environment we see that the ECB is increasingly out of phase. Not only did the US Federal Reserve raise interest-rates but so did a central bank nearer to home.

At its meeting today, the CNB Bank Board increased the two-week repo rate (2W repo rate) by 25 basis points to 1.50% ( C = Czech )

The situation is complex as we wait to see if they depress the international economy or we shake it off. But the ECB remains with negative interest-rates when economic growth looks set to slow. What could go wrong?

Me on Core Finance TV