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).

 

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

 

 

 

 

 

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 . 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.

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

 

 

 

 

The Bank of England has a credit problem

There is a lot to consider already today as I note that my subject of Monday Bitcoin is in the news as it has passed US $10,000 overnight. The Bank of England must be relieved that something at least is rising faster than unsecured credit in the UK! Sir John Cunliffe has already been on the case.

. Sir JohnCunliffe says cryptocurrencies not a threat to financial stability – but says it is not an official currency and urges investors to be cautious  ( h/t Dominic O’Connell )

It is probably a bit late for caution for many Bitcoin investors to say the least. However if we return to home territory we see an area where the Bank of England itself was not cautious. This was when it opened the UK monetary taps in August 2016 with its Bank Rate cut to 0.25%, £60 billion of extra Quantitative Easing and the £91.4 billion and rising of the Term Funding Scheme. This has continued the house price boom and inflated consumer credit such that the annual rate of growth has run at about 10% per annum since then.

The credit problem

As well as the banking stress tests yesterday the Financial Stability Report was published and it spread a message of calm and not a little complacency.

The overall stock of outstanding private non-financial sector debt in the real economy has fallen since prior to the crisis,though it remains high by historical standards, at 150% of GDP.

There are two immediate problems here. The credit crunch was driven by debt problems so using it as a benchmark is plainly flawed. Secondly many of those making this assessment are responsible for pushing UK credit growth higher with their monetary policy decisions so there is a clear moral hazard. In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?

Excluding student debt, the aggregate household
debt to income ratio is 18 percentage points below its 2008
peak.

This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees. From HM Parliament in June.

Currently more than £13 billion is loaned to students each year. This is expected to grow rapidly over the next few years and the Government expects the value of outstanding loans to reach over £100 billion (2014 15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014 15 prices) by the middle of this century.

Pretty much anything would be under control if you exclude things which are rising fast! On that logic thinks are okay especially if use inflation to help you out.

Credit growth is, in aggregate, only a little above nominal GDP growth. In the year to 2017 Q2, outstanding borrowing by households and non-financial businesses increased by 5.1%; in that same period, nominal GDP increased by 3.7%.

They have used inflation ( currently of course above target ) to make the numbers seem nearer than they are. This used to be the common way for looking at such matters but that was a world where wage growth was invariably positive not as it is now. If we switch to real GDP growth which was 1.7% back then or wages growth which this year has been mostly a bit over 2% in nominal terms things do not look so rosy.

If we apply the logic applied by the Bank of England above then this below is a sign of what Elvis Presley called “we’re caught in a trap”

The cost of servicing debt for households and businesses is
currently low. The aggregate household
debt-servicing ratio — defined as interest payments plus regular mortgage principal repayments as a share of household disposable income — is 7.7%, below its average since 1987 of 9%.

So not much below but something is a lot below. There are many ways of comparing interest-rates between 1987 and now but the ten-year Gilt yield was just under 10% as opposed to the 1.25% of now. So we cannot afford much higher yields or interest-rates can we?

Consumer credit

The position here is so bad that the Bank of England feels the need to cover itself.

consumer credit has been growing rapidly,
creating a pocket of risk

Still pockets are usually quite small aren’t they? Although the pocket is expanding quite quickly.

The outstanding stock of consumer
credit increased by 9.9% in the year to September 2017

What are the numbers for economic growth and wages growth again? There is quite a gap here but apparently in modern language this is no biggie.

Rapid growth of consumer credit is not, in itself, a material risk to economic growth through its effect on household spending. The flow of new consumer borrowing is equivalent to only 1.4% of consumer spending, and has made almost no contribution to the growth in aggregate consumer spending in the past year.

This is odd on so many levels. For a start on the face of it there is quite a critique here of the “muscular” monetary policy easing of Andy Haldane. Also if the impact was so small the extra 250,000 jobs claimed by Governor Carney seems incredibly inflated. In this parallel world there seems almost no point to it.

Yet if we move into the real world and look at the boom in car finance which supported the car market there must have been quite a strong effect. Of course that has shown signs of waning. Also if you look at what has been going on in the car loans market and the apparent rise of the equivalent of what were called “liar loans” for the mortgage market pre credit crunch then the complacency meter goes almost off the scale with this.

Low arrears rates may
reflect underlying improvement in credit quality

Number crunching

I know many of you like the data set so here it is and please note the in and then out nature of student debt.

The total stock of UK household debt in 2017 Q2 was
£1.6 trillion, comprising mortgage debt (£1.3 trillion),
consumer credit (£0.2 trillion) and student loans (£0.1 trillion).
It is equal to 134% of household incomes (Chart A.9), high by historical standards but below its 2008 peak of 147%.(1)
Excluding student debt, the aggregate household debt to
income ratio is 18 percentage points below its 2008 peak

Most things look contained if you compare them to their peak! Also if we switch to mortgages we get quite a few pages on how macroprudential regulation has been applied then we get told this.

The proportion of households with high mortgage
DTI multiples has increased somewhat recently, although it
remains below peaks observed over the past decade ( DTI = Debt To Income)

Comment

The issue here can be summarised by looking at two things. This is the official view expressed only yesterday.

Lenders responding to the Credit Conditions Survey reported that the availability of unsecured credit fell in both 2017 Q2 and Q3, and they expect a further reduction in Q4.

Here is this morning’s data.

The annual growth rate of consumer credit was broadly unchanged at 9.6% in October

As you can see the availability of credit has been so restricted the annual rate of growth remains near to 10%. The three monthly growth rate accelerated to an annualised 9.6% and the total is now £205.3 billion.

The situation becomes even more like some form of Orwellian scenario when we recall the credit easing ( Funding for Lending Scheme) was supposed to boost lending to smaller businesses. So how is that going?

in October, whilst loans to small and
medium-sized enterprises were -£0.4 billion

There is of course always another perspective and Reuters offer it.

Growth in lending to British consumers cooled again in October to an 18-month low, according to data that may ease concerns among Bank of England officials concerned about the buildup of household debt………The growth rate in unsecured consumer lending slowed to 9.6 percent in the year to October from September’s 9.8 percent, the slowest increase since April 2016.

 

 

 

The continuing surge in UK unsecured credit adds to Mark Carney’s woes

This week will be a significant one for Mark Carney and the Bank of England as we await their decision on UK interest-rates. Today brings us another brick in the wall in terms of factors which will influence them as we receive the latest money supply and unsecured credit data. On the latter the Bank of England has undergone something of a change because if we go back to January 2016 Governor Carney told us this.

This has not been a debt-fuelled recovery. Aggregate private credit growth is modest compared to pre-crisis conditions, and is just now coming into line with nominal GDP growth.

However if we step forwards to the 30th of November of that year the BBC was reporting this.

The governor of the Bank of England, Mark Carney, has given a warning about the high level of debt in UK households.

In particular he said that consumers were borrowing more on their credit cards and other unsecured debt.

Figures from the Bank this week showed that credit card lending is at a record level, up by £571m in the last month.

Overall unsecured debt – which includes overdrafts – is rising at its fastest pace for 11 years.

“We are going to remain vigilant around the issue, because we have seen this shift,” he told a press conference at the Bank.

The really awkward point about all this arrives if we note who was at the van of causing the problem. From the Bank of England on the 4th of August and the emphasis is mine

This package comprises: a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.

As so often it was something which was not a headline maker that was the main player here as the banks were given access to cheap central bank funding.

In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate. This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

A further smokescreen was provided by the claims about business lending which was unlikely to change materially and even to some extent mortgage lending as the Bank of England had pushed that higher a few years before. Thus a fair bit of the cheap funding was likely to head for the unsecured credit sector. So the problem the Bank of England has been warning about is a consequence of its own policies.

Today’s data

Credit continues to flow to the UK economy.

The net flow of sterling credit remained robust at £9.6 billion in September. Within this, lending to households has been growing steadily at around 4% per year.

The outlook for secured credit to households continues pretty much as before.

Mortgage approvals for house purchase fell slightly to 66,232 in September, close to their recent average .

But the worrying news for the Bank of England is this.

The annual growth rate of consumer credit has remained broadly unchanged since June, at around 10%. The flow was £1.6 billion in September, also close to its recent average

So contrary to what we have been told the flow of unsecured credit remains strong to the UK economy. There have been various claims that it has been slowing but so far each monthly update has kept the rate of annual growth around 10%. In addition this month has seen some upwards revisions to past data.

 

Business Lending

At the start of each new policy initiative we are invariably told that it is to boost business lending.

Large non-financial businesses made net repayments of £1.8 billion of loans in September (Table M), with manufacturing contributing the most to this movement.

From this we learn several things. Firstly some of the welcome boost seen in lending to manufacturing a couple of months or so ago has dissipated away. But if we look at the general picture there is no great sign of any surged. As it happens smaller businesses ( SMEs) had a better September borrowing some £400 million but this only raised the six month average to £100 million. The official response involves quoting a counterfactual world where lending to smaller businesses was even lower. Odd that they do not feel the for counterfactuals about unsecured credit don’t you think?

What about interest-rates?

If we look first at savings rates we see that the Bank of England thinks that new deposits will now get a bit over 1% ( 1.11%) driven by this.

Effective rates on new individual fixed-rate bonds between 1 and 2 year, and over 2 year maturity have increased by 16bps from 1.13% to 1.29% and 1.32% to 1.48%, respectively.

Of course this means that in real terms they are losing at a bit under 2% if you use the CPI inflation measure and a bit under 3% if you use the RPI. Meanwhile new mortgage rates remain below 2% ( 1.97%). Also “other loans” ( unsecured credit) have ignored the rhetoric of the Bank of England and got a bit cheaper as 7.54% in June has been replaced by 7.15% in September.

Comment

So we see that unsecured credit growth remained strong in the third quarter of 2017. This leaves us wondering if earlier this month the banks pulled the wool over the eyes of the Bank of England.

Lenders responding to the CCS reported that the availability of unsecured credit fell in both Q2 and Q3.

Indeed this morning’s upward revisions change the narrative somewhat for the sector below.

This decline was mainly due to weaker growth in lending for dealership car finance, although this continues be a key driver of consumer credit

Thus we see that the “unreliable boyfriend” will be finding it ever harder to be unreliable with economic growth nudging higher and unsecured credit continuing to surge especially with inflation above target. Perhaps he will concentrate on the weaker CBI surveys we have seen but there will be quite a debate going on this week in Threadneedle Street. Especially as the unsecured credit boom is something the Bank of England lit the blue touch-paper on.