Where next for US house prices?

Yesterday brought us up to date in the state of play in the US housing market. So without further ado let us take a look.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 3.2% annual gain in September, up from 3.1% in the previous month. The 10-City Composite annual increase came in at 1.5%, no change from the previous month. The 20-City Composite posted a 2.1% year-over-year gain, up from 2.0% in the previous month.

The first impression is that by the standards we have got used to that is a low number providing us with another context for the interest-rate cuts we have seen in 2019 from the US Federal Reserve. Of course it is not only the Fed that likes higher asset prices.

“DOW, NASDAQ, S&P 500 CLOSE AT RECORD HIGHS”

Another new Stock Market Record. Enjoy!

Those are 2 separate tweets from Monday from President Trump who not only loves a stock market rally but enjoys claiming it is all down to him. I do not recall him specifically noting house prices but it seems in the same asset price pumping spirit to me.

In my opinion the crucial part of the analysis provided by S&P comes right at the beginning.

After a long period of decelerating price increases, it’s notable that in September both the national and
20-city composite indices rose at a higher rate than in August, while the 10-city index’s September rise
matched its August performance. It is, of course, too soon to say whether this month marks an end to
the deceleration or is merely a pause in the longer-term trend.

If we look at the situation we see that things are very different from the 10% per annum rate reached in 2014 and indeed the 7% per annum seen in the early part of last year.That will concern the Fed which went to an extreme amount of effort to get house prices rising again. From a peak of 184.62 in July of 2006 the national index fell to 134.62 in February of 2012 and has now rallied to 212.2 or 58% up from the low and 15% up from the previous peak.

As ever there are regional differences.

Phoenix, Charlotte and Tampa reported the highest year-over-year gains among the 20 cities. In
September, Phoenix led the way with a 6.0% year-over-year price increase, followed by Charlotte with
a 4.6% increase and Tampa with a 4.5% increase. Ten of the 20 cities reported greater price increases
in the year ending September 2019 versus the year ending August 2019…….. Of the 20 cities in the composite, only one (San Francisco) saw a year-over-year price
decline in September

Mortgage Rates

If we look for an influence here we see a contributor to the end of the 7% per annum house price rise in 2018 as they rose back then. But since then things have been rather different as those who have followed my updates on the US bond market will be expecting. Indeed Mortgage News Daily put it like this.

2019 has been the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections……Fed policy and the US/China trade war have been key players.

But we see that so far a move that began in bond markets around last November has yet to have a major influence on house prices. If you wish to know what US house buyers are paying for a mortgage here is the state of play.

Today’s Most Prevalent Rates For Top Tier Scenarios

  • 30YR FIXED -3.75%
  • FHA/VA – 3.375%
  • 15 YEAR FIXED – 3.375%
  • 5 YEAR ARMS –  3.25-3.75% depending on the lender

More recently bonds seem to be rallying again so we may see another dip in mortgage rates but we will have to see and with Thanksgiving Day on the horizon things may be well be quiet for the rest of this week.

The economy

This has been less helpful for house prices.There may be a minor revision later but as we stand the third quarter did this.

Real gross domestic product (GDP) increased 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. ( US BEA ).

Each quarter in 2019 has seen lower growth and that trend seems set to continue.

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

News from this week’s data releases increased the nowcast for 2019:Q4 by 0.3 percentage point.

Positive surprises from housing data drove most of the increase.

Something of a mixture there as the number rallied due to housing data from building permits and housing starts.Mind you more supply into the same demand could push future prices lower! But returning to the wider economy back in late September the NY Fed was expecting economic growth in line with the previous 5 months of around 2% in annualised terms.But now even with a rally it is a mere 0.7%.

Employment and Wages

The situation here has continued to improve.

Total nonfarm payroll employment rose by 128,000 in October, and the unemployment rate was little
changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in
food services and drinking places, social assistance, and financial activities……..In October, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $28.18. Over the past 12 months, average hourly earnings have increased by 3.0 percent.

But the real issue here is the last number. Yes the US has wage gains and they are real wage gains with CPI being as shown below in October.

Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

So this should be helping although it is a slow burner at just over 1% per annum and of course we are reminded that according to the Ivory Towers the employment situation should mean that wage growth is a fair bit higher and certainly over 4% per annum.

Moving back to looking at house prices then wage growth is pretty much the same so houses are not getting more affordable on this criteria.

Comment

As we review the situation it is hard not to laugh at this from Federal Reserve Chair Jerome Powell on Monday.

While events of the year have not much changed the outlook,

You can take this one of two ways.Firstly his interest-rate cuts are not especially relevant or you can wonder why he did them? Looking at the trend for GDP growth does few favours to his statement nor for this bit.

Fortunately, the outlook for further progress is good

Indeed he seemed to keep contradicting himself.

 The preview indicated that job gains over that period were about half a million lower than previously reported. On a monthly basis, job gains were likely about 170,000 per month, rather than 210,000.

But I do note that house prices did get an implicit reference.

But the wealth of middle-income families—savings, home equity, and other assets—has only recently surpassed levels seen before the Great Recession, and the wealth of people with lower incomes, while growing, has yet to fully recover.

As to other signals we get told pretty much every day that the trade war is fixed so there is not a little fatigue and ennui on this subject. Looking at the money supply then it should be supportive but the most recent number for narrow money M1 at 6.8% shows a bit of fading too.

So whilst we may see a boost for the economy from around the spring of next year we seem set for more of the same for house prices.Unless of course the US Federal Reserve has to act again which with the ongoing Repo numbers is a possibility. The background is this though which brings me back to why central bankers are so keen on keeping on keeping house prices out of consumer inflation measures.Can you guess which of the lines below goes into the official CPI?

https://www.bourbonfm.com/blog/house-price-index-vs-owners-equivalent-rent-residences-1990

Whilst it is not sadly up to date it does establish a principle….

 

 

Australia gets ready for QE but claims to reject negative interest-rates

So far the credit crunch era has been relatively kind to Australia. A major factor in this has simply been one of location as its huge natural resources have been a boon and that has been added to by its proximity to a large source of demand. Or putting it another way that is why we have at times given it the label of the South China Territories. However times are now rather different with the headlines being occupied by the subject of the various trade wars and as we have noted along the way this is particularly impacting on the Pacific region. Thus we find that the Governor of the Reserve Bank of Australia has given a speech this morning on unconventional monetary policy as they too fear that the super massive black hole that was the impact of the credit crunch may be pulling them towards an event horizon.

Why?

If we look at the state of play as claimed by Philip Lowe you may be wondering why this speech is necessary at all?

The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 per cent in 2021. This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually.

This is straight out of the central banking playbook where you discuss such moves and then imply they will not be necessary. They think it is a way of deflecting blame and speaking of deflecting blame interest-rate cuts are nothing to do with them either.

low interest rates are not a temporary phenomenon. Rather, they are likely to be with us for some time and are the result of some powerful global factors that are affecting interest rates everywhere

If interest-rates are indeed set by “powerful global factors” then we could trim central banks down to a small staff surely?

Banks

As ever it turns out to be all about “The Precious! The Precious!” for any central banker.

At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms. In any given currency, the Australian banks can raise funds at the same price as other similarly rated financial institutions around the world, and markets are not stressed.

You might think that plunging into unconventional economic policy might be driven by the real economy but oh no as you can see there is a different driver. In spite of the effort below to say Australia is different this means that it has learnt nothing and will make the same mistakes.

We are not in the same situation that has been faced in Europe and Japan. Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation. So we are in a much stronger position.

Again this is a central banking standard as they claim “this time is different” and then apply exactly the same policies!

QE it is then

We get various denials which I will come to in a bit but the crux of the matter is below.

My fourth point is that if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.

The explanation of why he would choose this option will certainly be popular with Australia’s politician’s.

The first is the direct price impact of buying government bonds, which lowers their yields. And the second is through market expectations or a signalling effect, with the bond purchases reinforcing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.

You may note that he has contradicted himself with the second point as he has already told us that low interest-rates are “are likely to be with us for some time”.  He then points out again that he has already acted this year.

It is important to remember that the economy is benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector.

That also gets awkward because having cut interest-rates by 0.75% already this calendar year Governor Lowe is implying we could get to his QE threshold quite quickly.

Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that. At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.

Why QE?

Well he is clearly no fan of negative interest-rates.

More broadly, though, having examined the international evidence, it is not clear that the experience with negative interest rates has been a success.

Indeed he may even have read yesterday’s post on here.

Negative interest rates also create problems for pension funds that need to fund long-term liabilities.

Or perhaps he has been a longer-term follower.

In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement. A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious.

Although this bit is quite a hostage to fortune and may come back to haunt Governor Lowe.

The second observation is that negative interest rates in Australia are extraordinarily unlikely.

Comment

It is hard not to have a wry smile as central bankers catch up with a point I was making about a decade ago.

Given these considerations, it is not surprising that some analysts now talk about the ‘reversal interest rate’ – that is, the interest rate at which lower rates become contractionary, rather than expansionary

I argued it was in the region of 1.5% and Australia is now well below it so it is I think singing along with Coldplay.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble

As to why the RBA is preparing the ground for even more monetary action then let me switch to Deputy Governor Debelle who also spoke today. This starts well.

Over much of the past three years, employment has grown at a healthy annual pace of 2½ per cent. This has been faster than we had expected, particularly so, given economic growth was slower than we had expected.

But in a reversal of the Meatloaf dictum that “two out of three aint bad” we get this.

But the unemployment rate has turned out to be very close to what we had expected and has moved sideways around 5¼ per cent for some time now………Then I will look at wages growth and show that the lower average wage outcomes of the past few years have reflected the increased prevalence of wages growth in the 2s across the economy.

The next issue is that does the mere mention of QE operate in the same manner as The Candyman in the film? If so that is at least 2 mentions in Australia so at the most we have 3 to go before it appears.

Finally with a ten-year bond yield already at 1.06% or about 1.5% lower than a year ago, what extra is there to be gained?

 

 

 

 

UK employment trends will worry the Bank of England

Today moves us on from the output situation of the UK economy to the employment and wages situation. On the latter we have already received some good news this week. From the BBC.

Thousands of UK workers will enjoy a pre-Christmas pay bump if their employer is a member of the “real living wage” campaign.

Businesses who have signed up to the voluntary scheme will lift their UK hourly rate by 30p to £9.30.

People living in London will see their hourly pay rise by 20p to £10.75.

The scheme is separate to the statutory National Living Wage for workers aged 25 and above which currently stands at £8.21 an hour.

The Living Wage Foundation said its “real” pay rate – which applies to all employees over 18 – is calculated independently and is based on costs such as food, clothing and household bills.

If we look at the wider pay picture we see from the Bank of England that it has been really rather good.

Pay growth has increased steadily over the past few years as the labour market has tightened. Private sector regular
pay growth was 4.0% in the three months to August, as high as it has been in over a decade. The
strength in pay growth has been broadly based, with growth picking up in both the private and public sectors in recent years.

I am not so sure about their “increased steadily” as they have been like the boy ( and occasional girl) who cried wolf on this subject. But we have seen a better phase and it is this that has been a major factor in keeping us away from recession and seeing some economic growth. The fear looking ahead is that it may fade.

A number of indicators suggest that pay pressures are no longer building, and pay growth may cool over the coming
months . The Bank’s settlements database suggests pay awards are clustering between 2% and 3%, slightly
lower than a year ago. Surveys by the REC and the Bank’s Agents also suggest pay growth is stabilising a little below
the pace of growth in the official data.

This may not be as bad for real pay growth as you might think because there are grounds for thinking inflation will decline. The rally in the UK Pound £ will help bring it lower and I note that having improved against the Euro to over 1.16 we should head towards the inflation rate there.

Euro area annual inflation is expected to be 0.7% in October 2019, down from 0.8% in September according to a
flash estimate from Eurostat, the statistical office of the European Union.

Today’s Data

If we start with the wages data then maybe the Bank of England has been right for once. It does not happen often so let’s give them a little credit.

In the year to September 2019, nominal total pay (which includes bonus payments) grew by 3.6% to reach £542 per week. Over the same period, nominal regular pay (which excludes bonus payments) grew by 3.6% to reach £508 per week.

The nuance to this is that it was not so long ago we would be quite happy with this and there were suspicions that the numbers had been boosted by the timing of NHS settlements. The official view on the impact of this is shown below.

Total and regular pay can be expressed in real terms when they have been deflated. We deflate them using the Consumer Prices Index including owner occupiers’ housing costs (CPIH) (2015=100). After adjustment, real total pay increased by 1.8% over the year to £502 in September 2019. Real regular pay increased by 1.7% over the year to £470.

I am pleased they have switched to “we deflate them” which at least gives some sort of hint of the woeful inflation measure they use as it is driven ( 17%) by imputed rents. As it happens because house price growth has fallen back it is not as wrong as usual but is still an over estimate of real wage growth in my opinion.

There was a counter current in the detail because September wage growth at 3.6% was better than the 3.4% of August. The sector pulling it higher was construction at 6%.

A Wages Depression?

If we move to the bigger picture then even using such a flattering and favourable view of inflation cannot escape this reality.

real regular pay was £3 (or 0.63%) lower than the pre-downturn peak of reached in the three months to April 2008 (£473). The real total pay value of £502 in September was £23 (or 4.38%) lower than the peak reached in the three months to February 2008 (£525).

In spite of the recovery we have seen in other areas particularly output and employment those numbers are a stark reminder that the credit crunch era has brought ch-ch-changes. Even at the current rate of real wage growth it will be more than a couple of years before we do a Maxine Nightingale and get right back where we started from.

Employment

The Resolution Foundation have summed it up here.

it’s clear that there is no bigger change to our economy over this period than the employment boom. Over 3 million more people are in work and the working-age employment rate is around 3 percentage points higher than when we were last broadly at full employment in 2008.

They however find themselves in some theoretical quicksand highlighted by their use of “full employment” when it was a fair bit lower than now and the use of “broadly” does not cut it. They are in the same quicksand with wages as higher labour supply has apparently kept it low and yet in the past we recall being told that higher migration ( higher labour supply) did not affect wage growth.

But the picture here has been like the “Boom! Boom! Boom!” of the Black-Eyed Peas as we note that now the winds of change might be blowing.

The latest UK Labour Force Survey (LFS) estimates for Quarter 3 (July to Sept) 2019 saw employment decline by 58,000 to 32.75 million, the second rolling quarterly decrease. However, in the year to September 2019, employment increased by 323,000.

This is consistent with a slowing economy and high levels of employment. We will have to see if the numbers will ebb and flow or have now turned lower. Also the mixture has changed as recent years have been a case of let’s hear it for the girls.

The fall in employment in Quarter 3 was driven by the fall in the number of women in employment, down by 93,000 to 15.46 million. Over the same period, the number of employed men increased by 35,000 to 17.3 million.

Comment

Let me now switch to the best part of today’s report which is this.

The level of unemployment fell by 23,000 to 1.31 million in Quarter 3 2019, while the unemployment rate fell by 0.1 percentage point to 3.8%. Compared with Quarter 3 2018, the level of unemployment decreased by 72,000.

For newer readers unemployment and employment can both rise or as they have in this instance fall. It seems illogical but there is also an inactive category, but the specific move at this time of year is probably related to students.

The mixed picture we have today of slowing wage growth with employment falling will be noted at the Bank of England. Already 2 have voted for an interest-rate cut and more much of these will see that number rise. Of course the Bank of England is in quite a mess as Samuel Tombs of Pantheon inadvertently pointed out.

And at 3.8%, the u/e rate is well below the MPC’s estimate of its sustainable level, 4.25%.

So wage growth should be rising. Oh well! Also that is before we get to them thinking it was 4.5%, 5%, 5.5% and 6.5%. So they do not know what they are doing which usually in their case means another interest-rate cut is in the offing.

That would be curious as we are in a phase where bond yields generally have been backing up. The UK 5 and 2 year yields have risen in response to 0.55%, who said markets were always right? Or indeed always logical?

 

 

 

 

 

The success story of Spain faces new as well as old challenges

Back in the Euro area crisis the Spanish economy looked in serious trouble. The housing boom and bust had fit the banking sector mostly via the cajas and the combination saw both unemployment and bond yields soar. It seems hard to believe now that the benchmark bond yield was of the order of 7% but it posed a risk of the bond vigilantes making Spain look insolvent. That was added to by an unemployment rate that peaked at just under 27%. The response was threefold as the ECB bought Spanish bonds under the Securities Markets Programme to reduce the cost of debt. There was also this.

In June 2012, the Spanish government made an official request for financial assistance for its banking system to the Eurogroup for a loan of up to €100 billion. It was designed to cover a capital shortfall identified in a number of Spanish banks, with an additional safety margin.

In December 2012 and January 2013, the ESM disbursed a total of €41.3 billion, in the form of ESM notes, to the Fondo de Restructuración Ordenada Bancaria (FROB), the bank recapitalisation fund of the Spanish government. ( ESM)

Finally there was the implementation of the “internal competitiveness” model and austerity.

What about now?

Things are very different as Spain has been in a good run. From last week.

Spanish GDP registers a growth of 0.4% in the third quarter of 2019 compared to to the previous quarter in terms of volume. This rate is similar to that recorded in the
second trimester.The interannual growth of GDP stands at 2.0%, similar to the previous quarter.

There are two ways of looking at this in the round. The first is that for an advanced economy that is a good growth rate for these times, and the second is that it will be especially welcome on the Euro area. Combining Spain with its neighbour France means that any minor contraction in Germany does not pull the whole area in negative economic growth.

However there is a catch for the ECB as Spain has slowed to this rate of economic growth and had thus exceeded the “speed limit” of 1.5% per annum for quite a while now. That will keep its Ivory Tower busy manipulating, excuse me analysing output gaps and the like. In fact once the dog days of the Euro area crisis were over Spain’s economy surged forwards with annual economic growth peaking at 4.2% in the latter part of 2015 and then in general terms slowing to where we are now. As to why the ESM explanation is below.

 Strong job creation followed the economic expansion, and employment has recovered by more than 2.5 million. Structural reforms have been paying off: competitiveness gains have supported economic rebalancing towards tradable sectors, and exports of goods and services have stabilised at historical highs (above 30% of GDP). The large and persistent current account deficit, which had reached 9.6% of GDP in 2007, has turned into a surplus averaging 1.5% of GDP in 2014-18.

Actually the IMF must be disappointed it did not join the party as turning around trade problems used to be its job before it came under French management. But Spain certainly rebounded in economic terms.and has been a strength of the Euro area.

Looking at the broader economy, Spain returned to economic growth in 2014 and continues to perform above the euro area average in that category

Over the past six months external trade has continued to boost the economy in spite of conditions being difficult.

On the other hand, the demand external presents a contribution of 0.2 points, eight tenths lower than the quarter past.

The impact of all this has improved the employment situation considerably.

In interannual terms, employment increases at a rate of 1.8%, rate seven tenths
lower than the second quarter, which represents an increase of 332 thousand jobs
( full time equivalents) in one year.

In terms of a broad picture GDP in Spain peaked at 104.4 in the latter part of 2007 then had a double-dip to 94.3 in the autumn of 2013 and now is at 110.9. So it has recovered and moved ahead albeit over the 12 years not made much net progress.

Problems?

According to the ESM the banks remain a major issue.

Several legacy problems also remain in the banking sector. These include larger and more persistent-than-expected losses of SAREB, which pose a contingent liability to the state. Banks have adequate capital buffers, but should further strengthen them towards the euro area average to withstand any future risks. In addition, the privatisation of Bankia and the reform of cajas need to be completed.

Of course banking reform has been just around the corner on a Roman road in so many places. Also the balance sheet of the Spanish banks has received what Arthur Daley of the TV series Minder would call a “nice little earner”.

Housing prices rise 1.2% compared to the previous quarter.The annual variation rate of the Housing Price Index has decreased 1.5 points to 5.3%,

Annual house price growth returned in the spring of 2014 which the banks will welcome. The index based in 2015 is now at 124.2.

However not all ECB policies are welcomed by the banks.

Finally, banks still face pressure on profitability due to the low interest rate environment, and potentially from a price correction in financial assets if the macro environment deteriorates. ( ESM )

An official deposit rate of -0.5% does that to banking profitability. I do not recall seeing signs of the Spanish banks passing this on in the way that Deutsche Bank announced yesterday but the heat is on. I see that the ESM is covering its bases should house prices fall again.

If we look at mortgage-rates then they are falling again as the Bank of Spain records them as 1.83% in September which looks as though it may be an all time low but we do not have the full data set.

Comment

The new phase of economic growth has brought better news on another problem area as the Bank of Spain reports.

Indeed, the non-financial private sector debt ratio
relative to GDP stood at 132%, 5 pp down on a year earlier and 4 pp below the euro area average.

The ratio of the national debt to GDP has fallen to this.

Also, in June 2019 the public debt/GDP ratio stood at 98.9%, a level still 13 pp higher than the euro area average.

 

and these days it is much cheaper to finance as the 7% yields of the Euro area crisis have been replaced by some negative yields and even the benchmark ten-year being a mere 0.31%.

On the other side of the coin first-time buyers will not welcome the new higher house prices and there are areas of trouble.

In this respect, consumer credit grew in June 2019 at a year-on-year rate of around 12%, and non-performing consumer loans at 26%, raising the NPL ratio slightly to 5.6% ( Bank of Spain)

What could go wrong?

Another signal is the way that the growth in employment has improved things considerably but Spain still has an unemployment rate that has only just nudged under 14%.So there is still much to do just as we fear the next downturn may be in play.

A fifth successive monthly deterioration in Spanish
manufacturing operating conditions was signalled in October as a challenging business climate negatively impacted on sales and output……At 46.8, down from 47.7 in September, the index also posted its lowest level for six-and-half years.   ( Markiteconomics )

 

UK wages growth, employment and unemployment all weaken in a worrying sign

Today merges several of our themes as a rather packed diary sees Bank of England Governor Mark Carney give evidence to Parliament just as the latest employment and wages data are released. There are various matters which make have him breaking out in a cold sweat. One is the rally in the UK Pound £ to US $1.266 which even he may be able to talk down. The next is the rise in annual wage growth above 4% which in the past has been regarded as something of a threshold for considering interest-rate increases. Of course that is likely to go the way that the 7% unemployment rate did! That of course raises the next issue of how the unemployment rate has fallen below 4% being chased by an equilibrium unemployment rate which is apparently now 4.25%.

It was only yesterday that I pointed out that Dave ( Sir David to his friends) Ramsden of the Bank of England was still churning out the failed Ivory Tower output gap methodology.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth,

Also tucked away in a really dull speech about longer-term trends Sir Jon Cunliffe made the case for more policy activism.

But, taken together with other changes in the economy – such as changes in the labour market which appear to have led to some flattening of the wage Phillips curve and
changes in the pass-through of labour costs to consumer prices – the probability is that demand management will need to use more tools to stimulate demand in downturns and work harder to prevent macro-economic tail events.

My apologies for their Phillips Curve obsession, but you see he is trying to tell us lower interest-rates are really nothing to do with him and his colleagues and then ask for even more freedom to interfere in the economy! He continues on that path here and “can be overdone” is classic civil service speak where is he taking out a bit of an each-way bet for himself ( but not us).

There is a lively debate over the extent to which aggressive use of monetary policy tools to stimulate demand creates financial stability risks by inflating asset prices and encouraging risk taking and the build-up of debt. My own view is that this can be overdone. There are, as I have said, deep-seated underlying structural drivers of low for long.

Perhaps he learnt all this stuff during his time at HM Treasury ( 1990-2007) which seems to have undertaken a reverse takeover of the Bank of England.

Wages

Today has brought some news that the recent past was not quite as good as we thought it was . Last month we were told that average earnings growth in July was 4.2% but this morning that has been cut to 3.9% which ch-ch-changes the picture somewhat. So now let us peruse this month’s data.

Estimated annual growth in average weekly earnings for employees in Great Britain was 3.8% for both total pay (including bonuses) and regular pay (excluding bonuses).

This means that the Bank of England can let loose a sigh of relief as the 4% wages growth threshold was not in fact in play as we only made 3.9% and have now dipped back to 3.8%. In terms of a pattern we see that since October last week each month with only one exception has seen annual wages growth above 3% so we have moved to a new higher path. Of which August at 3.6% is consistent with that and the detail backs this up.

All sectors except manufacturing saw annual pay growth of at least 3.0%; construction saw the highest estimated growth of over 5.5% for both total pay and regular pay…..manufacturing saw the lowest growth, estimated at 2.7% for total pay and 2.5% for regular pay.

So the numbers are good but not as good as we were previously told and maybe this was a factor.

Public sector pay growth has fallen back below that for the private sector, following higher growth in March to May 2019, impacted by the effect of a different pattern of pay rises for some NHS staff in 2019 compared with 2018.

Real Wages

According to the official rhetoric the position is now rather good.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.9% and annual growth in regular pay is estimated to be 2.0%.

As nominal pay growth is the same I am not sure how they get to that! Let us hope there is a difference at the second decimal place. But the fundamental issue is that it requires the use of the fantasy imputed rent driven CPIH inflation measure to get numbers that high. If we use RPI it drops back to more like 1%.

Also even using it we remain in a depression for real wage growth.

The equivalent figures for total pay in real terms are £502 per week in August 2019 and £525 in February 2008, a 4.4% difference.

Employment

The situation here has been good for seven years or so but this morning indicated the first signs of a wobble.

The UK employment rate was estimated at 75.9%; higher than a year earlier (75.6%) but 0.2 percentage points lower than last quarter……the estimated employment rate for women was 71.6%; this is 0.6 percentage points up on the year, but 0.3 percentage points down on the quarter

I added the detail on women because the change was them. Does anybody have any thoughts as to why this might be so?

We get some more detail from this.

Estimates for June to August 2019 show 32.69 million people aged 16 years and over in employment, 282,000 more than a year earlier. This annual increase was mainly driven by women (up 202,000 on the year), those aged 50 years and over (up 287,000 on the year) and full-time workers (up 263,000 on the year). There was, however, a 56,000 decrease in employment on the quarter, which was the first quarterly decrease since August to October 2017.

Furthermore we seem to be switching towards self-employment again.

However, the latest estimate shows the weakest annual increase for employees since May to July 2012 (see Figure 3), making it smaller than the annual increase for the self-employed.

Unemployment

This has been in a long downtrend but again we saw a change today.

The UK unemployment rate was estimated at 3.9%; this is lower than a year earlier (4.0%) but 0.1 percentage points higher than last quarter…….the level of unemployment increasing by 22,000 to 1.31 million, in the three months to August 2019.

Yet rather oddly considering the pattern of the employment data above it was men that were made unemployed.

the estimated UK unemployment rate for men was 4.0%, 0.1 percentage points lower than last year but 0.1 percentage points higher than the previous quarter……..the estimated UK unemployment rate for women was 3.7%, down 0.3 percentage points on a year earlier but largely unchanged on the quarter.

Comment

This is the first real hint of a possible sea change in the UK labour market which has just seen something of a troika of news. Wage growth is slower than we thought combined with weaker employment and higher unemployment. We still have much better wage growth and the employment levels are very high but if we were the Star ship Enterprise the Captain would be considering pressing the yellow alert button.

The changes in the wages data remind us of the caution that is requited with even official data. Let me remind you that the self-employed and the armed forces are ignored and that companies below 20 people are mostly imputed.

Returning to the Bank of England then they will be thinking of another interest-rate cut whilst Governor Carney emits gens like this.

“The pound is either going to move up or down,” says Mark Carney ( @BruceReuters)

Also he has been contradicting past Bank of England research.

BANK OF ENGLAND’S CARNEY SAYS UK INCOME AND WEALTH INEQUALITY FELL OVER THE PERIOD BOE QUANTITATIVE EASING WAS ACTIVE ( @RedboxGlobal )

 

 

 

 

Australia cuts interest-rates for the third time in five months

This morning has brought news that we were expecting so let me hand you over to the Reserve Bank of Australia or RBA.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.75 per cent.

This means that the RBA has cut three times since the fifth of June. Thus those who travel in a land down under are seeing a central bank in panic mode as it has halved the official interest-rate in this period. It means that they have joined the central bankers headbangers club who rush to slash interest-rates blindly ignoring the fact that those who have already done so are singing along with Coldplay.

Oh no I see
A spider web it’s tangled up with me
And I lost my head
And thought of all the stupid things I said
Oh no what’s this
A spider web and I’m caught in the middle
So I turned to run
The thought of all the stupid things I’ve done.

If we look at the statement we get a reminder of our South China Territories theme.

The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.

We can cut to the nub of this by looking at what the RBA also released this morning.

Preliminary estimates for September indicate that the index decreased by 2.7 per cent (on a monthly average basis) in SDR terms, after decreasing by 4.6 per cent in August (revised). The non-rural and rural subindices decreased in the month, while the base metals subindex increased. In Australian dollar terms, the index decreased by 3.5 per cent in September.

So the benefit from Australia’s enormous commodity resources has faded although it is still just above the level last year.

Over the past year, the index has increased by 1.8 per cent in SDR terms, led by higher iron ore, gold and beef & veal prices. The index has increased by 5.2 per cent in Australian dollar terms.

Aussie Dollar

The index above makes me think of this and here is a view from DailyFX.

Australian Dollar price action has remained subdued throughout most of 2019 with spot AUDUSD trading slightly above multi-year lows.

As I type this an Aussie Dollar buys 0.67 of a US Dollar which is down by 6.6% over the past year. The trade-weighted index has been in decline also having been 65.1 at the opening of 2018 as opposed to the 58.9 of this morning’s calculation.

So along with the interest-rate cuts we have seen a mild currency depreciation or devaluation. But so far President Trump has not turned his attention to Australia.

Also if we stay with DailyFX I find the statement below simply extraordinary.

 if the central bank continues to favor a firm monetary policy stance since announcing back-to-back rate cuts.

A firm monetary stance?

Back to the RBA Statement

Apparently in case you have not spotted it everybody else is doing it.

Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation.

As central bankers are pack animals ( the idea of going solo wakes them up in a cold sweat) this is very important to them.

Then we got a bit of a “hang on a bit moment” with this.

The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018.

Now if you believe that things are turning for the better an obvious problem is created. Having cut interest-rates twice in short order why not wait for more of the effect before acting again as the full impact is not reached for 18/24 months and we have barely made four?

Mind you if you look at the opening of the statement and the index of commodity prices you may well be wondering how that fits with this?

a brighter outlook for the resources sector should all support growth.

Indeed the next bit questions why you need three interest-rate cuts in short order as well.

Employment has continued to grow strongly and labour force participation is at a record high.

With that situation this is hardly a surprise as it is only to be expected.

Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate.

The higher participation rate makes this hard to read and analyse.

Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Moving to inflation the RBA seems quite happy.

Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

It does not seem to bother them much that if wage growth remains weak trying to boost inflation is a bad idea. Also if they look at China there is an issue brewing especially as the Swine Fever outbreak seems to be continuing to spread.

Pork prices have surged more than 70% this year in China due to swine fever, and “people are panicking.”

( Bloomberg)

House Prices

These are always in there and we start with an upbeat message.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne.

Yet the foundations quickly crumble.

In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight.

Comment

A complete capitulation by the RBA is in progress.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

They like their other central banking colleagues around the word fear for the consequences so they are getting their retaliation in early.

The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.

This is referring to the use of what is called r* or the “natural” rate of interest which of course is anything but. You see in this Ivory Tower fantasy it is r* which is cutting interest-rates and not their votes for cuts. In fact it is nothing at all to do with them really unless by some fluke it works in which case the credit is 100% theirs.

Sweet fantasy (sweet sweet)
In my fantasy
Sweet fantasy
Sweet, sweet fantasy ( Mariah Carey )

 

 

It is boom time for UK wages growth

Today has opened with a reminder of one of the biggest hits of Steve Winwood.

While you see a chance take it
Find romance
While you see a chance take it
Find romance

It is on my mind for two reasons. The first is that the fifty-year Gilt yield in the UK has risen back to 1% after reaching an all-time low of 0.79%. It is still remarkably cheap for the UK to borrow for infrastructure projects and the like just not as cheap as it was. On the other side of the coin the Bank of England will be trying to make it cheaper today by buying some £1.27 billion of longer-dated ( 2036 – 2071) UK Gilts as part of its reinvestment programme for its £435 billion of QE holdings. This is an extension of QE which can do little good in my opinion which will now continue until 2071 as the Bank has bought a little over £2 billion of it, Something to affect our children and grandchildren.

PPI

There was more news on this subject yesterday as Barclays joined the list of banks adding to their exposure.

Total amounts set aside for PPI redress now stand at £51.8-£53.25 billion – over 5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 20 times over the past 8 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs. ( New City Agenda)

This has plainly boosted UK consumption and the stereotypical example would be on car sales. But it is not quite a free lunch for GDP as there have been offsetting impacts elsewhere.

  • At Lloyds, retail misconduct costs have amounted to a staggering £14 billion, compared to dividends of just £500 million.
  • RBS has not paid a penny in dividends to its shareholders, but has had to find £6.4 billion in misconduct costs and has chosen to pay £3.8 billion in bonuses.
  • If Barclays had managed to restrain its misconduct costs then it could have tripled its dividend.

People have asked me why this has taken so long? Easy, those in charge of the banks have been able to maintain their positions with the large salaries and bonuses by “managing” the news flow. In banking crises just like in war the first casualty is the truth.

Wages

After yesterday’s strong GDP reading for July we maybe should not have been surprised to see some really good wages numbers, but perhaps not this good.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 4.0% for total pay (including bonuses), and fell to 3.8% for regular pay (excluding bonuses).

As you can see total pay growth reached 4% so what is called a big figure change and it was driven by the July number rising to 4.2%. Below are the sectoral numbers.

Of the sectors reported on, Construction and Finance and Business services are experiencing the highest pay growth, of over 5% (not adjusted for inflation) for total pay; manufacturing is experiencing the lowest pay growth, of 2.4%.

Actually construction wages rose at an annual rate of 7% in July. The numbers here have been boosted by bonus payments which have been around £30 per week for the last year. So it looks as though something has changed there and in a good way for once. I have to admit that it raises a wry smile as it fits with my Nine Elms to Vauxhall crane count rather better than the official construction figures.

Real Wages

Let me first show you the official view.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 2.1% and annual growth in regular pay is estimated to be 1.9%.

The problem with that is that it relies on the CPIH inflation measure which is 17% fantasy via the use of Imputed Rents ( it assumes homeowners pay themselves rent which of course they do not). Thus on a technical level it should not be used as a deflator at all but sadly the UK statistics authorities have abandoned such logic. Let me explain by how they present the overall picture now. They start with regular pay.

£470 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£461 per week), but £3 (0.7%) lower than the pre-recession peak of £473 per week for April 2008……..The equivalent figures for total pay in real terms are £502 per week in July 2019 and £525 in February 2008, a 4.3% difference.

Now let me show some alternative numbers from Rupert Seggins.

How close is real pay compared to where it was at the start of the crisis? That answer still very much depends on your favoured measure of prices. For CPIH fans it’s close, -1% below. If CPI’s your thing it’s -3%. If you prefer RPI it’s -8% and -11% if you like RPIX.

The problem with real wage growth is one of the main issues of the credit crunch and trying to sweep it away with the stroke of a statistical pen is pretty shameful in my view.

Employment and Unemployment

The numbers here were pretty good too.

the estimated employment rate for everyone was estimated at 76.1%; this is the joint-highest on record since comparable records began in 1971 and 0.6 percentage points higher on the year………Estimates for May to July 2019 show 32.78 million people aged 16 years and over in employment, 369,000 more than for a year earlier.

The cautionary note for employment is that the rate of growth has slowed as shown below.

In the three months to July 2019, UK employment increased by 31,000 to reach 32.78 million.

On the other side of the coin we see that unemployment continues to trend lower.

For May to July 2019, an estimated 1.29 million people were unemployed, 64,000 fewer than a year earlier and 716,000 fewer than five years earlier.

Some 11.000 lower in these numbers meaning it is at a 45 year low.

Comment

There is a lot to welcome in these numbers as we see wage growth pick-up with rising employment and falling unemployment. In the detail we see that the wage growth has been driven by bonuses and maybe there is a flattering of these numbers from timing changes. But it is also true that the change in the timing of NHS payments has fallen out of the numbers with no appreciable effect.

There are more than a few factors to consider. The wage growth has happened with little or no productivity growth as employment has risen by 1.1% over the past year. Next it is hard not to have a wry smile at the Resolution Foundation who had a conference on responding to recession yesterday. They are a little touchy if you point this out as this reply to me from their communications director highlights.

Given that the report says we’re not ready for a recession, we’re pretty glad we’re not in one . And as a pro-rising living standards think-tank, we’re obviously in favour of stronger wage growth.

Also there is an issue we have long expected. That is after countless occasions where it has been wrong, useless and misleading some were always going to cling to the Phillips Curve like a drowning (wo)man clings to a piece of wood.

For all the talk of its demise, the UK Phillips Curve shows signs of life ( FT economics editor Chris Giles )

To me this is a basic difference in approach. I adapt theory to reality whereas others adapt reality to suit pre-existing theory.

Oh and UK wage growth is now in line with the sort of rate at which the Bank of England would in the past be thinking of raising Bank Rate. So over to you Mark Carney and your Forward Guidance…..