Japan gas now seen three quarters of either contraction or no economic growth

Today is another example where we need to look East as this was released by the Cabinet Office earlier.

Gross domestic product contracted at an annualized pace of 2% in the three months through March, the Cabinet Office said Thursday. Economists had forecast a contraction of 1.2% ( The Japan Times)

Not only was the first quarter of this year weak the past was revised lower too leaving the situation like this.

The report showed that the economy has failed to grow since last spring, as updated figures for the last quarter of 2023 were revised to show the economy flat-lining after slumping in the summer. ( The Japan Times)

Putting that in numerical terms the Japanese economy has gone -0.9% then 0% and now -0.5% as we would count it in the last three quarters. This is all rather different to the strong growth we saw as 2022 moved into 2023. Indeed the year on year rate of GDP growth is now negative at -0.2% and the figures for this quarter will have to replace strong growth (1%) at this time last year.

There are a couple of excuses.

The result reflects the negative impact of a New Year’s Day earthquake northwest of Tokyo and disruptions to auto production and sales after a certification scandal blew up at Daihatsu Motor, a subsidiary of Toyota Motor.

The Problem that is Inflation

Regular readers will be aware of my theme that inflation is bad for economic output. This not only clashes with economics 101 ( people buy now to avoid higher prices later) but also the whole concept of Abenomics where zero inflation was supposed to be replaced by 2% per annum creating some sort of economic nirvana. How is that going?

While those factors can be discounted as temporary, the continuing impact of the strongest inflation in generations is a more enduring problem. Household spending keeps falling as workers contending with persistent declines in real wages tighten their budgets. Personal consumption has now declined for four consecutive quarters, the longest stretch of retreats since the global financial crisis. ( The Japan Times)

The bit I have emphasised is essentially my theme in a nutshell. The figures for private consumption have gone -0.7%, -0.3%,-0.4% and now -0.7%.That means the annual rate of growth is now 1.9%. This reinforces the message from last week when we looked at another decline in real wages. This contrasts strongly with the rhetoric and promises.

The first quarter saw companies emerge from annual negotiations with unions pledging the largest wage hikes in three decades.

This takes me back to what I pointed out on the 9th of this month.

Japan’s latest wage figures showed pay gains have now lagged inflation every month for two years even as a measure of the deeper trend points to steady growth. ( Bloomberg

The latest annual rate of fall is 2.5% adding to 2 years of falls and yet there is supposedly a “deeper trend”. Perhaps Bloomberg journalists should be paid like that and see what they think then! Putting it another way let me take you back to my thoughts on April 28th last year.

I hope that we will see some higher rises in the spring pay rounds, but so far there is little sign of any culture shift.

Moving away from this blog I came under fire for such views from some on social media, but I have not heard from any of them since then. Maybe we will get some improvements this year but any growth first has to offset the existing losses. Or if you prefer we are back to wages being a lagging indicator. In terms of the impact Kyodo News has put it like this.

The  Mizuho Research & Technologies Ltd. institute estimates that Japanese households will pay an additional 106,000 yen ($690) or more in the current business year to March due to inflation caused by rising crude oil prices, a weak yen and other factors.

We can also see why the present government is so unpopular. From The Japan Times

In March, Kishida said preventing deflation from recurring is the purpose of his administration’s existence.

So far he has made workers and consumers worse off with inflation and real wage falls. Now he has a shrinking economy too.

Trade

In the detail were some pretty awful trade figures. Exports fell at an annualised rate of 18.7% and imports by 12.7%. No doubt there is a Daihatsu effect but even so people will be worried.

Japanese Yen

This rallied quite strongly to 153.60 in response to the GDP release but then faded to 154.40 as people wondered about this?

Financial markets expect the central bank to raise interest rates again later this year as pressure could mount on the BOJ to counter the yen’s weakness, a byproduct of its dovish stance. ( Kyodo News)

Raising interest-rates into a declining economy would be brave and perhaps even courageous. Although care is needed as the expected changes are minor. But there has been a significant change as the thirty-year yield is around 2% these days as opposed to the 1.2% of a year ago.That in Japanese terms is significant.

Debt Costs

Japan in line with the above is getting worried about the cost of its debt.

TOKYO, Feb 2 (Reuters) – Japan faces more than a two-fold increase in annual interest payments on government debt to 24.8 trillion yen ($169 billion) over the next decade, draft government estimates seen by Reuters showed on Friday……versus 9.83 trillion yen for the fiscal year ending in March 2025, the draft estimate showed.

As to total national debt the St.Louis Fed did some number crunching at the end of last year.

Notice that for Japan, the net debt-to-GDP ratio (government bonds-to-GDP ratio) found in the consolidated balance sheet is only 114%, which is much smaller than the debt-to-GDP ratio reported earlier (226% in the second quarter of 2022)…….. For example, the Bank of Japan’s holdings of Japanese government debt is equivalent to around 100% of GDP.

As you can see Japan has indulged in quite a merry go round with its national debt. But there are now two factors in play. Debt is now more expensive. Plus the balance sheet of the Bank of Japan is weaker and one way of looking at that is via the Japanese Government Bond future. This peaked above 155 in Covid times and is now 144. That may not seem a lot but when you owe so many of them it is. Also you may recall me reviewing Governor Ueda’s rather complacent speech on the subject last autumn. Well the future is now 4 points lower and he has raised his own cost of borrowing.

Comment

This is another phase of the Lost Decade crisis. How does that go with my pointing out earlier this year that Japan Inc will be happy? It stands up because the record highs in the Nikkei 225 equity index and the much weaker Japanese Yen are good news for them. Plus there is this.

Corporate profits have improved and business sentiment has stayed at a favorable level. ( Bank of Japan)

But the Japanese worker and consumer will be unhappy as the weaker Yen has helped drive the inflation which has made them poorer. If we look back this was the original critique of Abenomics that Japan Inc would win but most would lose.

Then there is the issue of the Bank of Japan. Yes as the media have been reporting it has large equity market profits. Curiously they skip the issue of the reality that anyone else would be in jail for market rigging. But more to the point taking them requires a “cunning plan” as actual sales would torpedo the profits. But on the other side of the coin the enormous bond holdings are singing along with Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

 

 

 

 

 

The answer to Euro area economic problems is not more of the same policies (which got it into its present malaise)

The recent economic debate about the Euro area has concentrated on its under performance compared to the United States. For example back on the 17th of February I looked at the analysis of Dr.Isabel Schnabel on how it had fallen behind the US on productivity and AI.So it was intriguing to see the Financial Times open its analysis with this.

Claus Romanowsky reckons those who claim Europe’s economy is falling technologically behind are out of touch. The chatbot developed by his team at German engineering company Siemens will soon let factory workers anywhere talk to robots and machines without needing to know any code — potentially reaping massive gains in productivity.

This is traditional Financial Times fare of supporting the Euro area but you may note the “potentially”as opposed to the reality in the US. Indeed suddenly things look rather bad.

If more European companies harnessed artificial intelligence in this way, it might help to address some of the deep-seated problems in the region’s economy, which is lagging behind the rip-roaring growth of the US. Europe remains badly behind in AI innovation and adoption.

Indeed we get something of a reverse ferret from the Financial Times which has long argued that the Euro area provides economic growth.

Europe’s economic underperformance has long worried policymakers. But it has surged to the top of their agenda now that the growth gap with the US has become even wider.

Plus it is hard to know where to start with the previous sacred cows of Financial Times analysis which get thrown under the bus here.

The combination of high European energy costs, now well above those in the US, and the attractive subsidies offered by Washington for green energy and semiconductor projects built in the country is tempting large numbers of European companies to shift activities there.

But things continue as one of those who has led the Euro area into this mess ( think “Draghi Laws” and the later collapse of many Italian banks) is apparently cast as a saviour.

The EU has asked Mario Draghi, Italy’s former prime minister and ex-head of the ECB, to come up with ways of boosting the bloc’s competitiveness.

He will of course recommend even more Euro plans. But this article exposes a real problem with that as the hits keep coming. You see before the Euro began the economies in it were doing really rather well.

Europe’s economy was riding high in the early 1990s, enjoying a boost from deepening the EU’s single market before expanding it eastward following the end of the cold war.

But since the Euro started they have done badly.

But since then, the combined economies of the 27 countries that make up the EU today have steadily lost ground to the US, hit by a series of setbacks, particularly the Eurozone debt crisis a decade ago. More recently, the Covid-19 pandemic and Russia’s war in Ukraine have both inflicted more economic damage to Europe than to the US.

You may note the rather long list of excuses being used as a smokescreen. In fact the answer is apparently more of the policies which have contributed to the mess.

Paolo Gentiloni, the EU’s economy commissioner, says the question now is how to address the need for critical investments in areas such as the green transition and defence given the sluggish backdrop.

There is quite a conceptual problem here. I do not know about you but if I was looking for people to solve an economic crisis I would not start with 2 members of Italy’s political caste after all the years of trouble there. That is reinforced by the fact that a change of government to outside the caste ( Meloni) has so far seen Italy’s economy improve.

House Prices

The analysis then takes the advice of Lewis Carroll at the “Drink me!” stage for Alice as we see the claimed cause of the economic problems.

House prices have fallen in many countries and governments are reining in spending.

Yes it is lack of wealth effects that are at play.

“There are negative wealth effects in Europe,” says Ana Boata, an economist at German insurer Allianz Trade. “If you don’t expect to get more from public welfare or pension systems, you are likely to save more and spend less. Then you add in the uncertainty from wars and you have doom and gloom.”

That will of course be news to first-time buyers in the Euro area who would rather not pay ever higher prices for housing. You may note that these “wealth effects” have a loser which is the person paying that price! This is why I have long argued that you need some combination of house prices and mortgage rates in any proper cost of living measure.

Also the claim that house prices have fallen is rather disingenuous. Yes they fell recently.

House prices down by 1.1 % in the euro area and up by 0.3 % in the European Union in the fourth quarter of 2023, compared with the same quarter of 2022.

But if you look back you see that the impact of negative interest-rates and mass QE did lead to a change. The Euro area house price index passed 110 in late 2017 after struggles and then the beginnings of a recovery. But from then it went to 150 and some of the surge was really rather extraordinary post Covid and clearly driven by the negative interest-rates and bond yields. Except where were the economic gains from these wealth effects?

So many of the arguments are circular here as US investors have done better out of their equity market partly because their economy has done better.

US households have also benefited from investing more in equity markets, which have risen sharply in recent years.

Next up is a claim that seems to forget that US unemployment rate at 3.9% is much lower than the Euro area average of 6.5%.

US productivity was boosted by the temporary surge in unemployment after the pandemic hit in 2020, which reshuffled people into new and more productive roles once activity picked back up. Europe instead chose to protect jobs with massive furlough schemes. “We froze our labour market,” says Boata at Allianz, adding that this resulted in “zombified jobs”.

Comment

Let me bring this up to date via a reference in this piece.

“[It] is not a new issue for Europe and not a new issue for the Netherlands: growth has not been spectacular,” says Steven van Weyenberg, the Dutch finance minister.

This morning has seen the latest numbers from Netherlands Statistics.

The Netherland’s economy fell by 0.1% on quarter in the first quarter of 2024, returning into contraction after a 0.4% expansion in the previous period, a preliminary estimate showed……The Gross Domestic Product (GDP) in Netherlands contracted 0.70 percent in the first quarter of 2024 over the same quarter of the previous year.

I can put it another way via the European Commission spring forecasts.

This Spring Forecast projects GDP growth in 2024 at 1.0% in the EU and 0.8% in the euro area. This is a slight uptick from the Winter 2024 interim Forecast for the EU, but unchanged for the euro area. EU GDP growth is forecast to improve to 1.6% in 2025, a downward revision of 0.1 pps. from winter. In the euro area, GDP growth in 2025 is projected to be slightly lower, at 1.4% – also marginally revised down.

So at best not much. Yet apparently according to those in charge of the Euro area and those writing for the Financial Times the solution is more of the same people and policies that have led it down this road.

Strong UK GDP growth rather embarrasses the Bank of England

This morning the UK has received some economic news which fits with the recent sunny and warmer weather.

UK gross domestic product (GDP) is estimated to have increased by 0.6% in Quarter 1 (Jan to Mar) 2024, following declines of 0.3% in Quarter 4 (Oct to Dec) and 0.1% in Quarter 3 (July to Sept) 2023.

That is an outright good number and even our national broadcaster is reporting that.

The 0.6% rise in GDP means that the economy grew at the fastest rate for two years, according to the ONS.

It is the best growth since the first three months of 2022 when Russia invaded Ukraine, sparking an energy crisis, soaring food prices and general inflationary chaos.

We have wiped out the recession although to my mind if you recall the wild swings in retail sales ( a collapse in December and a surge in January) I think some of the fall then rise was a statistical anomaly. The adjustments have not kept up with the changes in the times.But returning to the figures our growth was such we have something we have not had for a while.

Real GDP per head is estimated to have increased by 0.4% in Quarter 1 2024, following seven consecutive quarters without positive growth.

We can drill down into the numbers and see that services were the biggest contributor but not the fastest growth area.

In output terms, services grew by 0.7% on the quarter with widespread growth across the sector; elsewhere the production sector grew by 0.8% while the construction sector fell by 0.9%.

Services

In fact we saw growth in each of the individual months and it was pretty broad.

Services increased in all three months of the quarter: January (0.4%), February (0.3%) and March (0.5%), as explained in our monthly GDP release…….There was widespread growth in the services sector, with 11 out of 14 subsectors increasing in Quarter 1 2024,

The leader of the pack is below.

The largest contributor to the growth in service output was a 3.7% increase in the transport and storage subsector. This was largely driven by growth of 6.4% in land transport services via pipelines (excluding rail transport). This industry saw its highest quarterly growth rate since Quarter 3 2020.

Actually whilst there was growth in that sector some of it was via a reshuffling of the statistical cards.

 there was strong growth in February 2024 where Monthly Business Survey (MBS) data showed strength in the land transport services industry. A reclassification of a company into this industry, previously allocated in the wholesale trade excluding motor vehicles and motorcycles industry, also contributed to the strong growth.

Regular readers may recall the way that the construction numbers were distorted by something similar back in the day. It is one of the reasons (large revisions are another) why I lack confidence in them. As to the next area I think most would prefer it to be science rather than legal although of course the concept of science has been devalued by abuse of it.

Professional, scientific and technical activities increased 1.3% in the latest quarter and was the second-largest positive contributor. The growth in this subsector was driven mostly by legal activities, and scientific research and development.

I mentioned the swings in the retail sector earlier which were worse on a monthly basis at the turn of the year.

Overall, consumer-facing services grew by 0.6% in Quarter 1 2024, following a fall of 0.4% in Quarter 4 2023, and this was largely driven by Retail trade, except of motor vehicles and motorcycles.

Not every area grew and there was an interesting quirk which I have highlighted as is this another consequence of working from home?

Elsewhere there were falls in accommodation and food service activities (0.2%), and activities of households as employers; undifferentiated goods and services activities of households for own use (3.4%).

Production

Growth here was negative in January followed by a strong rally.

This reflects a fall of 0.5% in January 2024 followed by growths of 1.0% and 0.2% in February and March, respectively.

It was particularly welcome to see a recovery in manufacturing.

Manufacturing output is estimated to have increased by 1.4% in Quarter 1 2024 following a fall of 1.0% in Quarter 4 2023. The largest positive contributor was a 5.7% increase in the manufacture of transport equipment, which has grown for six consecutive quarters.

The breakdown has an interesting swing as I winder whether the decline in the textiles sector is due to the high inflation we saw in the clothing and footwear numbers?

Manufacture of basic metals and metal products grew 3.1% and manufacture of food products, beverages and tobacco showed growth of 1.5%. However, this was partially offset by a fall of 3.6% in the manufacture of textiles, wearing apparel and leather, which fell for the sixth consecutive quarter.

At the end of the report there are a couple of numbers which deserve more highlighting. With the problems in the water sector and Thames Water in particular the fall should be looked at more. Also in the midst of an energy crisis the fall in mining ( think oil and gas) reflects the disastrous policies our political class has imposed on us.

However, the growth in this sector and manufacturing was partially offset by a fall of 2.4% in water supply; sewerage, waste management and remediation activities, and a fall of 2.2% in mining and quarrying across the quarter.

As it happens their emphasis on renewables had a simply awful night especially for those who have been busy claiming that the wind always blows in the UK.

A proud moment for British ‘Wind Power’ As after 30 years of being papmpered and cossetted and subsidised big time, it can’t even manage to make 1% of our electricity tonight. Not 1/500th of our total energy needs

An absolute disgrace! ( @latimeralder)

Construction

As I stated earlier these numbers are rather unreliable.

Construction output is shown to have fallen by 0.9% in Quarter 1 2024 following a decline of 0.9% in the previous quarter. The level of construction output in Quarter 1 2024 was 0.7% lower than the same quarter a year ago.

Monthly Numbers

Each month showed economic growth and after the upwards revision to February it is pretty consistent for the monthly series.

GDP is estimated to have increased by 0.4% in March, following growth of 0.2% in February (revised up from 0.1% growth), and an unrevised increase of 0.3% in January 2024.

Bank of England

When I said that the numbers were welcome the Bank of England forecasting department may not be quite so keen after telling is this only yesterday.

Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1

Even worse news is that they have used it for another of their theoretical brain farts.

 Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period. A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter,

Comment

It is nice to be able to review and analyse some much better economic numbers from the UK. It is hard not to have a wry smile at those who have been tweeting Brexit Disaster this week just in time for our quarterly economic growth to be double the Euro area’s. Buy whilst the number itself is good and hopefully sets the tone for 2024 the annual number shows that 2023 was a troubled one.

Compared with the same quarter a year ago, GDP is estimated to have increased by 0.2% in Quarter 1 2024.

If we move from quarterly to monthly picture improves.

GDP is estimated to have grown by 0.7% in March 2024 compared with the same month last year

We have improved from shrinking ( the last annual number for Q4 was -0.2%) so the direction of travel is good and looks set to pick-up. But it is also true that 0.2% is not very much and within the margin of error.

Also another hopeful sign is that the GDP inflation measure is declining.

The implied price of GDP rose by 0.6% in Quarter 1 2024, where the increase is primarily driven by higher prices in household consumption and gross capital formation. Compared with the same quarter a year ago, the GDP implied deflator further eased to 4.0%

 

The Riksbank of Sweden leads the charge to lower interest-rates

This morning has brought another example of the contrary times in which we live. After yesterday’s news from the Reserve Bank of Australia which may be mulling another interest-rate rise we received this from the world’s oldest central bank.

Inflation is approaching the target while economic activity is weak. The Riksbank can therefore ease monetary policy. The Executive Board has decided to cut the policy rate by 0.25 percentage points to 3.75 per cent.

Our first perspective is that they have kept their word as they suggested a rate cut was in the offing for May or June. In fact they have also added that they are not done for 2024 which as they are backing words with action has credibility.

If the outlook for inflation still holds, the policy rate is expected to be cut two more times during the second half of the year.

The next instant perspective is that this is a risk for the currency the Krona and many other central banks ( ECB and Bank of England for example) will be watching to see what happens next. An initial response is below.

EURO JUMPS VS SWEDISH CROWN AFTER RIKSBANK CUTS RATES; LAST UP 0.4% AT 11.725 CROWNS ( @FirstSquawk)

Actually the monetary policy report keeps coming back to the main issue here.

The strength of the US economy has led to higher interest rates globally….

The US economy has continued to perform strongly….

The strong economic performance is affecting inflation in the United States

Fewer policy rate cuts are expected abroad going forward…

The dollar has appreciated against other currencies.

We get the idea.

Inflation

If we switch to the inflation target we see the Riksbank slapping itself on the back.

Monetary policy and fading supply shocks have contributed to inflation now being close to the target. In March, CPIF inflation was 2.2 per cent, which was lower than the Riksbank’s forecast. CPIF inflation excluding energy was 2.9 per cent, which was also lower than expected.

Did the lower March number spook them into firing the starting gun on interest-rate cuts? That would be bad policy. Oh and according to the central bankers inflation expectations were anchored as inflation itself soared.

Inflation expectations are firmly anchored and wage increases are moderate. Information received since the Monetary Policy Report in March reinforces the outlook for inflation remaining close to target also in the
longer term.

However they are being a little disingenuous in their report by omitting this.Or if you prefer more of a guide to the actual cost of living.

The inflation rate according to the CPI was 4.1 percent in March 2024, down from 4.5 percent in February. On a monthly basis, the CPI index increased by 0.1 percent from February to March.

The difference is down to an area which is one of my major themes,housing costs.

The interest rates for household’s mortgages rose and contributed with 2.1 percentage points to the annual inflation rate according to CPI.

Whilst the central bank should not target this ( as by changing interest-rates it has raised it) it should also take note of what citizens are experiencing.

Anyway we then see that it is not as sure about inflation as its earlier words suggested.

However, the outlook for inflation is uncertain. As inflation now falls from very high levels, there is uncertainty on both the upside and downside.

Yes the “two-handed economist” has returned.

The Economic Situation

This has been weak for a while now in Sweden.

Swedish GDP growth has been weak but is expected to rise gradually. The GDP indicator points to low growth in the first quarter, in line with the March forecast. However, growth is expected to strengthen going forward.

I am not quite sure where they are going with the “low growth” line when Statistics Sweden has already told us this.

Sweden’s GDP contracted 0.3 percent in March, seasonally adjusted and compared with the previous month, as shown by the preliminary compilation of the GDP indicator. For the first quarter as a whole GDP contracted with 0.1 percent compared with the preceding quarter.

Indeed whilst the Riksbank sings along with the Beatles.

I’ve got to admit it’s getting better (better)
A little better all the time (it can’t get no worse)
I have to admit it’s getting better (better)
It’s getting better

Statistics Sweden are much less convinced.

“Swedish economic activity continued to weaken in the first quarter of 2024 with contractions in the months of February and March. This is the fourth consecutive quarter with negative growth.” says Mattias Kain Wyatt, economist at Statistics Sweden.

In fact they are suggesting it can get worse. This was reinforced by this on Monday.

Just as we thought that the Swedish economy was sending pro-cyclical signals, the Services PMI crashes back to contraction territory this morning ( @AndreasSteno)

Zawya provides more detail on this.

Activity in Sweden’s services sector fell to 48.1 in April from an upwardly revised 54.1 the previous month, compilers Silf/Swedbank said on Monday.

It was the first time since November last year the index has dropped below 50 points, seen as the dividing line between expansion and contraction in the sector.

The composite index of the service and manufacturing sectors decreased to 49.0 points from 53.0 points the previous month.

That is quite a lurch and takes Sweden in the opposite direction from the UK and Euro area who have both shown signs of a pick-up so far in 2024.

As to the background it has not only been a recession but perhaps also a depression.

 Both the month of March and the quarter as a whole had GDP-levels 1.1 percent lower than in their respective corresponding periods of 2023. ( Sweden Statistics)

House Prices

Another factor likely to cause central banks to cut interest-rates is lower house prices and Statistics Sweden posted the latest this morning.

Prices according to the Real Estate Price Index for one- or two-dwelling buildings fell by almost 1 percent at national level in the first quarter 2024 compared with the previous quarter.

Over the past year they have done this.

 On an annual basis compared with the first quarter of 2023, prices fell by more than 2 percent for one-or two dwelling buildings at the national level.

If you are wondering how much?

At the national level, the average price for one- or two-dwelling buildings was more than SEK 3.7 million in the first quarter of 2024.

Comment

As you can see this was in fact the central bank equivalent of the stars aligning. We have inflation galling back towards target, a weak economy and maybe most crucially another fall in house prices. Whilst they claim to be positive about there must be fears about the way it looks to be under performing the Euro area and UK.

Both the ECB and Bank of England will have their binoculars on the Krona to see what effect an interest-rate cut has? At the time of typing this it has fallen by 0.5% to 10.9 versus the US Dollar making the change over the past year 7,5%. Although perhaps a better idea comes from the fall of around 9% so far this year as expectations around interest-rates changed. It is a risk.

Swedish Krona near all-time lows vs USD at 10.94 (@akcakmak)

Fingers crossed for plenty of tourist spending for Eurovision in Malmo.

 

 

 

The Bank of England should take note of the money supply and abandon QT bond sales

On the surface this has been a quiet week for the Bank of England along the lines of the Norges Bank of Norway which has just voted to keep interest-rates at 4.5%. But as I pointed out yesterday its QE and now QT efforts have left it singing along with Coldplay.

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

Plus there has been another development which turns the screw on it and it comes from an unusual source which is former Governor Mervyn King. Former Governors tend not to bite the hand which gave them a generous RPI linked pension plus the title of Baron King of Lothbury and Most Noble Order of the Garter. But as the Financial Times points out he has drawn his sword.

The Bank of England’s failure to forestall the post-pandemic surge in inflation was the result of collective amnesia in the economics profession about the role of money supply, according to a former governor.

He is of course correct about this and then he gently debunks the claim by Ben Bernanke that there was no group think at the Bank of England.

Lord Mervyn King, who led the UK’s central bank between 2003 and 2013, said on Thursday it was “troubling” that when prices began to rise in 2020 and 2021, there had been “no dissenting voices to challenge the view that inflation was transitory” among policymakers on either side of the Atlantic.

He then built up steam on the money supply issue whilst taking a swipe at academia as well.

“Too much money chasing too few goods is and always has been a recipe for inflation,” he said, calling it “foolish” for central banks to rely on forecasting models that ignored the role of money entirely.
“The academic economics profession has essentially jettisoned the idea that one might ask what the growth of broad money [a measure of the amount of money circulating in the economy] was telling us,” King said, adding that this consensus had “led to the problems we are now too familiar with”.

As an aside this raises another issue which has troubled me. These days students pay ( well borrow) a lot of money to get an economics degree and this is not matched in any way by much of the teaching. Also I see he was quite damning of the Bernanke Review as you can see below where he is accusing it of missing the main issues.

“The mistakes of 2020 and 2021 were not the result of presentation. The Bank might have used fan charts, the Fed used dot plots. It didn’t make any difference. They both made the same misjudgement,” said King. “What really matters are judgments about the state of the economy and the way monetary policy works.”

QT Bond Sales

These have been somewhere between a shambles and a disaster for the Bank of England. I did not mention them in yesterday’s post to avoid double-counting but another consequence of the rise in interest-rates is that the Bank of England is effectively capitalising its losses at the bottom of the market. You do not have to know much about markets to realise that buying at the top ( indeed creating the top) and then selling at the bottom is a bad idea.

Thus this from Bloomberg overnight rather caught my eye.

Demand for cash from the Bank of England jumped to a record £12.2 billion ($15.3 billion) on Thursday, the latest in a string of increases that may spur policy makers to ease financial conditions through the bond market within months, analysts say.
The BOE will opt to end its weekly bond sales later this year, which will act in tandem with interest-rate cuts to loosen monetary policy, according to Deutsche Bank AG and NatWest Markets.

Actually until recently many at the Bank of England will have welcomed the extra demand for cash as it tightened policy.

The clamor has already driven up a short term money market rate to 5.35%, above the BOE’s benchmark rate. That has the effect of tightening financial conditions, just as the Monetary Policy Committee is considering easing policy by cutting interest rates.

Frankly I think that they should stop the QT bond sales now. The main reduction in the balance sheet has come when bond holdings mature and making the cost of UK debt higher for subsequent generations is yet another policy error.

The Economy

Whilst the Bank of England is rather enmeshed in its own problems the UK economy looks to be experiencing something of a spring bounce.

The seasonally adjusted S&P Global UK PMI Composite
Output Index* registered 54.1 in April, up from 52.8 in March and in positive territory for the sixth consecutive month. Moreover, the latest reading signalled the fastest expansion of private sector business activity since April 2023.

It has been as so often for the UK economy services driven.

Stronger output growth was driven by a robust and
accelerated upturn in the service economy. Manufacturing
production meanwhile returned to contraction, although
the decline was only marginal. There was a similar pattern
for order books, with service providers reporting a faster rise while goods producers experienced a renewed downturn.

I am not sure where S&P are going with this though as the previous lower readings were supposed to give this level of growth.

The latest survey results are consistent
with the UK economy growing at a quarterly rate of 0.4% and therefore pulling further out of last year’s shallow recession.

Even what seems a minor statement like “shallow recession” will produce itchy shirt collars at the Bank of England. After all their forecast was for a deep recession with economic output falling by 2%

Comment

As you can see the Bank of England has dug several holes for itself with its policies. One could reasonably argue that over the past few years it has made the UK’s economic performance worse rather than better. It fed then ignored an inflationary boom and in return for an orgy of QE bond buying and interest-rate cuts we got very little economic growth. In an way I think that this from the Office for National Statistics earlier rather sums up the state of play.

Public service productivity in Quarter 4 2023 is estimated to be 6.8% below its pre-coronavirus (COVID-19) pandemic peak (Quarter 4 2019) but has remained relatively stable since Quarter 2 (Apr to June) 2021 through the post-pandemic period.

But fortunately the economy looks as though it is recovering in spite of their meddling. Although that does rely on the PMI release to some extent other numbers have been consistent with it.

 

There are consequences from US interest-rates remaining at 5.5% for the fiscal deficit and the Japanese Yen

Today is Federal Reserve day when just after 7pm (they are usually late) we learn the interest-rate decision of Jerome Powell and his colleagues. On the surface not much is expected which is highlighted by the front page of the Financial Times not mentioning it at all as I type this.Yet underneath the surface it is being very powerful via what the apocryphal civil servant Sir Humphrey Appleby would call “masterly inaction.” We can start with the financial market event of the week.

LONDON (Reuters) – Japan’s yen saw a sudden jump on Monday, suggesting the country’s authorities may have finally followed through on the FX market intervention warnings they have be making for months.

Monday’s moves follow a near-11% drop in the yen’s value against the dollar this year and a 35% slump over the last three decades that has pushed it to a 34-year low.

The around 5% pick-up in yield terms between the US Dollar and the Japanese Yen left it vulnerable,especially with Japan continuing the Abenomics style policies for a weaker Yen. On Monday with Japan quiet due to Golden Week the Yen found itself pushed to 160 as what the Japanese authorities were hoping would happen in several months took instead several hours. It looks as though they spent around US $30 billion in a barrage of intervention to get it back to 155, although they are being tight-lipped on the matter.

This has affected the Yen against other currencies as it was only recently it seemed a big deal that the Yen passed 160 versus the Euro. I remember people on Twitter scoffing at my view that the UK Pound £ would be strong versus it and I guess they were rather quiet when it nearly made 200 on Monday morning. A factor that has driven this on can be looked at via this from the 14th of December last year.

Most Federal Reserve officials have forecasted that the US central bank could cut rates by about 0.75 percentage points next year, as they held interest rates at a 22-year high…Officials expect rates to fall even lower in 2025, with most officials forecasting they would end up between 3.5 per cent and 3.75 per cent.

That lit the blue touch paper for bond markets and interest-rate cut expectations and on that road tonight could even have been the second cut. Except not only have there not been any so far the first one keeps getting further away.I pointed out at the time that the US two-year yield had fallen to 4.3% that day and in fact it later fell towards 4.1% whereas I recently noted it climbing back to 5% and it is now 5.03%. In itself it may not seem enormous but the change in expectations has been and along the way the central planners at the Bank of Japan have been wrong-footed. On the 30th June last year I pointed out they wanted a lower Yen and along the way Japan Inc will have welcomed that and the consequent all-time highs in the Nikkei 225 equity index as one of the signposts of the Lost Decade was taken down. But on Monday morning it became a bit of a rout, as these things have a habit of doing. This morning the Yen at just under 158 will be singing along with Queen and David Bowie.

Pressure pushin’ down on me
Pressin’ down on you, no man ask for
Under pressure that brings a building down
Splits a family in two, puts people on streets

US Fiscal Problems

The situation here begins will the Bidenomics policy which in old language would be called a dash for growth.

The IMF’s fiscal monitor estimates that the U.S. deficit for 2024 will reach 6.67% of GDP, rising to 7.06% in 2025 – double the 3.5% in 2015. ( Reuters)

In itself that is fine as long as the economy grows which so far it has. Whilst GDP growth in the first quarter of this year slowed to 0.4% it was some 3.1% higher than a year before which oils many fiscal wheels. But last night brought rather a change of emphasis from the US government.

US TREASURY SECRETARY YELLEN: I AM CONCERNED ABOUT WHERE WE’RE GOING WITH THE US DEFICIT. ( @financialjuice )

If we ignore the rather obvious elephant in the room about it being her policies which have sent in there we can see other issues. Back on the 26th of March I pointed out that she was also running the debt in a very risky way.

The US has shifted its deficit funding to short-term debt issuance, something most people in markets link to the fall in long-term Treasury yields since Oct. 2023. No one in the G10 remotely comes close to this shift. Canada is most similar, but debt issuance is much smaller… ( Robin Brooks )

The problem with doing that is you become ever more vulnerable to a fiscal crisis because you end up with quite a schedule of rollovers of your debt.

Now that was in theory going to be sorted by the Federal Reserve beginning a series of interest-rate cuts with US bond yields falling. Clever Janet! Except they have not happened and things in terms of the schedule always began a bit of a crunch next month due to the short-dated nature of her debt policy. Stupid Janet! With bond yields now high again refinancings will be expensive as we mull another case of theory clashing with reality. It also means that something else I noted on the 26th of March becomes more of an influence.

The interest on the debt alone exceeds $1 trillion per year, constituting around 20% of the government’s annual revenue. ( @BigBreakingWire)

As I frequently point out debt interest is a slow burner, but the issue for the US has changed. First there was all the Covid spending ( which officially does not count as most of it is on the books of the Fed). Then we have seen a continuation of loose fiscal policy added to by a very loose style of debt management by the US Treasury. Now US bond yields look set if I may use one of Jerome Powell’s phrases “higher for longer”

Comment

The Bank of Japan will be on alert later in case the policy announcement leads to another phase of Yen selling. It will no doubt be sending hints to Jerome Powell although there is the issue that the Federal Reserve is notoriously insular and rarely takes any notice at all of international implications of its policy. That means if we do get something there is a admission that the problem is very serious.

Next up is the issue of the fiscal deficit and Jerome Powell has mentioned this before as a worry. However he does not want to create a crisis and there are worries here. For example economic growth has been good and in the past many would have called the numbers below full employment.

Total nonfarm payroll employment rose by 303,000 in March, and the unemployment rate changed
little at 3.8 percent, the U.S. Bureau of Labor Statistics reported today.

Yet we see a fiscal deficit heading for 7% of GDP in what are officially good times.So we can expect something which Treasury Secretary Yellen has tried to forestall. These things can escalate quickly. One way of taking the pressure off would be an announcement to reduce QT……

The ECB will be cutting its balance sheet as it cuts interest-rates under present plans.

We can start our look at the Euro area economy with a reflection via the Dine series of books. For those unaware in Dune it is the future which is known and the past which is uncertain. I thought of this as I read the latest HCOB PMI update last week.

“The eurozone got off to a good start in the second quarter. The Composite HCOB Flash PMI took a significant step into
expansionary territory. This was propelled by the services sector, where activity has gathered further steam. Considering various factors including the HCOB PMIs, our GDP forecast suggests a 0.3% expansion in the second quarter, matching the growth rate seen in the first quarter, both measured against the preceding quarter.”

The estimate for the first quarter caught my eye because we had been told 47.9 in January or a decent rate of contraction, 49.2 in February for a minor contraction and 50.3 in March for an even more minor expansion. Some argue that in range of 48-52 the PMI numbers mostly just say a form of stagnation and you can take that two ways. One is that with economic growth at this rate being a bit more than 1% they have a point. Or for these times 1% actually feels okay. But my main point is that the PMI series has just rather rewritten its own history.

This matters as we know that the ECB follows it with President Lagarde and and Dr.Schnabel in the van of those who regularly mention it. Also in an unusual occurrence it shows President Lagarde as being correct in that the survey would show some better news. Although the most recent ECB statement changed its mind.

The economy remained weak in the first quarter.

Also her most recent speech has a curious reflection on things.

But history tells us that ideas can only drive growth if we first create the right conditions that allow them to reach their full potential – and if we are committed to breaking the bottlenecks that stand in their way.

The issue of “bottlenecks” reminds me that every press conference from her predecessor Mario Draghi called for reform. This type of theme continues here.

Most advanced economies, however, have seen productivity decelerate for some time.

Regular readers will recall us looking at a rather downbeat analysis of this from Dr.Isabel Schnabel which is now apparently morphing into this according to President Lagarde.

Developments in recent years suggest that the case for optimism was stronger.

Eh?

The good news for global productivity growth is that we see these new ideas flourishing across major economies, a direct legacy from the common ties that were crafted during the era of globalisation. And Europe, in contrast to what some may believe, is actually well placed to benefit from these ideas.

Those who see this being driven by the big US tech companies may be wondering how all the European attacks on them leave the European Union well placed? They may well be simply adding most of this to US GDP.

One study finds that generative AI alone has the potential to add up to almost USD 4.5 trillion annually to the global economy, roughly 4% of global GDP.^[10

Maybe it was a bit of a Freudian slip to measure it in US Dollars….

According to President Lagarde Europe is the world leader.

According to one study, Europe draws in more AI talent than the United States, with over 120,000 active AI roles, and last year, Europe accounted for one-third of total early-stage capital invested in AI and machine learning across the two economies.

I have had a look at the source quoted for this and it also refers to the UK so the definition of “Europe” used by President Lagarde seems to be rather flexible.

Money Supply

Friday’s update brought some minor improvements.

• Annual growth rate of broad monetary aggregate M3 increased to 0.9% in March 2024 from 0.4% in February

If you take that literally the rate of inflation looks set to fall further if we look ahead 18/24 months or so. The catch is that these numbers have been suggesting low inflation (good) but also low economic growth for a while now.

• Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, was -6.7% in March, compared with -7.8% in February

There may be more of a change here than it may immediately look because the -113 billion Euros of January were replaced with 10 billion Euros in March. The numbers may not be accurate to 10 billion but there looks to have been quite a change for the better. Although that does rather collide with planned ECB policy.

The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

So until the end of June we have a “the spice must flow” type of situation. But then any narrow money growth will face a monthly headwind of 7.5 billion Euros and at the end of the year reinvestments will stop meaning a faster pace of reduction. In monetary terms this will be picked up by the M1 numbers as cash is withdrawn. It will also influence the broader measures. This will be added to the existing contraction.

 In addition to that, given the APP gradual runoff, we also reduce our balance sheet by an average of about EUR 30 billion per month.

This gives us a really awkward situation. We have some hopes of economic improvement via a change in the narrow money supply and the ECB may stamp on it just as it is cutting interest-rates!

 but in June we know that we will get a lot more data and a lot more information and we will also have new projections, which will incorporate and be informed by all that will be published before the projection is completed.

For all the rhetoric about being “data dependent” we are being guided towards a June rate cut which will coincide with a further restriction in the money supply via more QT. Iy would be sensible to reverse course on the latter but President Lagarde was adamant.

That process is ongoing and will continue to happen as anticipated, as predicted and as determined by the maturity of those bonds that come to runoff, and then we will move to the reduction of the PEPP reinvestment, from the 1^st of July until the end of December. That’s the plan, but there is no further discussion on that.

Comment

The possible improvement in Euro area growth will not make much difference to the ECB and no doubt some wags will spot that inflation in terms of the ECB towers remains below target this morning.

Germany Hesse CPI (YoY) (Apr) $EUR Actual: 1.9% Previous: 1.6% ( @PiQSuite)

But if we switch to Quantitative Tightening we see that many central banks have got themselves into quite a mess. The US with the best performing economy as loosened the QT strings although it is not the Federal Reserve’s fault as Treasury Secretary Yellen has issued lots of short-dated debt. Whereas the ECB is trimming its sails and intends to add to it with a much worse economic performance. So I would not be surprised if the ECB abandons some of this. Better to be embarrassed than to actually be a fool.

Although it does beg a question of when the ECB can reduce its QE bond holdings?

Podcast

This week’s podcast has turned out to be rather timely as we see the Yen plunge and now intervention today.

 

 

UK March Retail Sales are either flat (seasonally adjusted) or up 4.3%

This morning has seen the latest UK Retail Sales release and on the surface not much is happening.

Retail sales volumes (quantity bought) were estimated to be flat (0.0%) in March 2024, following an increase of 0.1% in February 2024 (revised from 0.0%).

In literal terms there is an improvement via the February revision but it is very marginal especially for such a volatile series. However it does mean that the positive vibe for the UK’s first quarter GDP numbers continue.

Looking at the quarter, sales volumes increased by 1.9% in the three months to March 2024 when compared with the previous three months. This was following low sales volumes over the Christmas period for retailers.

So a 1.9% rise for this sector will feed into the GDP release. However the last sentence of the quote above is a reminder that it looks as though the seasonality calculations were sung about by Lyndsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

The collapse in December followed by the surge in January does look like it was created by the statistical methodology rather than reality. So it is more precise to say that with the official release showing a decline in GDP for the last quarter things look set for it to be offset as 2024 starts.

What happened in March?

Whilst the headline was unchanged there was quite a bit going on within the numbers.

Within retail, sales were mixed, with automotive fuel and non-food stores sales volumes rising by 3.2% and 0.5%, respectively. This was offset by falls in food stores and non-store retailers of 0.7% and 1.5%.

Maybe people were loading up with fuel ready for trips and holidays over Easter.

Automotive fuel sales volumes rose in March 2024 to reach their highest index level since May 2022. Retailers reported that this rise was linked to increased footfall on their forecourts.

For once there was a little bit of good news for the high street.

Non-food stores sales volumes (the total of department, clothing, household and other non-food stores) rose by 0.5% over the month, with increased footfall reported by some retailers. This is consistent with the rise in footfall on the high street, as seen in the national retail footfall data in our Economic activity and social change in the UK, real-time indicators bulletin. Rises were seen in secondhand goods stores (which includes antiques and auction houses), hardware and furniture stores, and clothing stores.

Although not for department stores per se.

Offsetting these rises, department stores, food stores and non-store retailing sales volumes all fell over the month with retailers suggesting that increased prices were affecting consumer spending habits.

It is good to see that our official statisticians have fallen in with my long-running theme that inflation is bad for Retail Sales volumes. But it is also awkward for the argument that inflation is ending. This led to me take a look at the deflator which calculates inflation for the retail sector. We see that the annual rate peaked at 12.4% in July of 2022 which was in the middle of a year of essentially ( the low was 9.7%) double digit rises. So prices are higher. The annual rate is much lower now (2.2% in March), but the monthly rise was 0.6% which after February’s 0.9% shows a reacceleration perhaps.

The online numbers were a little discouraging for the previous glimmer of hope for the high street.

As total spend showed no growth on the month, the 0.1% rise in the amount spent online increased the proportion of sales made online, from 25.8% in February 2024 (revised from 25.7%) to 25.9% in March 2024.

Seasonal Adjustment

Harvir Dillon of the British Retail Consortium makes a fair point.

Surely there has to be a distinction made between what *actually* happened and what happened after a statistical adjustment? Shoppers didn’t *actually* cut back, last month. And consumed more food than they did during the same time, last year.

Let me illustrate with the unadjusted index numbers. 110 ( November ). 113.1 , 88.7.90.7 and now 94.6 for March.  On this basis we saw a rise of over 4% in March on a monthly basis. In a way such numbers mae the case for seasonal adjustment as otherwise every December would be a monthly triumph and every January a disaster. But it is also true that the seasonally adjusted series is plainly struggling and in my view has been misleading.

Perspective

The official view is this.

Volumes rose 0.8% over the year to March 2024, while remaining 1.2% below their pre-coronavirus (COVID-19) pandemic level in February 2020.

If we take the non seasonally adjusted numbers we had a 1.8% rise on the year and are 2.8% above February 2020.

The chart below shows something in addition to the impact of the recent inflationary burst which is that Retail Sales are at 98% of 2019 levels,

Comment

On the face of it the UK economy had a much better first quarter in terms of Retail Sales and likely also GDP growth. Although as we have seen some of that is a statistical artifact as the seasonal adjustments look to have overstated both the December fall and the January rally. If we look ahead then the improving news on real wages looks set to continue to help the Retail Sales numbers.

On the other side of the coin is the US driven rise in international bond yields which has seen my leading indicator for UK mortgages ( our five-year yield) be around 4.2% recently. Thus I am expecting more of this from Mortgage Strategy.

Principality Building Society will raise selected residential fixed-rate home loans by up to 21 basis points, while Accord will lift some landlord and product transfer deals by as much as 19bps. 

The mutual increases, which come to market tomorrow (18 April)

Co-operative Bank has warned brokers that current rates will be withdrawn at 5pm tomorrow to make way for price increases of up to 41 basis points.

This morning Barclays have joined in.

Two and five-year mortgage rates have been increased, Barclays announced on Friday, as it unveiled sweeping product changes, which included some cuts.

The lender started charging 4.98% on a 75% long-to-value two-year fixed mortgage from Friday under the move, while five-year deals now include rates of up to 4.8% ( Proactive Investors)

 

 

US fiscal policy has juiced bond yields, interest-rates and economic growth

The economic story of 2024 is again being driven by the US economy. Back on the 4th of this month we were ahead of the game.

The Bond market sold off in response to the above and the thirty-year yield has moved above 4.5%. Or if you prefer the bond market was not buying what Jerome Powell was selling. Money markets moved as well.

In fact the US thirty-year yield is 4.7% as I type this so the heat has been on in the meantime. Along the way it has been above 4.75%. There are quite a few consequences from this and let us start with the ones domestic to the US economy.

The IMF has warned the US that its massive fiscal deficits have stoked inflation and pose “significant risks” for the global economy.
The fund said in its benchmark Fiscal Monitor that it expected the US to record a fiscal deficit of 7.1 per cent next year — more than three times the 2 per cent average for other advanced economies. ( Financial Times)

I have pointed out before the dangers of using higher bond yields as a permanent signal as opposed to a potentially temporary one.But it is also true that the US economy has been juiced by quite a bit of fiscal stimulus under President Biden.

But the IMF said the US had exhibited “remarkably large fiscal slippages”, with the fiscal deficit hitting 8.8 per cent of GDP last year — more than double the 4.1 per cent deficit figure recorded for 2022.

This is a change for the IMF because when I recently looked at their database they were suggesting deficits more like 6% of GDP for the US. Interestingly they added an estimate of the inflationary impact of all of this.

The IMF said the country’s fiscal deficit had contributed 0.5 percentage points to core inflation — a measure of underlying price pressures that excludes energy and food.

Being the Financial Times there is an attempt to blame The Donald.

The presumptive Republican presidential nominee Donald Trump has pledged to make his 2017 tax cuts permanent, a move the Committee for a Responsible Federal Budget think-tank expects to cost $5tn over the next decade.

Whilst The Donald is a man of extensive debt experience he is not the President responsible for the surge in US borrowing. Also as I pointed out on the 4th of this month the Biden administration has been issuing debt in a risky way.

Back on the 26th of March I pointed out that the US is borrowing short by the issuance of lots of Treasury Bills thus making things more unstable.

So with bond yields higher things are both riskier and more expensive in the long-term. Also those looking for a mortgage will be facing higher interest-rates.

The bad times keep rolling for mortgage rates with the average conventional 30yr fixed rate back up to 7.5% according to our daily index.  ( Mortgage Daily News on Tuesday)

In the end this all depends on economic growth as along the way decent growth fixes pretty much everything.

IMF FORECASTS US 2024 GROWTH AT 2.7% VS 2.1% IN JANUARY FORECAST; 2025 GROWTH AT 1.9% VS 1.7% IN JANUARY ( @FirstSquawk)

Problems will arise pretty quickly should growth stop though.

Problems for Jerome Powell

The Chair of the US Federal Reserve was at the IMF meeting and used it to give his view.

Powell on Tuesday signaled the Fed will wait longer than previously anticipated to cut borrowing costs following a series of surprisingly high inflation readings — marking a notable shift from his December pivot toward easing. ( Bloomberg)

That was rather awkward for him personally. But we have been guided towards interest-rate cuts in March and then June and now we will get neither. As we seem to be progressing quarterly that now brings September into the frame. Except then we will be in the election campaign I am sure The Donald will be all over the implications of any interest-rate cuts for that.

Looking at the economics what makes me uncomfortable is that central bankers are again looking backwards to past inflation prints when the real issue is what will happen in 2025/26. They are what it can influence but they keep doing this.

I keep forgettin’ we’re not in love anymore
I keep forgettin’ things will never be the same again
I keep forgettin’ how you made that so clear
I keep forgettin’ ( Michael McDonald)

The US Dollar

The factors above mean we have returned to the phase of King Dollar

The US dollar is on track for its best 5-day run since February 2023. The Bloomberg Dollar Spot Index has risen by ~2% over the last 5 trading days, the most in 14 months. Meanwhile, the US dollar index is up ~5% year to date. ( KobeissiLetter)

This has tightened the noose on everyone else just as 2024 was supposed to be the year of lower interest-rates and a weaker US Dollar. Yet we have instead seen this.

• The Japanese Yen has continued to show weakness against the U.S. Dollar following last week’s USD/JPY breakout to fresh 34-year highs. ( forex.com)

In Japanese terms this is awkward on several levels. Their change to a positive interest-rate was supposed to calm things. Then Finance Minister Suzuki indulged in some open mouth foreign exchange interventions. As we stand at 154.25 he has only succeeded in putting his foot in it.

Whilst the situation is not as acute in Europe many central banks there are in the process of having itchy shirt collars due to the strength of the US Dollar. The ECB has guided people as directly as it can towards an interest-rate cut in June where it expected to be accompanying the Federal Reserve. The Swedish Riksbank guided towards May or June. Both will now fear further currency weakness and in an irony might even welcome this.

Purposely devaluing the U.S. dollar by pressing other countries to alter their own currency values would represent the most aggressive proposal yet in Trump’s attempts to reshape global trade……… A weaker dollar would make U.S. exports cheaper on the world market and potentially reduce the U.S.’ yawning trade deficit. ( Politico)

I mean the policies as in an extraordinary statement for a central banker President Lagarde has expressed her hatred of The Donald more than once. The problem with this is that any Dollar decline is likely to come quite some time after the ECB wants ( and indeed needs) to cit Euro area interest-rates.

Comment

There are clear elements of groundhog day here as in some ways we have gone back to last autumn. Higher bond yields leading to fears about the US deficit. Stronger US growth giving us a higher Dollar and so on. Actually also for the Federal Reserve where “higher for longer” which was only a PR phrase has returned.

Some of the implications are welcome, for example US economic growth. But there are risks as we wonder about those who borrow in US Dollars? Plus there are the issues with US regional banks and commercial property. Other countries need interest-rate cuts due to weak economic growth but now also have currency risks. Plus there is the US itself as its numbers will deteriorate fast in the next recession. Which makes fiscal stimulus even more likely as it strives ever harder to avoid it.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” (The Mad Hatter)

Is it a coincidence that UK unemployment has risen following a methodological change or an effect of it?

This morning’s UK laboir market release is a bit of a change on what we have become used to. But we can start with something that is both familiar and in my opinion good news.

Annual growth in regular earnings (excluding bonuses) was 6.0%, and annual growth in employees’ average total earnings (including bonuses) was 5.6%.

Wage growth remains strong and with inflation fading brings with it the prospect of some decent real wage gains. There is a small fading of the monthly growth rate to 5.4% in February but for this series 5.9%,5.5% and now 5.4% for the monthly rates is in fact pretty stable.

We can continue that theme into the initial breakdown.

Annual average regular earnings growth for the public sector remains relatively strong at 6.1% in December 2023 to February 2024 (Figure 4). For the private sector this was 6.0%, and growth was last lower than this in April to June 2022 (5.4%). Annual average total earnings growth for the private and public sector was 5.6% and 6.0%, respectively, in December 2023 to February 2024.

So they are very similar which is a change on what we saw at times last year. In fact that pattern continues as whilst the official release shows a difference in regular pay as shown below the total pay figures are quite similar.

In December 2023 to February 2024, the manufacturing sector saw the largest annual regular pay growth at 6.9%. The finance and business services sector, and wholesaling, retailing, hotels and restaurants sector both followed at 6.8% and 6.4%, respectively

The stand out is construction where total pay rose by only 3.1%.Perhaps it was affected by the rain we noted when looking at the GDP release for February.

Overall there was even some good news for the Bank of England.

 If we compare the latest three months with the three months that preceded them, and then annualise this growth rate, nominal regular average weekly earnings grew by 4.8%.

Real Pay

Here the official release brings us two choices.

In real terms (adjusted for inflation using the Consumer Prices Index including owner occupiers’ housing costs (CPIH)), total real pay was 1.6% in December 2023 to February 2024……. Regular real pay was 1.9%;

The problem with CPIH as a measure is that nobody with any series believes its imputed rent driven version of housing costs. But as it happens the two official series are giving results not that different.

Using CPI real earnings, in December 2023 to February 2024, total pay was 1.8%…. Regular pay was 2.1%;

The nuance is that from an establishment point of view this is a failure as CPIH was designed to give lower inflation and this higher real wages figures. But even if we use an inflation measure that is much more realistic for the housing sector we see that the annual rate for the RPI was falling from 5.2% in December to 4.5% in February so we had real wages growth here too.

Employment

Switching from the quality to quantity numbers we get a little bit of a jolt.

Payrolled employees in the UK fell by 18,000 (0.1%) between January and February 2024, but rose by 352,000 (1.2%) between February 2023 and February 2024.

The situation had showed slower employment growth but if we now add in the provisional March figures we see that both numbers show a change of direction this time around.

The early estimate of payrolled employees for March 2024 decreased by 67,000 (0.2%) on the month but increased by 204,000 (0.7%) on the year to 30.3 million.

Regular readers will be aware I find it disappointing that the official release guides us towards payroll employment these days rather than the wider overall employment. In these numbers it is material as some would gleam from this.

The UK employment rate for December 2023 to February 2024 (74.5%) remains below estimates a year ago (December 2022 to February 2023), and decreased in the latest quarter.

As that is rather vague let me help out. as this is some 0.5% lower than a quarter ago and 0.8% lower than a year ago. Or employment has fallen by 156,000 in this period making it 195,000 lower than a year ago. These numbers are significant in themselves but also have further consequences. For example just as the GDP numbers have shown a return to growth we are seeing employment falls. Also we now have employment back below ( by 110,000) pre pandemic levels. If you wish a silver lining in this cloud then productivity has just improved.

Population Problems.

This is a contentious area as in party because the government is not keen to reveal its failures on migration we do not really know what the UK population is. In my own location of Battersea it feels like even more people have arrived and I am not making a value judgement simply stating what is reality albeit something of an anecdote. If you want an official confirmation of this it is here.

From our February 2024 labour market release, LFS periods from July to September 2022 onwards have been reweighted to incorporate the latest estimates of the size and composition of the UK population. This reweighting creates a discontinuity between June to August 2022 and July to September 2022.

If we switch to football terms a discontinuity is the sort of thing that would have fans chanting “You don’t know what you’re doing.” Ican take that further because since the pandemic we have seen employment dip by just over 0.3% but the employment rate fall by 1.7% meaning the labour force has risen by around 1.4%. That is different to the population growth but we can infer what it has been doing from this.

Unemployment

With employment now falling the number below should not unduly surprise in terms of direction but the size of the move is noticeable.

The UK unemployment rate for December 2023 to February 2024 (4.2%) is above estimates a year ago (December 2022 to February 2023), and increased in the latest quarter.

As the release seems a little reticent it rose from 3.9% to 4.2%. Putting it another way unemployment rose by 85,000 to 1.44 million in the latest quarter.

Comment

Over the time I have been writing this blog there have been many disappointments in the standards of official statistics. Right now is another one as we see the Bank of England getting out its electron microscope to examine numbers which the official release describes like this.

Therefore, we advise increased caution when interpreting short-term changes in series and recommend using them as part of a suite of labour market indicators……

Have the methodological changes caused the recorded changes in employment rather than reality? It is a little awkward at a time when GDP is growing again although they have been out of phase before.Plus the hours worked figures are more consistent with the GDP ones.

In the latest period (December 2023 to February 2024), total actual weekly hours worked increased on the quarter, to 1.06 billion hours, and are above the level a year ago (December 2022 to February 2023). Both men’s and women’s hours worked increased on the quarter.

Up by 13.2 million in fact.

Also returning to the strategic position there is this I pointed out on the day of the last release ( March 12th).

In summary, if the WFJ estimate is used to provide the overall picture, there are likely to be around one million more jobs than at the start of the pandemic instead of an LFS-based picture of employment stagnating since mid-2021 and even now only just attaining prerecession levels.

As the series Soap used to regularly remind us.

Confused? You will be….