Are we on the road to a US $100 oil price?

As Easter ends – and one which was simply glorious in London – those of us reacquainting ourselves with financial markets will see one particular change. That is the price of crude oil as the Financial Times explains.

Crude rose to a five-month high on Tuesday, as Washington’s decision to end sanctions waivers on Iranian oil imports buoyed oil markets for a second day.  Brent, the international oil benchmark, rose 0.8 per cent to $74.64 in early European trading, adding to gains on Monday to reach its highest level since early November. West Texas Intermediate, the US marker, increased 0.9 per cent to $66.13.

If we look for some more detail on the likely causes we see this.

The moves came after the Trump administration announced the end of waivers from US sanctions granted to India, China, Japan, South Korea and Turkey. Oil prices jumped despite the White House insisting that it had worked with Saudi Arabia and the United Arab Emirates to ensure sufficient supply to offset the loss of Iranian exports. Goldman Sachs said the timing of the sanctions tightening was “much more sudden” than expected, but it played down the longer-term impact on the market.

 

So we see that President Trump has been involved and that seems to be something of a volte face from the time when the Donald told us this on the 25th of February.

Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile! ( @realDonaldTrunp)

After that tweet the oil price was around ten dollars lower than now. If we look back to November 7th last year then the Donald was playing a very different tune to now.

“I gave some countries a break on the oil,” Trump said during a lengthy, wide-ranging press conference the day after Republicans lost control of the House of Representatives in the midterm elections. “I did it a little bit because they really asked for some help, but I really did it because I don’t want to drive oil prices up to $100 a barrel or $150 a barrel, because I’m driving them down.”

“If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.” ( CNBC)

If we stay with this issue we see that he has seemingly switched quite quickly from exerting a downwards influence on the oil price to an upwards one. As he is bothered about the US economy right now sooner or later it will occur to him that higher oil prices help some of it but hinder more.

Shale Oil

Back on February 19th Reuters summarised the parts of the US economy which benefit from a higher oil price.

U.S. oil output from seven major shale formations is expected to rise 84,000 barrels per day (bpd) in March to a record of about 8.4 million bpd, the U.S. Energy Information Administration said in a monthly report on Tuesday……..A shale revolution has helped boost the United States to the position of world’s biggest crude oil producer, ahead of Saudi Arabia and Russia. Overall crude production has climbed to a weekly record of 11.9 million bpd.

Thus the US is a major producer and the old era has moved on to some extent as the old era producers as I suppose shown by the Dallas TV series in the past has been reduced in importance by the shale oil wildcatters. They operate differently as I have pointed out before that they are financed with cheap money provided by the QE era and have something of a cash flow model and can operate with a base around US $50. So right now they will be doing rather well.

Also it is not only oil these days.

Meanwhile, U.S. natural gas output was projected to increase to a record 77.9 billion cubic feet per day (bcfd) in March. That would be up more than 0.8 bcfd over the February forecast and mark the 14th consecutive monthly increase.

Gas production was about 65.5 bcfd in March last year.

Reinforcing my view that this area has a different business model to the ordinary was this from Reuters earlier this month.

Spot prices at the Waha hub fell to minus $3.38 per million British thermal units for Wednesday from minus 2 cents for Tuesday, according to data from the Intercontinental Exchange (ICE). That easily beat the prior all-time next-day low of minus $1.99 for March 29.

Prices have been negative in the real-time or next-day market since March 22, meaning drillers have had to pay those with pipeline capacity to take the gas.

So we have negative gas prices to go with negative interest-rates, bond yields and profits for companies listing on the stock exchange as we mull what will go negative next?

Economic Impact on Texas

Back in 2015 Dr Ray Perlman looked at the impact of a lower oil price ( below US $50) would have on Texas.

To put the situation in perspective, based on the current situation, I am projecting that oil prices will likely lead to a loss of 150,000-175,000 Texas jobs next year when all factors and multiplier effects are considered.  Overall job growth in the state would be diminished, but not eliminated.  Texas gained over 400,000 jobs last year, and I am estimating that the rate of growth will slow to something in the 200,000-225,000 per year range.

Moving wider a higher oil price benefits US GDP directly via next exports and economic output or GDP and the reverse from a lower one. We do get something if a J-Curve style effect as the adverse impact on consumers via real wages and business budgets will come in with a lag.

The World

The situation here is covered to some extent by this from the Financial Times.

In currency markets, the Norwegian krone and Canadian dollar both rose against the US dollar as currencies of oil-exporting countries gained.

There is a deeper impact in the Middle East as for example there has been a lot of doubt about the finances of Saudi Arabia for example. This led to the recent Aramco bond issue ( US $12 billion) which can be seen as finance for the country although ironically dollars are now flowing into Saudi as fast as it pumps its oil out.

The stereotype these days for the other side of the coin is India and the Economic Times pretty much explained why a week ago.

A late surge in oil prices is expected to increase India’s oil import bill to its five-year high. As per estimates, India could close 2018-19 with crude import bill shooting to $115 billion, a growth of 30 per cent over 2017-18’s $88 billion.

This adds to India’s import bill and reduces GDP although it also adds to inflationary pressure and also perhaps pressure on the Reserve Bank of India which has cut interest-rates twice this year already. The European example is France which according to the EIA imports some 55 million tonnes of oil and net around 43 billion cubic meters of natural gas. It does offset this to some extent by exporting electricity from its heavy investment in nuclear power and that is around 64 Terawatt hours.

The nuclear link is clear for energy importers as I note plans in the news for India to build another 12.

Comment

There are many ways of looking at this so let’s start with central banks. As I have hinted at with India they used to respond to a higher oil price with higher interest-rates to combat inflation but now mostly respond to expected lower aggregate demand and GDP with interest-rate cuts. They rarely get challenged on this U-Turn as we listen to Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

Next comes the way we have become less oil energy dependent. One way that has happened has been through higher efficiency such as LED light bulbs replacing incandescent ones. Another has been the growth of alternative sources for electricity production as right now in my home country the UK it is solar (10%) wind (15%) biomass (8%) and nukes (18%) helping out. I do not know what the wind will do but solar will of course rise although its problems are highlighted by the fact it falls back to zero at night as we continue to lack any real storage capacity. Also such moves have driven prices higher.

As to what’s next? Well I think that there is some hope on two counts. Firstly President Trump will want the oil price lower for the US economy and the 2020 election. So he may grow tired of pressurising Iran and on the other side of the coin the military/industrial complex may be able to persuade Saudi Arabia to up its output. Also we know what the headlines below usually mean.

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Will the UK labour market data prove to be a better guide than GDP again?

It was a week or so ago that we took an in-depth view on UK productivity and yesterday the Financial Times was on the case. As ever they open with what is their priority.

Britain is the only large advanced economy likely to see a decline in productivity growth this year, according to new research, a development the Bank of England governor has blamed on Brexit.

There are a few begged questions here as for example the particularly weak period for UK productivity was in 2013/14 well before Brexit and in fact late 2017 or so was a relatively good period for it. The next part is more soundly based I think.

The figures from the Conference Board, a US non-profit research group, highlight the productivity crisis that has struck the UK since the financial crash of 2008-09, with the slowdown worse than in any other comparable country.

Indeed we have had a problem here but I am afraid that the Conference Board then gets a little carried away as it veers towards Fake News territory.

Britain is now in its tenth year of feeble labour productivity growth, Bart van Ark, chief economist of the Conference Board, said. “The UK is a consistent story of slow output growth, slow employment growth and slow productivity growth,” he warned. “Not even employment is growing quickly any more.”

The UK employment performance is something we follow month by month and has been really good since about 2012 so I am afraid that Bart is barking up the wrong tree. If we look at matters from the perspective of the UK employment rate it has risen from 70.1% at the end of 2011 to 76.1% now. On a chart going back to 1971 there is only one period where it rose faster ( 87-89) and that sadly then led to a bust.

Here are the numbers from the Conference Board and you may spot the holes in this yourselves.

The Conference Board figures show that the UK’s annual growth in output for every hour worked fell from 2.2 per cent between 2000 and 2007 to 0.5 per cent between 2010 and 2017. Last year, productivity growth achieved that figure again but with a buoyant jobs market and weak output growth, it is likely to fall to only 0.2 per cent in 2019.

So the “Not even employment is growing quickly any more” is also a “buoyant jobs market”! I note that rather than being hit by Brexit as originally claimed productivity last year was in line with the post credit crunch average, We end up with an expected weak 2019 leading to low productivity growth. If that makes you fear for Italy and Germany which at the moment have worse output prospects than us well apparently not.

The average equivalent growth rate in several dozen other mature economies is expected to be 1.1 per cent, said the Conference Board.

If we use the OECD and compare ourselves in 2018 we did better than Italy ( -0.2%) Spain ( -0.3%) and Germany (0%) but worse than France (0.6%) albeit only slightly.

Investment

This has been a troubled area recently for the UK economy as the Brexit uncertainty has seen a drop in business investment. But it would seem that if we ever get over that hill money will be arriving from different quarters.

The United Kingdom has snatched the top spot in a survey that ranks how attractive countries are as investment destinations over the coming year.

Despite “continued uncertainty stemming from its intention to leave the European Union”, the UK knocked the United States off its perch, which it had held since 2014, according to the data conducted by accountancy firm EY. ( Daily Telegraph)

Of course that is a different definition of investment usually focusing more on the financial sector.

Today’s Data

Unfortunately for the rhetoric of the Conference Board above but fortunately for UK workers our official statisticians have released this.

Estimates for December 2018 to February 2019 show 32.72 million people aged 16 years and over in employment, 457,000 more than for a year earlier. This annual increase of 457,000 was due entirely to more people working full-time (up 473,000 on the year to reach 24.15 million)……The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.4%) and the joint-highest figure on record.

If we compare the annual rate above to the latest three-monthly one we see that job growth may even have sped up.

The level of employment in the UK increased by 179,000 to a record high of 32.72 million people in the three months to February 2019.

Considering the level of employment we are now at then this are pretty impressive numbers. If we switch to hours worked they are up by 2.1% on a year ago which again is strong. As GDP growth seems lower there may well be an issue here again for productivity growth but not for the opposite to the reason given by the Conference Board.

Wages

In the period since the quantity numbers for the UK economy turned for the better we have waited quite a long time for the quality or wages numbers to also do so. But more recently we have seen better news.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.5%, before adjusting for inflation, and by 1.6%, after adjusting for inflation, compared with a year earlier.

If we look at the more comprehensive category we note that bonuses are pulling up the numbers which may be a hopeful sign. As to the real wage figures whilst I believe we now have some growth sadly it is not as high as claimed due to the flaws in the inflation number used. For some perspective the Retail Prices Index grew by 2.5% in the year to February as opposed to the 1.8% recorded by the Imputed Rent influenced CPIH. So real wage growth is more like 1% I would argue.

If we look at the month of February alone then we see that at 3.2% the number is lower but the monthly numbers are erratic. The growth has been pulled higher by the construction sector which has seen wages rise by 4.6% over the year to February and pulled lower by manufacturing which saw growth of a mere 1.9%. Although it was not an especially good February for them a factor in the overall rise in UK wage growth has come from the public-sector where the circa 1% of a couple of years ago has been replaced by 2.6% over the three months to February.

Comment

As ever there is much to consider here. The picture presented by our official statisticians is as good as it has been for quite some time. With employment at these high levels in some ways it is a surprise it continues to rise at all. For wages the picture is different but is now brighter than it has been for some time. Although if we look for perspective there is still if not a mountain quite a hill to climb.

For February 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at: £465 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £8 lower than the pre-recession peak of £473 per week for March 2008.

Using a more realistic inflation measure than the officially approved CPIH only makes the perspective darken along the lines sung about by Paul Simon.

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

Moving to productivity I would remind readers of my analysis of the subject from the 5th of this month. As to the Conference Board analysis well the idea of UK employment growth being weak has had a bad 7 years and there is an irony as of course it has been that pushing productivity growth lower. Looking ahead will the labour market numbers prove to be a better guide to the economic situation than the output or GDP ones like in 2012? Only time will tell…….

Less welcome is the new way of presenting the numbers which frankly is something of a mess.

Manufacturing and Production help to drive UK GDP growth

Today brings us up to date with the latest monthly data on the UK economy. the problem with this is as I feared that the numbers are in practice rather erratic.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018.

Actually December recorded a -0.4% GDP growth rate so if you take the figures literally there was quite a wild swing. More likely is that some industries do not conform to a regular monthly pattern in the way we have seen the UK pharmaceutical industry grow overall but with a boom and bust pattern on a monthly basis.

There are areas where we see two patterns at once in the UK economy. For example Tesco has produced good figures already this morning.

Tesco has reported a 28.8% rise in full-year pre-tax profits to £1.67bn with revenue at the supermarket rising 11.2% to £63.9bn ( Sky News)

On the other hand this week has already seen this.

Ailing department store chain Debenhams has been rescued by its lenders after falling into administration.

Three years ago, the 166-strong chain was worth £900m, compared with £20m as of this week. ( BBC News)

Sadly the BBC analysis seems to avoid this issue highlighted by the Financial Times.

Debenhams troubles stem partly from a period of private equity ownership at the start of the millennium, when CVC, Merrill Lynch and TPG sold off freehold property, added debts and paid themselves large dividends.

It looks a case of asset-stripping and greed followed by over expansion which was then hit by nimbler retailers and the switch to online sales. Without the asset-stripping it would be still with us. Meanwhile the BBC analysis concentrates on Mike Ashley who put up £150 million and offered an alternative. I am no great fan of his business model with its low wages and pressure on staff but he does at least have one.

Wages

Speaking of wages there are several strands in the news so let us start with the rather aptly named Mr. Conn.

The chief executive of Centrica, the owner of British Gas, received a 44% pay rise for 2018, despite a difficult year in which the company imposed two bill increases, warned on profits and announced thousands of job cuts.

Iain Conn received a total pay package worth £2.4m last year, up from £1.7m in 2017, according to Centrica’s annual report. His 2018 packet was bolstered by two bonuses, each worth £388,000.  ( The Guardian )

Yet on the other side of the ledger we see things like this. From The Guardian.

Waterstones staff told how they have had to back on food in order to afford rent as they travelled across the country to deliver a 9,300-signature petition to the chain’s London headquarters, calling for the introduction of a living wage.

Mind you we seem to be making progress in one area at least.

Golden goodbyes for public sector workers will be capped at £95,000 in a clamp down on excessive exit payments, the government has confirmed. ( City-AM)

Although I note that it is something planned rather than already done, so the modern-day version of Sir Humphrey Appleby will be doing his or her best to thwart this. Here is his description of the 7 point plan to deal with such matters.

This strategy has never failed us yet. Since our colleagues in the Treasury have already persuaded the Chancellor to spin the process out until 2008, we can be sure that, by then, there will be a new chancellor, a new prime minister and, quite possibly, a new government. At that point, the whole squalid business can be swept under the carpet. Until next time.

As for payoffs it is the ones for those at the top who are quite often switching jobs which need to stop as often it is merely a name change of their employer.

Today’s GDP data

This was good in the circumstances.

Monthly GDP growth was 0.2% in February 2019, after contracting by 0.3% in December 2018 and growing by 0.5% in January 2019. January growths for production, manufacturing, and construction have all been upwardly revised due to late survey returns.

As you can see December was revised up as was January although not enough in January to raise it by 0.1%. But it is an erratic series so let us step back for some perspective.

UK gross domestic product (GDP) grew by 0.3% in the three months to February 2019

Whilst we do not yet have the March data regular readers may recall that the first quarter in the UK ( and in the US at times) can be weak so this is better than it may first appear.

As ever services were in the van as we continue to rebalance in exactly the opposite direction to that proclaimed by the former Bank of England Governor Baron King of Lothbury.

The services sector was the largest contributor to rolling three-month growth, expanding by 0.4% in the three months to February 2019. The production sector had a small positive contribution, growing by 0.2%. However, the construction sector contracted by 0.6%, resulting in a small negative contribution to GDP growth.

Inside its structure this has been in the van.

The largest contributor to growth was computer programming, which has performed strongly in recent months.

Production

Thanks to the business live section of the Guardian for reproducing this from my twitter feed.

One possible hint is that production numbers for Italy and France earlier have been strongish, will the UK be the same?

It turned out that this was so.

Production output rose by 0.6% between January 2019 and February 2019; the manufacturing sector provided the largest upward contribution, rising by 0.9%, its second consecutive monthly rise……In February 2019, the monthly increase in manufacturing output was due to rises in 11 of the 13 subsectors and follows a 1.1% rise in January 2019; the largest upward contribution came from basic metals, which rose by 1.6%.

In the detail was something I noted earlier as pharmaceutical production was up by 2.5% in the last 3 months which put it 4.3% higher than a year ago in spite of a 0.1% fall in February.

But whilst this was a welcome development for February the overall picture has not been of cheer in the credit crunch era.

Production and manufacturing output have risen since then but remain 6.1% and 1.9% lower respectively for the three months to February 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Things have been singing along with The Beatles since late 2012.

I have to admit it’s getting better (Better)
It’s getting better

but overall we are left mulling the John Lennon counter at the end of this line.

A little better all the time (It can’t get no worse)

Comment

This morning’s numbers were strong in the circumstances and confirm again my theme that we are growing at around 0.3/4% per quarter. Yet again the prediction in the Sunday Times that there would be no growth turned out to be a reliable reverse indicator. Of course there are fears for March after the Markit PMI business survey so as ever we await more detail.

As to stockpiling this has become an awkward beast because I see it being put as the reason for the growth, although if so why did those claiming this not predict it. Anyway I have done a small online survey of what people have been stockpiling.

Okay inspired by and her stockpiling of Scottish water we have from paracetamol for her dad for scare stories and dog has been burying treats

Meanwhile one area which has been troubled for many years continues to rumble on.

The total trade deficit (goods and services) widened £5.5 billion in the three months to February 2019, as the trade in goods deficit widened £6.5 billion, partially offset by a £0.9 billion widening of the trade in services surplus.

Perhaps there was some stockpiling going on there although as any departure from the European Union seems to be at Northern Rail speed those stockpiling may now be wondering why they did it?

 

 

How is it that even Germany needs an economic stimulus?

Sometimes we have an opportunity like the image of Janus with two heads to look at an event from two different perspectives. This morning’s trade data for Germany is an example of that. If we look at the overall theme of the Euro era then the way that Germany engineered a competitive devaluation by joining with weaker economies in a single currency has been a major factor in this.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 16.3 billion euros in February 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.1 billion euros), services (-1.1 billion euros), primary income (+6.2 billion euros) and secondary income (-7.9 billion euros). In February 2018, the German current account showed a surplus of 19.5 billion euros.

The large surplus which as you can see derives from its trade in goods feels like a permanent feature of economic life as it has been with us for so long. Also it is the bulk of the trade surplus of the Euro area which supports the value of the Euro although if we shift wider the Germany trade surplus is one of the imbalances which led to the credit crunch itself. So let us move on as we note an example of a currency devaluation/depreciation that has been quite a success for Germany.

What about now?

The theme of the last six months or so has shone a different perspective on this as the trade wars and economic slow down of late 2018 and so far this year has led to this.

Germany exported goods to the value of 108.8 billion euros and imported goods to the value of 90.9 billion euros in February 2019……After calendar and seasonal adjustment, exports were down 1.3% and imports 1.6% compared with January 2019.

We can add to that by looking at January and February together and if we do so on a quarterly basis then trade has reduced the German economy by a bit over a billion Euros. Compared to last year the net effect is a bit under four billion Euros.

One factor in this that is not getting much of an airing is the impact of the economic crisis in Turkey. If look at in from a Turkish perspective some 9% of imports come from Germany ( h/t Robin Brooks) and the slump will be impacting even though if we switch to a German view the relative influence is a lot lower.

Production

On Friday we were told this.

+0.7% on the previous month (price, seasonally and calendar adjusted)
-0.4% on the same month a year earlier (price and calendar adjusted)

There was an upwards revision to January and if we look back we see that the overall number peaked at 108.3 last May fell to 103.7 in November and was 105.2 in February if we use 2015 as our benchmark. So there has been a decline and we will find out more next month as March was a fair bit stronger than February last year.

Orders

These give us a potential guide to what is on its way and it does not look good.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in February 2019 a seasonally and calendar adjusted 4.2% on the previous month……..-8.4% on the same month a year earlier (price and calendar adjusted).

If we switch to the index we see that at 110.2 last February was the peak so that is a partial explanation of why the annual fall is so large as for example March was 108.6. But it is also true that this February saw a large dip to the weakest in the series so far at 101. 2 which does not bide well.

Also you will no doubt not be surprised to read that a decline in foreign orders has led to this but you may that it is orders from within the Euro area that have fallen the most. The index here was 121.6 last February as opposed to 104.6 this.

Forecasts

On Thursday CNBC told us this.

Forecasts for German growth were revised significantly downwards in a ‘Joint Economic Forecast’ collated by several prominent German economic research institutes and published Thursday, with economists predicting a meager 0.8% this year.

This is more than one percentage point lower than a prediction for 1.9% made in a joint economic forecast in fall 2018.

Although they should be eating a slice of humble pie after that effort last autumn.

The private sector surveys conducted by Markit were a story of two halves.

Despite sustained strong growth in services business activity in March, the Composite Output Index slipped from a four-month high of 52.8 in February to 51.4, its lowest reading since June 2013. This reflected a marked fall in goods production – the steepest since July 2012.

In terms of absolute levels care is needed as this survey showed growth when the German economy contracted in the third quarter of last year. The change in March was driven by something that was eye-catching.

Manufacturing output fell markedly and at the fastest
rate since 2012, with the consumer goods sector joining
intermediate and capital goods producers in contraction.

Comment

A truism of the Euro era is that the ECB sets monetary policy for Germany rather than for the whole area. Whilst that has elements of truth to it the current debate at the ECB suggests that it is “The Precious” which takes centre stage.

A debate on whether to “tier” the negative interest rates that banks pay on the idle cash they park at the ECB is now underway, judging by recent ECB comments and the minutes from the March meeting. ( Reuters)

There is a German element here as we note a Deutsche Bank share price of 7.44 Euros which makes any potential capital raising look very expensive especially to existing shareholders.. Also those who bought the shares after the new hints of a merger with Commerzbank have joined existing shareholders in having singed fingers. Maybe this is why this has been floated earlier.

The next frontier for stimulus at the ECB should include stock purchases, BlackRock’s Rick Rieder says

Will he provide a list? I hope somebody at least pointed out that the Japanese experience of doing this has hardly been a triumph.

It all seems not a little desperate as we see that ECB policy remains very expansionary at least in terms of its Ivory Tower models. It’s ability to assist the German economy has the problem that it already holds some 511 billion of German bonds at a time when the total numbers are shrinking, so there are not so many to buy.

This from Friday suggests that should the German government so choose there is plenty of fiscal space.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

That is confirmed by so many of Germany’s bond having a negative yield illustrated by its benchmark ten-year yield being 0% as I type this.

The catch is provided by my junkie culture economics theme. Why after all the monetary stimulus does even Germany apparently need more? In addition if we have been “saved” by it why is the “speed limit” for economic growth now a mere 1.5%?

They can tell you what to do
But they’ll make a fool of you ( Talking Heads )

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India is facing its own version of a credit crunch

Travel broadens the mind so they say so let us tale a trip to the sub-continent and to India in particular. There the Reserve Bank of India has announced this.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

The MPC also decided to maintain the neutral monetary policy stance.

So yet another interest-rate cut to add to the multitude in the credit crunch era and it follows sharp on the heels of this.

In its February 2019 meeting, the MPC decided to
reduce the policy repo rate by 25 basis points (bps)
by a majority of 4-2 and was unanimous in voting
for switching its stance to neutral from calibrated
tightening.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

What has caused this?

The formal monetary policy statement tells us this.

Taking into consideration these factors and assuming a normal monsoon in 2019,the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.

That path is below the annual inflation target of 4% (+ or – 2%) so it is in line with that.

However we know that central banks may talk about inflation targeting but supporting the economy is invariably a factor and can override the former. The Economic Times points us that way quoting the Governor’s words.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” RBI governor Shaktikanta Das said. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

I will park for the moment the appearance of the discredited output gap theory and look at economic growth. The opener is very familiar for these times which is to blame foreigners.

Since the last MPC meeting in February 2019, global economic activity has been losing pace……The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

I would ask what is Indian for “Johnny Foreigner”? But of course more than a few might say it in English. But if we switch to the Indian economy we are told this in the formal report.

Since the release of the Monetary Policy Report (MPR)
of October 2018, the macroeconomic setting for the
conduct of monetary policy has undergone significant
shifts. After averaging close to 8 per cent through
Q3:2017-18 to Q1:2018-19, domestic economic
activity lost speed.

So a slowing economy which is specified in the announcement statement.

GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

That is more likely to be the real reason for the move and the Markit PMI released this morning backs it up.

The slowdown in service sector growth was
matched by a cooling manufacturing industry.
Following strong readings previously in this quarter,
the disappointing figures for March meant that the
quarterly figure for the combined Composite Output
Index at the end of FY 2018 was down from Q3.

The actual reading was 52.7 but we also need to note that this is in an economy expecting annual economic growth of around 7% so we need to recalibrate. On that road we see a decline for the mid 54s which backs up the slowing theme.

Forward Guidance

We regularly find ourselves observing problems with this and the truth is that as a concept it is deeply flawed and yet again it has turned out to be actively misleading. Here is the RBI version.

The MPC maintained status quo on the policy repo rate in its October 2018 meeting (with a majority of 5-1) but switched stance from neutral to calibrated tightening.

So it led people to expect interest-rate rises and confirmed this in December. I am not sure it could have gone much more than cutting at the next two policy meetings. That is even worse than Mark Carney and the Bank of England.

Output Gap

Regular readers know my views on this concept which in practice has turned out to be meaningless and here is the RBI version. From the latter period of last year.

the virtual closing of the output
gap.

Whereas now.

The MPC notes that the output gap remains negative and the domestic economy is facing
headwinds, especially on the global front. The need is to strengthen domestic growth impulses by
spurring private investment which has remained sluggish

Yet economic growth has been at around 7% per annum. I hope that they get called out on this.

The banks

We have looked before at India’s troubled banking sector and since then there has been more aid and nationalisations. Here is CNBC summing up some of it yesterday.

Over the last several years, a banking sector crisis in India has left many lenders hamstrung and impeded their ability to issue loans. Banks and financial institutions, a key source of funding for Indian companies, hold over $146 billion of bad debt, according to Reuters.

That may be more of a troubled road as India’s courts block part of the RBI plan for this.

But such things do impact monetary transmission.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central bank’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.  ( Economic Times)

Putting it another way.

What is holding them back is higher interest rate on deposits and competition from the government for small savings.

The RBI is worried about this and reasonably so as it would be more embarrassing if they ignore this rate cut too.

Underlining the importance of transmission of RBI rate cuts by banks to consumers, Governor Shaktikanta Das on Thursday said the central bank may come out with guidelines on the same.

“We hope to come out with guidelines for rate cut transmission by banks,” Das said, interacting with the media after the monetary policy committee (MPC) meet.

 

Comment
There is a fair bit here that will be familiar to students of the development of the credit crunch in the west. I think one of my first posts as Notayesmanseconomics was about the way that official interest-rates had diverged from actual ones. Also we have a banking sector that is troubled. Next we have quick-fire interest-rate cuts following a period when rises were promised. So there are more than a few ticks on the list.
As to money supply growth it is hard to read because of the ongoing effects of the currency demonetisation in late 2016. So I will merely note as a market that broad money growth was 10.4% in February which is pretty much what it was a year ago.

 

What is happening with US house prices and its economy?

Sometimes it helps to look back so let us dip into Yahoo Finance from the 17th of December last year.

Home price growth has slowed for six consecutive months since April, according to the S&P CoreLogic Case-Shiller national home price index. And for the first time in a year, annual price growth fell below 6%, dropping to 5.7% and 5.5%, in August and September, respectively. October home price results will be released later this month.

So we see what has in many places become a familiar pattern as housing markets lose some of their growth. There was and indeed is a consequence of this.

“A couple of years of home prices running twice the rate of home income growth leads to affordability challenges,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “If you’re a buyer in 2019, you won’t see home price running away from you at the same speed in 2018.”

I think he means wages when he says “home income growth” but he is making a point which we have seen in many places where house price growth has soared and decoupled from wage growth. This has been oil by the way that central banks slashed official interest-rates which reduced mortgage-rates and then also indulged in large-scale bond buying which in the US included Mortgage-Backed Securities to further reduce mortgage-rates. This meant that affordability improved as long as you were willing to look away from higher debt burdens and the implication that should interest-rates rise the song “the heat is on” would start playing very quickly.

Or if you wish to consider that in chart form Yahoo Finance helped us out.

That is a chart to gladden a central bankers heart as it shows that the policy measures enacted turned house prices around and led to strong growth in them. The double-digit growth of late 2013 and early 2014 will have then scrambling up into their Ivory Towers to calculate the wealth effects. But the problem is that compared to wage growth they moved away at 8% per annum back then and the minimum since has been 2% per annum. That means that a supposed solution to house prices being too high and contributing to an economic crash has been to make them higher again especially relative to wages.

What about house price growth now?

Yesterday provided us with an update.

CoreLogic® (NYSE: CLGX), a leading global property information, analytics and data-enabled solutions provider, today released the CoreLogic Home Price Index (HPI) and HPI Forecast for February 2019, which shows home prices rose both year over year and month over month. Home prices increased nationally by 4 percent year over year from February 2018. On a month-over-month basis, prices increased by 0.7 percent in February 2019.

So there has been a slowing in the rate of growth which is reflected here.

“During the first two months of the year, home-price growth continued to decelerate,” said Dr. Frank Nothaft, chief economist for CoreLogic. “This is the opposite of what we saw the last two years when price growth accelerated early.

Looking ahead they do however expect something of a pick-up.

“With the Federal Reserve’s announcement to keep short-term interest rates where they are for the rest of the year, we expect mortgage rates to remain low and be a boost for the spring buying season. A strong buying season could lead to a pickup in home-price growth later this year.”

That gives us another perspective on the change of policy from the US Federal Reserve. So far its U-Turn has mostly been locked at through the prism of equity prices partly due to the way that President Trump focuses on them. But another way of looking at it is in response to slower house price growth which was being influenced by higher mortgage rates as the Federal Reserve raised interest-rates and reduced its bond holdings. This saw the 30-year mortgage-rate rise from just under 4% to a bit over 4.9% in November, no doubt providing its own brake on proceedings.

What about now?

If we look at monetary policy we see that perhaps something of a Powell Put Option is in place as at the end of last week the 30-year mortgage rate was 4.06%. Now bond yields have picked up this week so lets round it back up to say 4.15%. Even so that is quite a drop from the peak last year.

There is also some real wage growth according to the Bureau of Labor Statistics.

Real average hourly earnings for all employees increased 1.9 percent, seasonally adjusted, from February 2018 to February 2019. The change in real average hourly earnings, combined with a 0.3-percent decrease in the average workweek, resulted in a 1.6-percent increase in real average weekly earnings over this 12-month period.

In terms of hourly earnings the situation has been improving since last summer whereas the weekly figures were made more complex by the drop in hours worked meaning we particularly await Friday’s update for them.

Moving to the economy then recent figures have been a little more upbeat than when we looked at the US back on the 22nd of February but not by much.

The New York Fed Staff Nowcast stands at 1.3% for 2019:Q1 and 1.6% for 2019:Q2..News from this week’s data releases left the nowcast for 2019:Q1 unchanged and decreased the nowcast for 2019:Q2 by 0.1 percentage point.

Of the main data so far this week we did not learn an enormous amount from the retail sales numbers from the Census Bureau.

Advance estimates of U.S. retail and food services sales for February 2019, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes, were $506.0 billion, a decrease of 0.2
percent (±0.5 percent)* from the previous month, but 2.2 percent (±0.7 percent) above February 2018.

As these are effectively turnover rather than real growth figures a monthly fall is especially troubling but January had been revised higher.

Comment

We are observing concurrent contradictory waves at the moment. The effect from 2018 was of a slowing economy combined with monetary tightening in terms of higher mortgage-rates. More recently after the policy shift we have seen mortgage-rates fall pretty sharply and since last summer a pick-up in wage growth. So we can expect some growth and maybe we might even see a phase where wage growth exceeds house price growth. But it would appear that the US Federal Reserve has shifted policy to keep asset (house and equity) prices as high as it can so it may move again,

As to the overall picture this from Corelogic troubles me.

According to the CoreLogic Market Condition Indicators (MCI), an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 35 percent of metropolitan areas have an overvalued housing market as of February 2019. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income).

Only 35% overvalued? Look again at the gap between house price rises and wage rises in the Yahoo chart above. So if we look backwards very few places must have been overvalued just before the crash. Also times are hard for younger people.

Frank Martell, president and CEO of CoreLogic. “Our research tells us that about 74 percent of millennials, the single largest cohort of homebuyers, now report having to cut back on other categories of spending to afford their housing costs.”

I am not sure that goes with the previous research. Also if the stereotype has any validity times for millennials in the US are grim or should that be toast?

The price for Hass avocados from Michoacán, Mexico’s main avocado producing region, increased 34 percent on Tuesday amid President Trump’s calls to shut down the U.S.-Mexico border ( The Hill).

Let me end with a reminder from CoreLogic that averages do not tell us the full story.

Annual change by state ranged from a 10.2 percent high in Idaho to a -1.7 percent low in North Dakota

 

 

 

 

Australia faces both falling house prices and a falling money supply

This morning has brought us up to date with news from what the Men at Work described as.

Living in a land down under
Where women glow and men plunder
Can’t you hear, can’t you hear the thunder?

That is of course what was called Australis and then Australia and these days in economic terms can be considered to be the South China Territories. The monetary policy statement from the Reserve Bank of Australia (RBA)  reinforces the latter point as you can see.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.

One needs to read between the lines of such rhetoric as for a central banker “remains reasonable” is a little downbeat in reality as we note the following use of “declined” “softened” and “slower”.But he was providing a background to this.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

In essence the heat is on for another interest-rate cut and if you are wondering why? There is this.

GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output.

I will come to the central bankers fear of negative wealth effects from what they call an “adjustment in housing markets” in a moment as we note they cannot bring themselves to mention lower house prices. The pattern of GDP growth looks really rather poor as we see that the trend goes 1.1%,0.8% and then 0.3% and now 0.2%. So we see a familiar pattern of much weaker growth in the second half in 2018 which if we see again in the first half of this year will see the annual rate of growth halve. Actually it may be worse than that as the only factor driving growth according to Australia Statistics was this.

Government final consumption expenditure increased 1.8% during the quarter contributing 0.3 percentage points to GDP growth.

So without it the economy would have shrunk and Australia might be on course for something it has escaped for quite a while which is a recession. Also according to the Australia Treasury Budget from earlier it is planning a dose of austerity.

The total turnaround in the budget balance between 2013-14 and 2019-20 is projected to be $55.5 billion, or 3.4 per cent of GDP.

The Government’s plan for a stronger economy ensures it can guarantee essential services while returning the budget to surplus.

This budget year will see a surplus of $7.1 billion, equal to 0.4 per cent of GDP.

Budget surpluses will build in size in the medium term and are expected to exceed 1 per cent of GDP from 2026-27.

So as you can see it seems unlikely that government spending will continue to boost the economy. Also as they are assume growth of 2.25% then those numbers as so often seem rooted in fantasy rather than reality. Next if we switch back to the RBA the austerity plan comes at this time.

 In Australia, long-term bond yields have fallen to historically low levels.

In fact they fell to an all time low for the benchmark ten-year at 1.72% recently and is spite of a bounce back are still at a very low 1.82%. So yet again we are observing a situation where countries borrow heavily when it is expensive and try in this instance not to borrow at all when it is cheap. I know it is more complicated than that but we also have this into an economic slow down.

The Government is focused on reducing net debt as a share of the economy, which is expected to peak in 2018-19 at 19.2 per cent of GDP.

The Government is on track to eliminate net debt by 2029-30.

So it may look to be Keynesian but reality seems set to intervene especially on the economic growth forecasts.

House Prices

Again we see that the Governor of the RBA cannot bring himself to say, falling house prices. It is apparently just too painful.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low.

Even worse it has implications for “the precious”.

 At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased.

Indeed a central banker would have his/her head in their hands as they see the negative wealth effects in the latest quarterly national accounts.

Real holding losses on land and dwellings were $170.8b. This marks a fourth consecutive quarter of losses and reflects the falling residential property prices over the past year. ……The real holding losses have translated into the first fall in household assets (-1.5%) since the September quarter 2011. Household liabilities increased 1.0%.

Some of the latter was falling equity prices which have since recovered but house prices have not. Here is ABC News on the first quarter of 2019.

On a national basis, the average house price fell 2.4 per cent to $540,676, and apartment prices dropped 2.2 per cent to $484,552 during that period.

CoreLogic observed that markets which experienced their peaks earlier had experienced sharper downturns.

Darwin and Perth property prices skyrocketed during the mining boom, but peaked in 2014. Since then dwelling values in both capitals have fallen by 27.5 per cent and 18.1 per cent respectively.

So it seems likely that the value of the housing stock fell again. If we move to the official series we see that in the rather unlikely instance you could sell all of Australia’s houses and flats in on e go then from the end of 2015 to early 2018 the value rose by one trillion Aussie Dollars from a bit below 6 trillion to a bit below 7. Now in a development to pack ice round a central bankers heart it has fallen to 6.7 trillion officially and if we factor in other measures is now 6.6 trillion Aussie Dollars and to quote Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fallin’

Comment

Australia escaped the worst of the credit crunch via its enormous natural resource base. According to the RBA index of commodity prices that has not ended.

Preliminary estimates for March indicate that the index decreased by 0.9 per cent (on a monthly average basis) in SDR terms, after increasing by 5.3 per cent in February (revised)…….Over the past year, the index has increased by 11.0 per cent in SDR terms, led by higher iron ore, LNG and alumina prices. The index has increased by 16.6 per cent in Australian dollar terms.

But now we see that the domestic economy has weakened whilst the boost from above has faded. If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February. If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms. Thus the outlook for the domestic economy remains weak and could get weaker.