Have Apple Unilever and the makers of Digestive biscuits somehow missed the rally in the £?

This morning brings us the first official data covering December and in particular the retail sector and how it performed over Christmas. So after yesterday’s rays of sunshine which boosted the recorded performance of the telecoms sector over the past decade or so we wonder if a winter chill has arrived today? But before we get there we have much to look at and the opening salvo is fired by this.

GBP back to pre-Brexit levels against the USD. Interesting. ( @ericlonners )

To be more specific it has risen over US $1.39 this morning which does mark a change in UK economic conditions. We are now 15 cents higher than we were a year ago which means that we have switched from the boost to inflation from the past fall to a brake on it from the new higher level. I note he sent this to various journalists perhaps mulling how so many of them told us the only way was down for the UK Pound or perhaps noting the disappearance of polls asking if we are going to parity with the US Dollar? So lesson one is to get very nervous if places like the Financial Times and Wall Street Journal go bullish on the UK Pound £!

But before I move on an excellent question was asked.

So will Apple and Unilever be dropping their prices then, Eric? ( @AndrewaStuart )

After all they did raise prices when the UK Pound £ fell.

Monetary Policy

There is less impact here than you might think. There has been an overall tightening of monetary policy but only by the equivalent of a 0.5% Bank Rate rise as the effective or trade-weighted index has risen from 77 to 79. If you are wondering where the rise against the US Dollar has gone well some of it has been offset by the fall against the Euro where the 1.19+ of last April is 1.13 or so now.

This is something which economists who look at the UK economy have dreamed of in the past and today’s test if you will is to see if any mention it?! What we wanted was a rally against the US Dollar to reduce inflation via its role as the base for commodity prices and a fall against the Euro to improve our price competitiveness for trade. In essence we have had that over the past year or so albeit after the fall in the UK Pound £ after the EU Leave referendum.

Gilt Yields

Here we do not quite get what you might assume from all the media reports of rising bond yields  or from the Professor ( from Glasgow university I think) who was not challenged on BBC News 24 last night when he claimed the UK could borrow for nothing. Whilst it is hardly exorbitant 1.34% is not the “nothing” that you might argue for Germany or especially Switzerland. As to the change in yields they are lower than a year ago because the real change in world bond markets happened early last September when the UK ten-year Gilt yield was below 1%. So since then monetary policy has tightened via this route as well.

Wealth and House Prices

After offering views likely to upset the digestion of Bank of England Governor Mark Carney let me move onto a subject to make him smile. From the Financial Times today.


The value of all the homes in the UK has risen by more than third in the past decade, to £7.14tn, with older homeowners and landlords winning the biggest share of the new wealth as young people continue to be priced out of the market. After several flat years of growth following the financial crisis, the value of the UK’s property market began picking up strongly after 2013, according to analysis by Savills, the estate agent.

Governor Carney  will grin like a Cheshire Cat and perhaps order his favourite Martini as he notes it coincides with his watch.


After several flat years of growth following the financial crisis, the value of the UK’s property market began picking up strongly after 2013, according to analysis by Savills, the estate agent.

For newer readers please look up my posts on the Funding for Lending Scheme and its impact. Also there is a signal of a problem in the UK economy which is rather familiar.

Landlords more than doubled the value of their equity from £600bn in 2007 to £1.3tn in 2017.

I have nothing against individual landlords trying to make some money but I do have criticisms for the way that so much UK economic effort is incentivised to flow into this area and arena.

Also in a week where the economics editor of the Financial Times has railed against statistical fake news there are a couple of issues here. Firstly there is the use of marginal prices ( current house prices) to value a stock as for example you would never get those prices if you actually tried to sell the lot. Next there is the issue of pretty much copy and pasting a view on the housing position from an estate agent and turning a blind eye to the moral hazard involved. On those issues let us note they end with a stock of this nature compared to a flow which is government income.

As a type of critique let me point out this from the FT’s twitter feed.

The share of UK families’ budgets devoted to housing costs has more than doubled over the past 60 years.

Retail Sales

This was likely to be an awkward Christmas season for two reasons. Over the year we had seen falling real wages slowly erode UK retail sales growth that had been particularly strong at the end of 2016. Also some of the spending has shifted to November via the advent of what is called Black Friday which only makes an already erratic series harder to analyse. So we are left with this.

In the latest three months the quantity bought in retail sales increased by 0.4% compared with the previous three months; while the underlying pattern remains one of growth, this is the weakest quarterly growth since the decline of 1.2% in Quarter 1 (Jan to Mar) 2017……..In December 2017, the quantity bought increased by 1.4% when compared with December 2016, with positive contributions from all stores except food stores.

So we have some growth but not a lot of it and we had a curiosity because we had been told by individual company reports that it had been food sales which had saved Christmas yet on the collective level we see the opposite. Next we face the prospect that as winter moves into spring the numbers may be okay as we note that it was a rough start to 2017 for retail sales.


As ever we have much to consider. Let me start with the end of last year where the fourth quarter looked good but retail sales are not helping much and there was the shut down of the Forties pipeline. Thus it seems set to be at the weaker end of expectations followed by a bounce back in the first quarter as the pipeline re-opens all other things being equal.

Meanwhile some and in particular those who invested/punted/bought houses near to my locale may not be enjoying things that much. From Property Industry Eye.

The foreign investor market in London is on its knees – with ‘hundreds’ of buyers of homes purchased off-plan over the last four years nursing huge losses.

The problem, says one large London agent, has been ‘massively under-reported’ by the media.

With values of such properties having dropped like a stone, some investors are unable to complete on their purchases, with the developers taking possession.

Others are having to sell at almost a one-third loss to avoid having to hand back distressed properties to developers, and then risking legal action and greater losses.

Yet some still seem to be taking the blue pills. From Bloomberg.

Malaysia’s Permodalan Nasional Bhd will buy a stake in London’s Battersea Power Station building where Apple Inc. plan to occupy a new U.K. headquarters.

The sovereign wealth fund will own the building with the Employees Provident Fund in a deal which values the power station building at about 1.6 billion pounds ($2.2 billion), Battersea Power Station Development Co. said in a statement Thursday.

Oh and someone seems to have missed the rally in the £ completely.



The problems of the Private Finance Initiative mount

The crossover and interrelationship between the private and public-sectors is a big economic issue. I was reminded of it on Saturday evening as I watched the excellent fireworks display in Battersea Park but from outside the park itself. The reason for this is that it used to be council run and free albeit partly funded by sponsors such as Heart Radio if I recall correctly. But these days like so much in Battersea Park it is run by a company called Enable who charge between £6 and £10 depending on how early you pay. You may note that GDP or Gross Domestic Product will be boosted but the event is the same. However there is a difference as the charge means that extra security is required and the park is fenced in with barriers. I often wonder how much of the charges collected pays for the staff and infrastructure to collect the charge?! There is definitely a loss to public utility as the park sees more and more fences go up in the run-up to the event and I often wonder about how the blind gentlemen who I see regularly in the park with his stick copes.

Private Finance Initiative

Elements of the fireworks changes apply here as PFI is a way of reducing both the current fiscal deficit and the national debt as HM Parliament explains here.

National Accounts use the European System of accounts (ESA) to distinguish between on and off balance sheet debt. If the risks and reward of a project is believed to be passed to the private sector, it is not recorded in the government borrowing figures, and remains off balance sheet. Approximately 90% of all PFI investment is off balance sheet, and is not recorded in National Accounts. Public
spending statistics, such as the Public Sector Net Debt, also follow ESA.

I like the phrase “believed to be” about risk being passed to the private-sector as we mull how much risk there actually is in building a hospital for the NHS which will then pay you a fee for 25/30 years? However we see why governments like this as what would otherwise be state spending on a new hospital or prison that would add to that year’s expenditure and fiscal deficit/national debt suddenly disappears from the national accounts. Perfect for a politician who can take the credit with no apparent cost.


The magic trick for the public finances does not last however as each year a lease payment is made. So there is a switch from current spending to future spending which of course is the main reason why politician’s like the scheme. However the claim that the scheme’s offer value for money gets rather hard when you see numbers like this from a Freedom of Information reply last month.

The Calderdale and Huddersfield Hospitals NHS Foundation Trust entered into a PFI with a company called Calderdale Hospitals SPC Ltd. Prior to May 2002, the all in interest rate in respect of bank loans that the company had
taken from its bankers was 7.955% per annum. After May 2002, when the PFI Company refinanced its loan, it was 6.700% per annum.

As you can see the politicians at that time in effect took a large interest-rate or more specifically Gilt yield punt and got is spectacularly wrong. Even with the refinancing the 6.7% looks dreadful especially as we note that we are now a bit beyond the average term for a UK Gilt. So if a Gilt had been issued back then on average it would be being refinanced now at say 1.5%. Care is needed as of course politicians back then had no idea about what was going to happen in the credit crunch but on the other hand I suspect some would be around saying how clever they were is yields were now 15%! On that note let me apologise to younger readers who in many cases will simply not understand such an interest-rate, unless of course they venture into the world of sub-prime finance or get a student loan.

In terms of pounds,shillings and pence here is the data as of 2015.

The total annual unitary charge across all PFI projects active in 2013/14 was £10bn. The cumulative unitary charge payments sum to £310bn: of this £88 billion has been paid (up to and including 2014/15) and £222 billion is outstanding. The unitary charge figures will peak at
0.5% of GDP in 2017/18.


This is not only an issue on the finance side it is often difficult for the contracts to be changed as the world moves on. Or as HM Parliament puts it.

It can be difficult to make alterations to projects, and take into account changes in the public sector’s service requirements.

Are supporters losing faith?

Today the Financial Times is reporting this.

Olivier Brousse, chief executive of John Laing, which invests in and manages PFI hospitals, schools, and prisons, said PFI had lost “public goodwill” and needs “reinventing” with providers subject to a “payment by results” mechanism where money is clawed back for missed targets.

That is true although he then moves onto what looks like special pleading.

“The market in the UK is going away so we need to get back around the table and agree something acceptable,” said Mr Brousse. “The UK’s need for new infrastructure is significant and urgent. The private sector stands ready to deliver this . . . If the current PFI framework isn’t fit for purpose — then let’s completely rethink it to make it work.”

Indeed we then seem to move onto the rather bizarre.

“The problem with PFI isn’t transparency. It is outcomes,” he said. “I’m a citizen and if a school is built under PFI I also want it to commit to reducing bullying and violence.”

Surely the school should be run by the Governors rather than the company that built it? Perhaps he is trying to sneak in an increase in his company’s role.

There were also mentions of this which as I note the comments to the article seems set to be an ongoing problem whether it s in the public or private sectors.

In August John Laing agreed to hand back a lossmaking £3.8bn 25-year PFI waste project in Greater Manchester for an undisclosed sum. One of Britain’s biggest PFIs, the Greater Manchester waste disposal authority bin clearance, recycling, incinerator and green power station project had struggled to remain profitable. Manchester council said it would save £20m a year immediately from access to cheaper loans and £37m a year from April 2019.


To my mind the concept of PFI conflated two different things. The fact that private businesses can run things more efficiently than the public-sector which is often but not always true. For that to be true you need a clear objective which is something which is difficult in more than a few areas. The two main dangers are of missing things which turn out to be important as time passes and over regulation and complexity which may arrive together. Then we had the issue that whilst it was convenient for the political class to kick expenditure like a can into the future this meant a larger bill would eventually be paid by taxpayers. Even worse they have ended up trapping taxpayers into deals at what now seem usurious rates of interest.

Pretty much all big contracts with the private-sector seem to hit trouble as this from the National Audit Office on the Hinkley Point nuclear power project points out.

The Department has committed electricity consumers and taxpayers to a high cost and risky deal in a changing energy marketplace. We cannot say the Department has maximised the chances that it will achieve value for money.

There is of course the ever more expensive HS2 railway plan to add to the mix.

Thus we see that some of the trouble faced by UK PFI is true of many infrastructure projects. Yet some of it is specific to them and frankly it is hard to make a case for it right now because of some of the consequences of the credit crunch era. Firstly governments are able to borrow very cheaply by historical standards and secondly because adding to the national debt bothers debt investors much less than it once did especially if it is also simply a different form of accounting for an unaltered reality.

One of the arguments of my late father was that the UK needed an infrastructure plan set for obvious reasons a long way ahead. In many ways now would be a good time because the finance would be cheap but sadly we just seem to play a game of tennis as the ball gets hit from the private side of the net to the public side and back again.






How the Bank of England eased monetary policy yesterday

Yesterday something happened which is rather rare a bit like finding a native red squirrel in the UK. What took place was that part of the Forward Guidance of the Bank of England came true.

At its meeting ending on 1 November 2017, the
MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%.

Not really the “sooner than markets expect” of June 2014 was it? Also of course it was only taking Bank Rate back to the 0.5% of them. Or as it was rather amusingly put in the comments section yesterday the Bank of England moved from a “panic” level of interest-rates to a mere “emergency” one!


It was not that two Monetary Policy Committee members voted against the rise that was a problem because as I pointed out on Wednesday they had signalled that. It was instead this.

All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

In itself it is fairly standard central bank speak but what was missing was an additional bit saying something along the lines of “interest-rates may rise more than markets expect”. Actually it would have been an easy and cheap thing to say as expectations were so low. This immediately unsettled markets as everyone waited the 30 minutes until the Inflation Report press conference began. Then Governor Carney dropped this bombshell.

Current market yields, which are used to condition our forecasts, incorporate two further 25 basis point increases over the next three years. That gently rising path is consistent with inflation falling back over the next year and approaching the target by the end of the forecast

This was a disappointment to those who had expected a series of interest-rate rises along the lines of those from the US Federal Reserve. Some may have wondered how a man who plans to depart in June 2019 could be making promises out to 2021! Was this in reality “one and done”?

Added to this was the concentration on Brexit.

Brexit remains the biggest determinant of that outlook. The decision to leave the European Union is already having a noticeable impact.

The latter sentence is true with respect to inflation for example but like when he incorrectly predicted a possible recession should the UK vote leave the Governor seems unable to split his own personal views from his professional  role. This gets particularly uncomfortable here.

And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been evident in recent years in the rate at which the economy can grow without generating inflationary pressures.

The new “speed limit” for the UK economy of 1.5% per annum GDP growth comes from exactly the same Ivory Tower which told us a 7% unemployment rate was significant which speaks for itself! Or that wage increases are just around the corner every year. In a way the fact that the equilibrium unemployment rate is now 4.5% shows how wrong they have been.

The UK Pound

The exchange-rate of the UK Pound £ had been slipping before the announcement. As to whether this was an “early wire” from the long delay between the vote and the announcement or just profit-taking is hard to say. What we can say is that the Pound £ dropped like a stone immediately after the announcement to just over US $1.31 and towards 1.12 versus the Euro. Later after receiving further confirmation from the Inflation Report press conference it fell to below US $1.306 and to below Euro 1.12.

If we switch to the trade-weighted or effective index we see that it fell from the previous days fixing of 77.76 to 76.44. If we use the old Bank of England rule of thumb that is equivalent to a Bank Rate reduction of around 1/3 rd of a percent.

UK Gilt yields

You might think that these would rise in response to a Bank Rate change but this turned out not to be so. The cause was the same as the falling Pound £ which was that markets had begun to price in a series of increases and were now retreating from that. Let us start with the benchmark ten-year yield which fell from 1.36% to 1.26% and is now 1.24%. Next we need to look at the five-year yield because that is often a signal for fixed-rate mortgages, It fell from 0.83% to 0.71% on the news.

The latter development raised a smile as I wondered if someone might cut their fixed-rate mortgages?! This would be awkward for a media presenting mortgage holders as losers. This applies to those on variable rates but for newer mortgages the clear trend has been towards fixed-rates.

But again the conclusion is that post the decision the fall in UK Gilt yields eased monetary policy which is especially curious when you note how low they were in the first place.

This morning

Deputy Governor Broadbent was sent out on the Today programme on BBC Radio 4 to try to undo some of the damage.

BoE’s Broadbent: Anticipate We May Need A Couple More Rate Rises To Get Inflation Back On Track – BBC Radio 4 ( h/t @LiveSquawk )

The trouble is that if you send out someone who not only looks like but behaves like an absent-minded professor the message can get confused. From Reuters.

The Bank of England’s signal that it may need to raise interest rates two more times to get inflation back toward the central bank’s target is not a promise, Bank of England Deputy Governor Ben Broadbent said on Friday.

Then matters deteriorated further as “absent-minded” Ben claimed that Governor Carney had not said that a Brexit vote could lead to a recession before the vote and was corrected by the presenter Mishal Husain. I do not want to personalise on Ben but as there have been loads of issues to say the least about Deputy Governors in the recent era from misrepresentations to incompetence what can one reasonably expect for a remuneration package of around £360,000 per annum these days?

Here is a thought for the Bank of England to help it with its “woman overboard” problems. The questioning of Mishal Husain was intelligent and she seemed to be aware of economic developments which puts her ahead of many who have been appointed……


There is a lot to consider here as we see that the Bank Rate rise fitted oddly at best with the downbeat pessimism of Governor Carney and the Bank of England. Actually in many ways  the pessimism fitted oddly with the previous stated claim that a Bank Rate rise was justified because the economy had shown signs of improvement. On that road the monetary score is +0.25% for the Bank Rate rise then -0.33% for the currency impact and an extra minus bit for the lower Gilt yields leaving us on the day with easier monetary policy than when the day began.

Today saw another problem for the Bank of England as some good news for the UK economy emerged from the Markit ( PMI) business surveys.

The data point to the economy growing at a
quarterly rate of 0.5%, representing an
encouragingly solid start to the fourth quarter.

How about simply saying the economy has shown strengthening signs recently and inflation is above target so we raised interest-rates? Then you keep mostly quiet about your personal views on the EU leave vote on whichever side they take and avoid predictions about future interest-rates like the Bank of England used to do. Indeed if you have an Ivory Tower which has been incredibly error prone you would tell it to keep its latest view in what in modern terms would be called beta until it has some backing.

Oh and as to the claimed evidence that private-sector wages are picking up well the official August data at 2.4% does not say that and here is a song from Earth Wind and Fire which covers the Bank of England’s record in this area.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

Is this the end of the beginning for Quantitative Easing?

Today sees the Bank of England reach a threshold and but not yet a rubicon. This is because of this which it announced on last month.

As set out in the MPC’s statement of 2 February, the MPC has agreed to make £11.6bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 22 January 2017 of a gilt owned by the Asset Purchase Facility (APF).

This is an Operation Twist style manoeuvre where a Gilt matures and the Bank of England chooses to roll it forwards. Sometimes it does this a long way forwards as you see once a week a share of the funds have been put in what are called ultra-long Gilts which go out as far as 2068 ( of which it holds £1.54 billion). Creating an issue for our grandchildren and maybe great-grandchildren.  The details are shown below.

The Bank will continue, normally, to conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; of over 15 years on Tuesdays; and of 7-15 years on Wednesdays. The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £775mn for each maturity sector.

There was a time when £775 million seemed a lot of money but in central banking terms these days that is plainly no longer so. This should have finished last Wednesday but the Bank of England chose not to act on that day, maybe it did not want to let go! But more seriously it avoids days of known political importance as a rule.

So a threshold has been reached but the Bank of England will be able to announce something on Thursday as last week another Gilt matured and some £6.1 billion of that will be able to be rolled forwards. So no doubt it will be time for Operation Twist to wake itself after only a few days of being asleep to start again!

Charlotte Hogg

Charlotte should logically be voting against any further Operation Twist style move if this exchange with the Treasury Select Committee was any guide.

Andrew Tyrie ” On balance do you think we would be better off unwinding it or letting it run off?”

Charlotte Hogg ” I don’t see the distinction between the two to be honest”

So it does not do any good either? I pointed this out on the first of this month.

If Charlotte actually believes what she says then I look forwards to her voting against any more QE which must be pointless as apparently Gilt prices and yields would be unaffected if it stopped.

As to her own position people are more worried about her dissembling that her apparent lack of competence if this from Deborah Orr in the Guardian is any guide.

The trouble is that few people are likely to believe that not mentioning her brother’s job was an oversight. Even if they do, her judgment is still in question.

This bit does however mine a theme we have discussed on here many times.

Clearly, people run the risk of feeling over-entitled. They believe strongly in rules, but develop a belief that they are the people who make the rules, not the people who follow them……..Privileged people also run the risk of mistakenly believing that what’s good for them is good for everybody…….Finally, of course, privileged people assume, often rightly, that no one is going to hold them to account.

Sadly however the article seems completely unaware of the performance of Charlotte when questioned about monetary policy.

Hogg is clearly regarded as tremendously bright and capable.

More problems for the UK establishment

If you are intervening in so many areas then the need for honesty confidence and trust rises and yet we are also in an era where more issues are emerging. From the Wall Street Journal.

On average, between April 2011 and December 2016, U.K. government-bond futures correctly anticipated the rise or fall that ultimately happened when economic data were published, according to an analysis prepared for The Wall Street Journal by Alexander Kurov, associate professor of finance at West Virginia University.

Of course bond markets move on other days but there is a particular concern on these days because of this.

“The more prerelease access you have, the more likely it is that these things are going to be leaked,” said Hetan Shah, executive director of the Royal Statistical Society, the U.K.’s professional body for statisticians that has campaigned for several years to end such access.

At 9:30 am the day before release quite a large number of people ( 118 on the labour  market report)  get the numbers according to the WSJ.

Corporate Bond QE

This will continue but is of a much smaller size as there is only £2 billion left out of a total of £10 billion.. Regular readers will recall that I pointed out when it began that the Bank of England would struggle to mount any operation on a large scale because UK corporates issue a substantial proportion of their debt in Euros and US Dollars because they are often international businesses.  This has led the Bank of England on this road as I pointed out in early November.

The Bank of England is boosting the UK economy by buying the corporate bonds of Total and Maersk Oh hang on….

I was told they were back buying Maersk bonds last week. Also there is the issue of subsidising larger businesses who can issue corporate bonds versus ones which are too small to be able to afford the costs. That is awkward when you are claiming you are boosting the economy.


It too is in a zone where ch-ch-changes are ahead. I have written several times already explaining that with inflation pretty much on target and economic growth having improved its rate of expansion of its balance sheet looks far to high even at the 60 billion Euros a month due in April. But the issue was highlighted by this which was on the newswires last week. From the Financial Times.

He warns investors not to rule out that the ECB could raise rates while it is still in the process of tapering its stimulus spending.

Well of course it could! Indeed the Bank of England has suggested it would raise interest-rates towards 2% before it started to reverse its own QE purchases. But the confusion around is highlighted by this seemingly being an issue.


There is a fair bit to consider at this time when the central bankers face the issue of stopping their stimulus policies. The Federal Reserve of the United States has signalled it will raise interest-rates for a third time in this phase later this week. But the Bank of England and ECB have not even entered the foothills and are still easing. If we move on from policy plainly being inappropriate we face the issue of what will bond markets do when the largest buyers disappear? Well we are getting hints as this from the twitter feed of Bond Vigilantes suggests.

10 year Swiss Government bonds offer a positive yield again, having traded in negative territory for almost 18 months.

Something of a shift has already taken place in the US with its ten-year Treasury Note yield being at 2.56% but with the ten-year Gilt at a mere 1.21% there is quite gap these days. Real yields are getting ever more negative as inflation moves ahead. From the BBC.

SSE has become the latest “big six” energy supplier to raise its prices.

It said average electricity prices would rise by 14.9% from 28 April for 2.8 million customers. However, it will keep its gas prices unchanged.




Debt monetisation by the Bank of England

Today sees the release of the latest public finances data for the UK and they have been genuinely changed by the Brexit Referendum. Some care is needed here as there is a clear and present danger of Brexit fatigue setting in as highlighted by RANSquawk yesterday.

minutes mention “referendum” 33 times!

However the genuine change I am referring to is the way that the leave vote has accelerated an existing trend towards lower borrowing rates for the UK government. We have seen UK Gilt prices surge and thus yields plunge with a couple of brief episodes of negative yields in the 3/4 year maturity region.

Bank of England

The Bank of England is currently doing its best to drive Gilt yields even lower and has undertaken 3 further rounds of  purchases of UK Gilts totalling some £3.51 billion this week alone. There will be no further purchases today because the bond buyers at the Bank of England find those 3 days to be so stressful and tiring that they then need a 4 day weekend to recover!

However the crucial point was made on Tuesday when Gilts maturing in the 2060s were purchased. You see the Bank of England bought at yields of 1.13% (2060), 1.14% (2065) and 1.15% (2068). A pittance or a mere bagatelle. It is hard not to have a wry smile at the shape of the UK yield curve these days but let me move on as that is something for those who have followed it for many years as I have. The fundamental point as I have been making in my articles on fiscal policy is that such yields completely change the position as we can now borrow for fifty years amazingly cheaply. Unless there has been a complete revolution in the UK inflation outlook then these represent negative real or inflation adjusted yields and quit possibly substantially negative ones. It was only on Wednesday that the RPI inflation index was recorded at 1.9% which means compared to it all of our Gilt yields are lower now and even the CPI is on its way up in spite of the effort to keep it low via the omission of owner-occupied housing.

Also there is the issue of the prices the Bank of England is paying which was 198,150 and 191 respectively for the 3 Gilts maturing in the 2060s. If it is to hold these to maturity then it will only get 100 back in nominal terms which is likely to be heavily depreciated in real terms. If it sells them along the way then it will require someone to pay more than what are record highs driven by it. On that road you get the QE to infinity argument or as Coldplay put it in the song trouble.

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

What can we actually borrow at?

Some care is needed as the Gilt market is plainly gaming the Bank of England as they know it has to buy to back up the words of its Governor Calamity Carney. Also the promises of its Chief Economist Andy Haldane as what use is an empty sledgehammer?

Yesterday we sold an extra £1.25 billion of our 2055 Gilt at a yield of 1.21% so if we look at infrastructure projects there must be at least some room for manoeuvre as I suggested on the 4th of this month.

So there is scope on that basis but my suggestion is that we start from the more micro level than the grand macro plans which have so let us down in the credit crunch era. Rather than money looking for projects let us go the other way and look for projects that we feel would genuinely be beneficial. I am open to suggestions but as I discussed only on Friday the UK’s power infrastructure seems to have plenty of scope for ch-ch-changes and improvement to me.

There were quite a few suggestions in the comments for those wanting to think more about this.

Debt monetisation

I raise the concept because whilst we are not seeing this in its purest form there are issues when the Bank of England buys Gilts in a maturity zone on a Tuesday and we sell one on a Thursday. Just to be clear it did not buy the 2055 Gilt and will not do so next Tuesday.

UKT 4.25% 2055 is excluded from the 23/08/16 operation because it has been auctioned by the DMO within one week of the purchase operation.

However when I worked in the Gilt market a lot of business was one Gilt versus another. Back then younger readers may be amused to learn that whilst there was some computer support I amongst others would do such calculations in our heads. How archaic and perhaps even antediluvian! These days though surely an algorithm style operation could do it in a millionth of a second. Now where does that leave the concept of debt monetisation? Not explicit but presumably implicit.

Today’s data

Nice to see a surplus and it was caused by July being a month for self-assessment income tax payments albeit a minor disappointment in the size.

Public sector net borrowing (excluding public sector banks) was in surplus by £1.0 billion in July 2016; a decrease in surplus of £0.2 billion compared with July 2015.

Here is a little more perspective.

Public sector net borrowing (excluding public sector banks) decreased by £3.0 billion to £23.7 billion in the current financial year-to-date (April to July 2016), compared with the same period in 2015.

The revenue situation seems to be responding to the economic growth seen.

This was around 3% higher than in the previous financial year-to-date, largely due to receiving more Income Tax, Corporation Tax and National Insurance contributions, along with taxes on production such as VAT and Stamp Duty, compared with the previous year.

In July itself it was particularly nice to see this as it has been a bone of contention for a while.

Corporation Tax1 increased by £0.6 billion, or 8.4%, to £7.5 billion

National Debt

It was hard not to have a wry smile at this part of the report.

This is the second successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than net debt excluding public sector banks.

Chancellor George Osborne made a big deal out of that issue but despite various wheezes and not a little financial misrepresentation it remained elusive and outside his grasp. Now it arrives just after he gets the order of the boot. Life’s not fair as Lilly Allen reminds us.

Care is needed as it is only for two months so far. Also on the subject of misrepresentation we publish debt to GDP numbers that are on a different basis to other countries. This is not well explained by the media as many are unaware of it themselves, I still remember BBC Economics Editor Stephanie Flanders demonstrating poor knowledge of the subject matter. So having pointed out that Spain passed 100% yesterday here are comparable numbers for us.

general government deficit (Maastricht borrowing) in the financial year ending March 2016 (April 2015 to March 2016) was £74.5 billion, equivalent to 4.0% of GDP

general government gross debt (Maastricht debt) at the end of March 2016 was £1,649.2 billion, equivalent to 87.7% of GDP.


We find that the fiscal envelope of the UK has changed considerably in a short space of time. There is an irony that our patchy progress on the issue of our fiscal deficit, especially if you factor in the economic growth since 2013, has moved away from the front of the queue. The replacement has been the fact that we can now borrow so cheaply for the long-term and this provide plenty of opportunities as we note that the “bond vigilantes” are at least temporarily impotent.

However I counsel caution as if low bond yields and fiscal deficit spending were certain cures for the credit crunch malaise as many are now claiming then Japan would not be in the economic mess it is in would it? But we seem to be fulfilling at least a bit of what the Vapors promised.

I’m turning Japanese I think I’m turning Japanese I really think so
Turning Japanese I think I’m turning Japanese I really think so
I’m turning Japanese I think I’m turning Japanese I really think so
Turning Japanese I think I’m turning Japanese I really think so

Hinkley Point shows how monetary policy and fiscal policy have merged

Overnight has come what may prove to be a really good piece of news for the UK economy. One way of knowing this is to note that there are vested interests against it as illustrated by this from the BBC.

Hinkley Point delay is a high-stakes bet by government

Actually I agree with that but for opposite reasons. You see the original plan was a high stakes bet because of this.

Oct 2013 – UK government agrees £92.50 per megawatt-hour will be paid for electricity produced at the Somerset site – around double the current market rate at the time.

I always thought that we ( the UK taxpayer) were overpaying for this future supply of electricity which at full output would be around 7% of the total UK supply. Since then the world of power supply has changed in many ways. One of these is represented by the way that the oil price back then was in an era christened on here as being like it was influenced by a US $108 per barrel tractor beam. Now as I type this Brent Crude Oil is below US $43 per barrel.

We cannot directly translate lower oil prices into lower domestic energy costs for two reasons. Firstly we use related but not the same products such as gas for example and secondly we are looking a long way into the future. But there have clearly been ch-ch-changes. For example if we look at the official data for industrial energy prices (excluding climate change levy) the index was at 123 in 2013 and 124.9 at the start of 2014 but was 106.4 in the first quarter of 2016. So if we were overpaying back then the situation has got worse.

I found myself in City-AM today with this view.

Hinkley Point looks ever more like an economic disaster waiting to happen…

Monetary Policy

This now comes into the story and let me highlight it by something which did not change this morning. From the Bank of Japan.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

This has led to a situation where as I discussed yesterday Japan can borrow at -0.17% for ten years and indeed did borrow at 0.35% for forty years earlier this week, We can see a similar situation in Europe where the ECB (European Central Bank) is buying some 80 billion Euros of bonds a month as it too chomps away on them like a powered up Pac-Man. This too has led to a large grouping of negative bond yields and even Italy with its banking problems can borrow for 10 years at 1.2% as I type this.

So the “bond vigilantes” were routed in the same manner as General Custer at Little Big Horn. We know live in a world where we see both negative interest-rates and yields fairly regularly. There are various estimates around of how many bonds are now offering a negative yield and the largest I have seen was for US $11 Trillion but of course the exact number changes frequently.

The UK Specifically

Apart from a brief post Brexit referendum surge in UK Gilt prices in the 3/4 year maturity zone the UK has avoided negative Gilt yields. However we are seeing what are for us all time lows in yield and highs in prices. Let me illustrate with some tweets by me from yesterday.

The UK 5 year Gilt yield had a closing low of 0.3% today! Think of fixed-rate mortgages if you think that doesn’t matter.

The UK ten-year Gilt yield fell to 0.7% as we saw all-time lows in such measures. However I was already thinking of the implications for Hinkley Point.

With the thirty-year UK Gilt yield at a mere 1.6% it must be cheaper for the UK to build itself!

What was happening with Hinkley Point?

The BBC put it thus about the funding.

French firm EDF, which is financing most of the £18bn Hinkley Point project in Somerset, approved the funding at a board meeting………They are also concerned that the plant is being built by foreign governments. One third of the £18bn cost is being provided by Chinese investors.

Actually there were doubts about whether EDF ( mostly owned by the French government    ) could afford the project including on its own board.

Ahead of Thursday’s vote on whether to approve the project, an EDF board member, Gerard Magnin, resigned, saying the project was “very risky” financially……Earlier this year, EDF’s finance director, Thomas Piquemal, had resigned amid reports he thought Hinkley could damage EDF itself.

The fundamental issue here was that it was UK policy under Chancellor Osborne to reduce UK borrowing and the national debt so we ended up with this as described by Michael Liebreich.

Between them, chancellor George Osborne and DECC secretary Ed Davey agreed that the private sector would bear the risk of constructing and operating the project, at a stroke doubling its cost of capital and cost of power.

Meanwhile in a universe far far away we could have been taking advantage of France’s ability to borrow extremely cheaply ( ten-year yield 0.13%) although the irony is we did not know hat back in 2013! There would be a wry amusement in Mario Draghi and the ECB financing UK nuclear power.

Could EDF build it anyway?

There are genuine questions on this front as shown in this from Anthony Hilton in the Evening Standard from January.

But its two previous attempts to build this kind of reactor have been troubled. One in Normandy was budgeted to cost €3 billion (£2.8 billion) and be ready by 2012 but it will now not be finished until 2018 and the cost has more than tripled to €10.5 billion. The other in Finland is 10 years behind schedule and at least €5 billion over budget.

What could go wrong?


The financial world has changed so much since 2013 and I gather that the world of nuclear power has to as we face the fact that the words White and Elephant may be used as often as Hinkley and Point. The simple fact is that we could borrow the money for the project much more cheaply as a nation than the proposal here which pretty much looks like a ruse to keep the funding and cost off the UK balance sheet. how did a similar effort called PFI (Private Finance Initiative) end up? If we did the borrowing ourselves then currently the 50 year Gilt ( 2068 actually) yields less than 1.5% according to Investing.com.

The technology effort is much more complex as we have some ability via Rolls Royce and submarines but we have not ventured into this arena for decades. I know that some of you have expert knowledge in this area so I will be interested in your views on newer technologies including nuclear. unfortunately the clock is ticking because successive UK governments have ignored the area of energy supply putting us in something of a mess.


An official report has been highly critical of the IMF. I would just like to repeat what I wrote back on June 8th 2010.

It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.

Me on Official Tip-TV






What is the economic impact of the post Brexit UK Pound fall?

Yesterday saw England rudderless and confused with a poor performance from Sterling. But enough about the football although let me congratulate Iceland and wish them good luck in the next round. As we have a spell of market calm this morning with the FTSE 100 up 2% at 6100 as I type this and even the poor battered UK Pound £ rising above US $1.33 there are opportunities to take stock. An early lesson is a type of shock effect both emotionally and in the way that financial markets can move far far faster than the economy can respond. Whilst it has many flaws in other areas rational expectations economics has some success here although of course the obvious rejoinder is what do we rationally expect now?

Ratings Agency Downgrades of the UK

Once upon a time these bodies bestrode the world and economic agents were afraid of them . If they sliced a notch off a credit rating then the “bond vigilantes” would ride into town driving sovereign bond yields higher and making it more expensive for that country to borrow. The credit crunch hurt them in two ways starting with the way that debt they rated as “AAA” turned out to be a lot further down the alphabet in reality. Also as events like the Euro crisis hit they ended up chasing events rather than leading. They have survived because the need for measurement and analysis has risen in the credit crunch era and that has offset to some extent the plummet in their credibility.

So let us get to what they told the UK yesterday. From Standard and Poors

Ratings On The United Kingdom Lowered To ‘AA’ On Brexit Vote; Outlook Remains Negative On Continued Uncertainty.

This had particular emphasis for headline writers as it was the last of the ratings agencies to have the UK as AAA. Around 5 years ago I pointed out that we did not really deserve such a rating as whilst we have our own currency and could always print as much as we wanted that would likely be accompanied by a lower value of the UK Pound £. Also Fitch wanted a slice of the action as Reuters reported.

Fitch Ratings cut Britain’s credit rating on Monday and warned more downgrades could follow, joining Standard & Poor’s in judging that last week’s vote to leave the European Union will hurt the economy.

Fitch downgraded the United Kingdom’s sovereign rating to “AA” from “AA+” and said the outlook was negative – meaning that it could further cut its judgment of the country’s creditworthiness.

Some kept a sense of humour about it all.

Fitch downgrades UK to AA/neg now (@NicTrades )

A Wider Perspective

These days the story does not end there as you see there are much wider trends and themes at play. Overnight we have seen yet another example of the move lower in sovereign bond yields.


Apologies for the capitals used. If we move beyond that there is plenty of scope for reflection that the highest sovereign yield in Japan is not even 0.1%! Each time we see such a move I point out that business models which depend on yield such as pensions and annuities cannot work anymore.  The ten-year yield is now -0.22% which fits poorly with all the proclamations of economic recovery. Overall we see this.

Japan’s long yields on the road to zero. 40-year falls to record 0.08%, some 80% of JGB market is now sub-zero ( @HaidiLun )

Back in the UK

The story of the bond vigilantes riding into town has quite a reverse here. It was only yesterday that I pointed out that our benchmark 10 year Gilt had seen its yield fall below 1%. So yields are surging today in response to the downgrade? Er well no, as it is at 0.97% as I type this so on the edge of all-time lows ( since 18th century according to Ed Conway of Sky). This is a little higher than the lowest of yesterday but not much and this of course is a response to the higher level of the stock market. The thirty year Gilt yield is at 1.83% which in terms of my time following it is simply incredible.

So those looking for a response to the ratings downgrade only have inverse responses with Gilt yields extraordinarily low and the stock market and UK Pound £ rallying.

The impact of the lower UK Pound £

There have been a lot of headlines about the UK Pound £ saying it is a 31 year low or was yesterday. Many have forgotten to point out this is against the US Dollar which of course has been in a strong phase and overall we have seen falls but mostly smaller ones elsewhere such as to 1.20 versus the Euro.

As we have reached a calmer phase I can complete some calculations as the Bank of England only compiles its trade weighted index daily and is based on yesterday’s close. Thus we came into 2016 at just over 90 and are now at approximately 80. So using the old Bank of England rule of thumb we have seen a move equivalent to a Bank Rate reduction of 2.5% so far in 2016. Compared to this time last year it is more like 3.25%.

We can expect an inflationary push as well especially as the fall has been loaded towards the US Dollar. Many basic commodities will be seeing a push higher from this as it added to a falling trend anyway although there will be some offsetting from the falls in the oil price over the past few days. Over the past year the oil price (Brent crude oil -24%) has fallen more than the UK Pound £ (-15%) but over the last week it has fallen by less. So upwards but not by as much as those who have missed the oil price fall have suggested.


There continues to be much to consider as a multitude of economic events occur together. What it shows us is how tightly the world financial and economic system is tied together. Some of this is good as in manufacturing efficiency but some of it is not so good as complacency and bluster about the banks turns to near panic in an instant. On that subject whilst he is not always right this poses a question. From De Welt.

George Soros is betting 100 million Euros against Deutsche Bank

Meanwhile we have received an increase in uncertainty followed by an inflationary economic boost provided by the fall in the UK Pound £. Just what some at the Bank of England have called for over the years so it is no surprise to see former Governor Baron King reappearing in the news. In fact quite a few economists have called for that although it is nice to see the Resolution Foundation backing up one of my themes.

Housing wiped out 2/3 of post-2002 income gain. RF report on underplayed role of housing in living standards squeeze.

Steve McClaren

If you need some light relief at a difficult time you should watch this rather spectacular effort.