The Italian economic job has led us to the current mess

After looking at the potential plans of the new Italian coalition government, assuming it gets that far yesterday let us move onto the economic situation. Let us open with some news from this morning which reminds us of a strength of the Italian economy. From Istat.

The trade balance in March 2018 amounted to +4.5 billion Euros (+3.8 billion Euros for non EU area and +0.7
billion Euros for EU countries).

There is an immediate irony in having joined a single currency ( Euro ) to boost trade and find that your main surplus is elsewhere. However some 55.6% of trade is with the European Union and 44.4% outside so there is a sort of balance if we note we are not being told the numbers for the Euro area itself. If we do an annual comparison then it is not a good day for economics 101 either as the relatively strong Euro has not had much of an effect at all as the declines are mostly within the European Union.

Outgoing flows fell by 2.2% for non EU countries and by 1.5% for EU countries. Incoming flows increased by 0.4% for EU area and decreased by 0.5% for non EU area.

Actually both economic theory and Euro supporters will get some more cheer if we look at the year so far for perspective as exports with the EU ( 5.5%) have grown more quickly than those outside it (0,5%). The underlying picture though is of strength as in the first quarter of 2018 a trade surplus of 7.5 billion Euros has been achieved. If we look back and use 2015 as a benchmark we see that exports are at 114.1 and imports at 115.9 so Italy is in some sense being a good citizen as well by importing.

The main downside is that Italy is an energy consumer ( net 9.4 billion Euros in 2018 so far) which is not going to be helped by the current elevated oil price.

Inflation

This is an intriguing number as you might think with all the expansionary monetary policy that it was a racing certainty. But reality as so often is different. If we look at the trading sector we see this.

In March 2018 the total import price index decreased by 0.1 % compared to the previous month ; the total twelvemonth
rate of change increased by 1.0%.

So quite low and this is repeated in the consumer inflation data series.

In April 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.5% compared with March and by 0.6% with respect to April 2017 (it was +0.9% in the previous month).

Just for clarity that is what we call CPI in the UK and is not called that in Italy because it has its own measure already called that. Apologies for the alphabetti spaghetti. Such a low number was in spite of a familiar influence in March.

The increase on monthly basis of All items index was mainly due to the rises of prices of Non-regulated energy products (+1.1%) ( from the CPI breakdown).

Although there was also a reduction in regulated energy prices. But in essence the theme here is not much and personally I welcome this as I think that driving inflation up to 2% per annum would be likely to make things worse if we note the sticky nature of wage growth these days.

If we move to an area where we often see inflation after expansionary monetary policy which is asset prices we again see an example of Italy being somewhat different.

According to preliminary estimates, in the fourth quarter of 2017: the House Price Index (IPAB) increased by 0.1% compared with the previous quarter and decreased by 0.3% in comparison to the same quarter of the previous year (it was -0.8% in the third quarter of 2017);

The numbers are behind the others we have examined today but the message is loud and clear I think. Putting it another way Mario Draghi is I would imagine rather disappointed in the state of play here as it would help the struggling Italian banks by improving their asset base especially as such struggles draw attention to the legal basis for them known as the Draghi Laws which have been creaking.

Growth

The good news is that there is some as you see there is a case to be made that the trend rate of growth for Italy is zero which is not auspicious to say the least.

In the first quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2017 and by 1.4 per
cent in comparison with the first quarter of 2017.

If we stick with what Chic might call “Good Times” then Italy beat the UK and drew with Germany and France in the quarter just gone. However it was more their woes than Italian strength sadly as I note that even with this economic growth over the past four years has been 4.3%. This is back to my theme that Italy grows at around 1% per annum in the good times that regular readers will be familiar with and the phrase girlfriend in a coma. Less optimistic is how quarterly GDP growth has gone 0.5% (twice), 0.4% (twice) and now 0.3% (twice).

Labour Market

Here is where we get signs of real “trouble,trouble,trouble” as Taylor Swift  would say.

unemployment rate was 11.0%, steady over February 2018…..Unemployed were 2.865 million, +0.7% over the previous month.

The number has fallen by not by a lot and is still a long way above the 6-7% of the pre credit crunch era. So whilst it is good news that 190,000 more Italians gained jobs over the preceding 12 months that is very slow progress. Also wage growth seems nothing to write home about either.

At the end of March 2018 the coverage rate (share of national collective agreements in force for the wage setting aspects) was 65.1 per cent in terms of employees and 62.1 per cent in terms of the total amount of wages.

In March 2018 the hourly index and the per employee index increased by 0.2 per cent from last month.

Compared with March 2017 both indices increased by 1.0 per cent.

So a very marginal increase in real wages.

Comment

One thing that has struck me as I have typed this is the many similarities with Japan. Let me throw in another.

According to the median scenario, the resident population for Italy is estimated to be 59 million in 2045 and 54.1 million in 2065. The decrease compared to 2017 (60.6 million) would be 1.6 million of residents in 2045 and 6.5 million in 2065.

A clear difference can be seen in the unemployment rate and of course even Italy’s national debt is relatively much smaller although not as the Japanese measure such things.

The bond yield is somewhat higher especially after yesterday’s price falls and the ten-year yield is now 2.12% but here is another similarity from a new version of the proposed coalition agreement.

I imagine this would mean asking banks to hold less capital for the loans they give to SMEs. This would make banks more fragile and – in the 5 Star/League world – could lead to more “public gifts” to private banks. ( @FerdiGuigliano )

The Bank of Japan had loads of such plans and of course the Bank of England modified its Funding for Lending Scheme in this way too. Neither worked though.

Meanwhile we cannot finish without an apparent eternal  bugbear which is the banks.

League and 5 Star also have plans for Monte dei Paschi, which has been recently bailed out by the Italian government. They want to turn it into a utility, where the State (as opposed to an independent management) decides the bank’s objectives.

Me on Core Finance TV

 

 

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Millennials need lower UK house prices rather than £10,000

This morning the attention of Mark Carney and the Bank of England will have been grabbed by this from the Halifax Building Society.

On a monthly basis, prices fell by 3.1% in April, following a 1.6% rise in March, reflecting the
volatility in the short-term monthly measure.

Those who watched the ending of the Lord of the Rings on television over the bank holiday weekend may be wondering if this is like when the eye of Sauron spots that the ring of power is about to be thrown into the fires of Mount Doom? More on the Bank of England later as of course it meets today ready for its vote on monetary policy tomorrow although we do not get told until Thursday.

If we step back for some perspective we see this.

House prices in the latest quarter (February-April) were 0.1% lower than in the preceding
three months (November-January), the third consecutive decline on this measure

This means that we have fallen back since the apparent boom last October and November when the quarterly rate of growth reached 2.3%. Now we see that over the past three months it has gone -0.7%,-0.1% and now -0.1%.

Moving to annual comparisons we are told this.

Prices in the last three months to April were 2.2% higher than in the same three months a year earlier, down from the 2.7% annual growth recorded in March.

Again the message is of a lower number.

What have we learnt?

Whilst the monthly number is eye-catching this is an erratic series as going from monthly growth of 1.6% to -3.1% shows. Even the quarterly numbers saw falls last year at this time but then recovered as we mull a seasonal effect. But for all that as we look back we do see a shift from numbers of the order of 5% annual growth to numbers of the order of 2%. Of course that is the inflation target or would be if the UK establishment allowed house prices to be in the inflation index rather than keeping it out of them so it can claim any rise as wealth effects. Personally I see the decline in the rate of house price inflation as a good thing as for example the last three months has seen it much more in line with the growth in UK wages.

What does the Halifax think looking ahead?

They are not particularly optimistic.

“Housing demand has softened in the early months of 2018, with both mortgage approvals and completed home sales
edging down. Housing supply – as measured by the stock of homes for sale and new instructions – is also still very
low. However, the UK labour market is performing strongly with unemployment continuing to fall and wage growth finally picking up. These factors should help to ease pressure on household finances and as a result we expect
annual price growth will remain in our forecast range 0-3% this year.”

In terms of detail we are pointed towards this.

Home sales fell in March. UK home sales dropped by 7.2% between February and March to 92,270 –
the lowest level since May 2016.

And looking further down the chain to this.

Housing market activity softens in March. Bank of England industry-wide figures show that the
number of mortgages approved to finance house purchases – a leading indicator of completed house
sales – fell for the second consecutive month in March to 62,914 – a drop of 1.4%. Approvals in the
three months to March were 1.7% higher than in the preceding three months, further indicating a
subdued residential market.

So the fires of the system are burning gently at best.

The UK establishment responds

Of course so much of the UK economic system is built on rising house prices so we should not be surprised to see the establishment riding to the rescue. Here is the Financial Times on today’s report from the Intergenerational Commission and the emphasis is mine.

After an exhaustive, two-year examination of young Britons’ strained living standards and the elderly’s concerns about health and social care, the commission recommended a £10,000 “citizen’s inheritance” for 25-year-olds to help them buy their first home or reduce their student debt, lower stamp duty for people moving home and billions more spent on health in a report published on Tuesday.

Nobody at this august institutions seems to ever stop and ask the question as to why so much “help” is always needed? The truth is that it is required because house prices are too high. They of course turn a not very Nelsonian blind eye to that reality. Also the bit about creating the money seems rather vague.

The commission said the government could find the money needed to fund the additional public expenditure by introducing new taxes on property and wealth.

Indeed the lack of thought in this bit is frightening especially when we see the role of who said it.

Carolyn Fairbairn, CBI director-general and a member of the commission, said: “The idea that each generation should have a better life than the previous one is central to the pursuit of economic growth. The fact that it has broken down for young people should therefore concern us all.”

No challenging of all about can or should we grow if it means draining valuable resources and sadly no doubt soon we will get more global warming rhetoric from the same source. Then to correct myself on the issue of taxes we do get some detail and it is something that the establishment invariably loves.

The bulk of the additional tax measures came from a proposal for a new property tax, with annual rates of 1.7 per cent of the capital value of a home for any properties worth more than £600,000 and 0.85 per cent on values below that.

What sort of mess is that? You inflate house prices and tell people they are better off. Then you make the mess even worse by taxing many on gains they have not taken! A clear cash flow issue for many who may have a more expensive property but still live in it. This will be especially true for the retired living on a pension.

Oh and £10,000 won’t go far will it? So this is something that will plainly go from bad to worse.

Also some advice to millennials. Should you ever get this £10,000 don’t pay off your student debt as that looks to be something likely to be written off road to nowhere style in the end anyway.

Comment

If we start with millennials I do think that times are troubled but the real driving factor affecting them is this.

Those in their late 20s and early 30s were the first generation not to have higher pay on average than people of the same age 15 years earlier, according to the commission.

We are back to wages again which the establishment of course then shouts look over here and moves to house prices. But then it has a problem because its claim that there has been little or no inflation faces this inconvenient reality.

With the prospect of more time spent renting from private landlords, the average millennial spent 25 per cent of their income on housing, compared with roughly 17 per cent for baby boomers when they were younger, a figure that subsequently fell for that generation as their incomes rose sharply in the 1980s and 1990s.

So we have higher prices and payments without having much inflation! It is a scam which the establishment continue with their claim that housing inflation can be measured using imputed rents. Even worse they measure rents badly and may be underestimating the rises by around 1% per annum.

Now we can return to Mark Carney and the Bank of England who no doubt feel like they have heat stroke when they read of house price falls. This is because of the enormous effort they have put into this area of which the latest was the Term Funding Scheme which ended in February.  It started in August 2016 and UK Bank Rate is the same now at the emergency rate of 0.5% but we can measure its impact on mortgage rates. You see according to the Bank the last 3 months before it saw new business at 2.39% twice and then 2.3% whereas now it has gone 1.96%,2.02% and now 2,04%. So an extra Bank Rate cut just for mortgages.

Now if we factor that into house prices would it be churlish to suggest it may have raised them by the £10,000 the Intergenerational Commission wants to gift to millennials?

 

 

 

We have good news as the Bank of England gets an inflation headache

As our attention moves today to inflation in the UK there is something we have cause to be grateful for. Let me hand you over to the Independent.

The pound hit its highest level against the dollar since the Brexit vote in June 2016, rising to $1.4364 by mid-morning………….

It has fallen back to US $1.43 since that but the principle that we have seen a considerable recovery since we fell below US $1.20 holds. If we look back to a year ago then we were just below US $1.28 and this matters for inflation trends because so many basic materials and commodities in particular are priced in US Dollars. We have not done so well against the Euro as we are around 2% lower than a year ago here which used to be considered as a dream ticket but as ever when we get what we want we either ignore it or forget we wanted it. The Euro has been strong which we can observe by looking at it versus the Swiss Franc where it has nearly regained the famous 1.20 threshold which caused so much trouble in January 2015.  But overall for us currency driven inflation has become currency driven disinflationary pressure.

Oil

On the other side of the coin we are seeing some commodity price pressure from crude oil and those who follow trading will be worried by this development.

DG closes long USDJPY position (Short of 3 units of yen vs the dollar). Opens short WTI & Brent (one unit of each) ( @RANsquawk )

You have reached a certain level of fame or infamy in this case when you are known by your initials but Dennis Gartman has achieved this with claims like the oil price will not exceed US $44 again in his lifetime. So we fear for developments after finding out he has gone short and if we look back we see that the price has been rising. The rally started around midsummer day last year when it was just below US $45 per barrel for Brent crude as opposed to the US $72 as I type this. More specifically it was at US $53  a year ago.

If we look wider at commodity prices we see that there has been much less pressure here as the CRB Index was 423 a year ago as opposed to the 441 of now. What there has been seems to have been in the metals section which has risen from 894 to 968. We can add to that the recent Russia sanctions driven rise in the Aluminium price as it is not included in the index.

Shrinkflation

This is on my mind because as many of you will recall we were told that products were shrinking because of the lower level of the UK Pound £. Last July the Office for National Statistics told us this.

No, you’re not imagining it – some of your favourite sweets really are shrinking. In November 2016, Toblerone chocolate bars reduced in size by about 10%, provoking outrage online. And Maltesers, M&Ms and Minstrelshave gone the same way.

It’s a phenomenon known as “shrinkflation” – where manufacturers reduce the package size of household goods while keeping the price the same.

I just wondered if any of you have seen signs of prices going back down or more specifically pack sizes growing? If we move to the price of ingredients which was blamed I note that sugar prices are lower over the past year from above US $17 to below US $12 and whilst cocoa prices have risen this year they are still below where they were in early 2016.

Even if the picture for chocoholics is a little mixed there were plenty of products which rose in price which we were told was due to the lower Pound £, have any of these fallen back now it is higher? I can tell you that the new running shoes I have just received were at the new higher £65 rather than the previous £55. I also recall Apple raising prices did they come back down?

Moving back to a more literal shrinkflation there was this a week ago. From City AM

According to new research from LABC Warranty, average house sizes have shrunk by over 12 square metres over the last 50 years.

The study looked at 10,000 houses built between 1930 and the present day, using open data from property sites Rightmove and Zoopla. The analysis concluded that house sizes are smaller than they were in the 1930s, after reaching a peak in the 1970s.

How does that work with the obesity crisis?

Today’s data

There was more of the welcome news we have been expecting on here although I note that the Financial Times has called it “disappointing.”

The all items CPI annual rate is 2.5%, down from 2.7% in February.

We do get a hint that the rally in the UK Pound £ has helped from this part of the detail.

The CPI all goods index annual rate is 2.4%, down from 3.0% last month.

Good prices were pushed up by the previous fall in the currency but now inflation in this area is rather similar to that in the services sector ( 2.5%) so after the recent drops we may see a plateau of sorts. As to the factors at play this month as I have noted several times in the past couple of years it is time to say thank you ladies.

Large downward effect…….. Prices overall rose this year by less than a year ago, with the main downward contributions coming from women’s dresses, jumpers, cardigans and coats, and boys’ T-shirts.

The good news carried on with the Retail Prices Index although of course with a higher number albeit less of a gap than we have got used to.

The all items RPI annual rate is 3.3%, down from 3.6% last month.

Producer Prices

These give us an idea of what is “coming up that hill” as Kate Bush would put it. Here we see some better news at the start.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.4% on the year to March 2018, down from 2.6% in February 2018.

However we do see the beginnings of the influence of the higher oil price further in the distance.

Prices for materials and fuels (input prices) rose 4.2% on the year to March 2018, up from 3.8% in February 2018.

House Prices

We even had better news on this front.

Average house prices in the UK have increased by 4.4% in the year to February 2018 (down from 4.7% in January 2018). The annual growth rate has slowed since mid-2016 but has remained generally under 5% throughout 2017 and into 2018. Average house prices in the UK decreased by 0.1% on the month.

Of course if we look at all the different measures we seem to be bouncing between 0% and 5% but that in itself is better and the 5% upper barrier looks like it might be set to fall.

Comment

Just in time for the sunny spring weather the UK economy has produced two days of good data. Yesterday’s employment data has been followed by a fall in nearly all our inflation measures which of course sprinkles a few rays of sunshine on the prospects for real wages. These numbers will take time to filter into the other data such as consumption and GDP ( from the autumn perhaps) but the worm has now turned in this respect albeit not in time for the first quarter of this year.

Meanwhile there are two pockets of trouble and they are centred within our establishment. Firstly Bank of England Governor Carney has apparently had a headache and asked for some ibuprofen as he mulls how an inflation targeting central banker can raise interest-rates into falling inflation having ignored its rise?

Also the Office of National Statistics has argued itself into an increasingly lonely corner with this.

The all items CPIH annual rate is 2.3%, down from 2.5% in February.

Why has it become the economics version of “Johnny no mates”? Because nobody believes this version of property inflation.

The OOH component annual rate is 1.2%, unchanged from last month

If you have to make up a number my tip is to make at least some effort at credibility.

 

 

 

The Nine Elms problem is one of over supply

Partly because it is back in the news ( did it ever really go away?) and partly due to the nicer weather I cycled past Battersea dogs and cats home yesterday heading up to Vauxhall which gave me a cyclists eye view of the Nine Elms and Battersea Power Station developments. One simple measure is that it takes more than a few minutes to do this which gives an initial idea of scale. Another is my crane count which has now reached 32 as opposed to the 24 or 25 of the past. So activity is rising which of course is in the opposite direction to the official UK construction series but of course for me there is a type of locality bias here. Also if you cycle through the development as I did a couple of months ago you find that adding depth to height and length adds even more to the scale.

The Financial Times has been on the case too.

Battersea luxury homes scheme powers on despite oversupply fears

Frankly I am not sure what choice there is now but let us look deeper.

Now surrounded by hoardings and scaffolding, it lies at the heart of one of the most ambitious redevelopment schemes in Britain’s capital, with nearly 40 sites, owned by domestic and overseas developers, clustered in the surrounding 561 acres known as Nine Elms.

So nearly 3 Battersea Parks and there was an effort to pinch some of the park as well back in the day which fortunately was rebuffed. This has led to this.

It is four years since the prime property market peaked in London, but estate agency group JLL estimates that 3,323 upmarket homes are under construction and another 6,332 in the pipeline across the wider Nine Elms area. The volume of homes planned for the area has prompted fears of an oversupply of luxury properties that most Londoners cannot afford. According to JLL, properties in Nine Elms command £1,400 per sq ft on average, while landlords investing in one-bedroom flats can expect to command £450 a week rent.

This takes me back to February 7th when I noted this from the Guardian.

More than half of the 1,900 ultra-luxury apartments built in London last year failed to sell, raising fears that the capital will be left with dozens of “posh ghost towers”………The total number of unsold luxury new-build homes, which are rarely advertised at less than £1m, has now hit a record high of 3,000 units.

I guess ghost towers are a special(s) case of a ghost town.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Prices?

Back in February the FT was telling us this.

Prices per square foot in prime London have fallen 5 per cent since their 2014 peak while in the most expensive “prime central” areas they are down 11 per cent.

Whereas now it is giving us examples of larger falls.

A glance at property listings online reveals hefty discounts being offered as owners cut overblown prices. A one-bedroom flat in Aykon London One, a 50-story tower planned by Dubai-based developer Damac Properties, is being offered at £1.1m — a 36 per cent discount to its initial £1.7m price in November…………
Elsewhere, a five-bedroom penthouse is available for £11m — it was listed at close to £14m six months ago. Property agents say many vendors will be investors who bought off-plan early and no longer wish to complete.

What we do not know is how realistic these asking prices were in the first place? Also if you had bought off-plan as it is called then rather than take a 36% loss if that is what it is then you would presumably simply abandon your 10% deposit.

Number Crunching

There is the issue of value which of course is in this instance a little like asking how long is a piece of string? However a reply to the FT article from B gives it a go.

Work out the numbers with stamp duty, Agent fees, maintenance costs etc and the yield works out to 1.5% per annum for a cash buyer in an oversupplied market with limited prospect of capital gains at least for some years.

Assuming the FT data is correct then applying my rule of thumb for such matters means that the price needs to halve. Of course central London runs down a different road but this from Vanessa Warwick in January provides some perspective looking at a house in Newcastle.

*Trending* Is this 3 bed terrace for £39K with £550 pcm rental income a deal?

Actually if you look into it the start price seems to have been more like £55k but on that basis our Nine Elms yield just gets worse. It would also appear from the comments that the area might be what has become called a “sh*thole” by President Trump but then of course according to him Nine Elms is an “off location”.

If City-AM was right last week perhaps someone will be along.

The number of buy-to-let investors in the UK has hit an all-time high of 2.5m in the latest tax year. According to research from real estate agency Ludlow Thompson, the number of buy-to-let investors has increased five per cent in the last year, and 27 per cent over the last five years.

Mind you with rents in London falling I am not so sure about this bit.

Rising numbers of landlords shows the enduring appeal of buy-to-let, particularly in London,” said Stephen Ludlow, chairman at Ludlow Thompson. “The long-term picture for the buy-to-let market remains strong.”

Notice the use of “long-term” which in this instance appears to mean strong in spite of falling prices and rents. Mind you for some in central London his long-term may have come true. From Acadata this morning.

This is, however, almost entirely due to a massive 30.7% annual increase in the average price in Kensington and Chelsea,
London’s most expensive borough – and that largely the result of just seven high value property sales

lucky number 7?

Mortgages

It is hard not to think of the famous quote by Karl Marx after the news from the weekend.

History repeats itself, first as tragedy, second as farce.

From This Is Money.

The Post Office has launched a mortgage designed to help first-time buyers get onto the property ladder without the need for a deposit.

The deal – known as the family link mortgage – works by giving the first-time buyer a 90 per cent loan-to-value mortgage secured against the property they’re buying plus an interest-free five-year loan secured on a close relative or parent’s home.

There’s a catch – the parental home needs to be mortgage-free for the buyer to be eligible.

But unlike alternative family mortgages, this one costs the parents nothing so long as the buyer repays the loan on time.

This may not be of enormous use at Nine Elms due to the maximum size being £500,000.

Comment

There is a fair bit to consider here although some seem to have made up their mind before it even began. The perhaps aptly named Tony Islington in the FT comments.

Stuck in the wastelands of South London…..

Perhaps he drives a London black cab but whilst some parts of the area have stunning views over the Thames there are also some like this.

You have different developers putting up “luxury” towers and blocks cheek-by-jowl.  As a resident. your view would be either that of a neighbouring development or a set of railway tracks leading into the busiest railway station in the country.   Virtually all residents have on the ground is a giant supermarket. ( Nguba )

If anybody spots the giant supermarket please let me know. In the end the project will be reliant on foreign buyers as there are so few in the UK who can buy at these prices. But there is a flow of businesses to the area as this from the Wandsworth Guardian points out.

Dorling Kindersley (DK), the world leading illustrated reference publisher will move to One Embassy Gardens in Nine Elms from their 80 Strand Office by 2020……..DK have chosen to join colleagues from its sister company, Penguin Random House UK, whose move was announced in December 2017. The move is in line with a general shift in the media and publishing industries, with Apple to soon unveil London headquarters within the Nine Elm’s district.

But for now it looks like a classic case of over-supply.

R Lee Emery

The drill instructor who was so terrifying in Full Metal Jacket has sadly passed away. Let me leave you with this from him.

Here, you are ALL equally useless!

 

 

 

The Bank of England faces quite a dilemma

At the moment the minds of the Bank of England must be getting more befuddled than usual as jet lag adds to the usual problems. Once they get back from Australia ( Haldane and Broadbent) and Canada ( Governor Carney) no doubt they will set aside time to read Governor Carney’s latest speech on climate change. That is assuming the forward guidance of their various pilots is working much better than theirs as otherwise a few more flights will be required to get home. So let us open with some relatively rare good news for them. From the BBC.

Reaction Engines Limited (REL), the UK company developing a revolutionary aerospace engine, has announced investments from both Boeing and Rolls-Royce.

REL, based at Culham in Oxfordshire, is working on a propulsion system that is part jet engine, part rocket engine.

At the moment the sums are small but it is a reminder that space technology has been a success story for the UK economy over the past couple of years. It has been getting more and more mentions in the official statistics.

Ben Broadbent

Deputy Governor Broadbent has given a speech at the Reserve Bank of Australia this morning. Tucked away in it is something of a gem even for our absent-minded professor.

I discovered when writing the talk that my former colleague Paul Tucker made very similar arguments regarding accountability back in 2011.

The last thing any sensible person would do is equate former Bank of England Deputy Governor Paul Tucker with accountability. Many of you will remember the saga but for those that do not here is the Guardian from back then.

Paul Tucker, the former deputy governor of the Bank of England, is among several figures from the world of finance to receive a knighthood in the New Year honours list, despite claims that he was involved in the Libor interest-rate fixing scandal.

What has concerned our bureaucrat is what concerns bureaucrats the most everywhere which is a challenged to the bureaucratic empire.

Some have argued that, because there are significant interactions between the two, monetary and macroprudential policy should be housed not just in the same institution, but in the same policymaking committee
within the central bank. The distinct MPC and FPC should become a single “FMPC”.

Okay why not ?

The risk is that a single committee would pay
too much attention to its more verifiable objectives – the cyclical stabilisation of inflation and growth, currently
allocated in the main to the monetary policymaker – and too little to financial stability.

Yet he seems to forget this later as he remembers his boss is on both committees so we get this.

Even if the two hands are separate, it is important that the one should know what the other
is doing, and in that respect it helps that some people sit on both committees.

Indeed they do some things together.

Many economic
issues are relevant for both and, in the Bank of England, the MPC and FPC regularly receive joint briefings
on such matters.

Poor old Ben then trips over his own feet with this as an increasing number think that what he fears is the current state of play.

I think there would be risks in asking the central bank to meet a wide range of objectives with no distinctive accounting for the use of its various tools.

The housing market

Those at the Bank of England who have trumpeted wealth effects from higher house prices will be troubled by this from Estate Agents Today.

Prices are flat nationally but there are major regional variations with London seeing the sharpest fall in prices, according to the surveyors.

Respondents in the South East of England, East Anglia and the North East of England also reported prices to be falling, but to a lesser extent than in London.

Prices increased elsewhere in the UK in the last three months.

Will they now be so keen to try to push mortgage interest-rates higher and thus drive away the claimed wealth effects? Whereas at the moment the situation according to the credit conditions survey of the Bank of England reminds us that its previous policies are still having an effect.

A narrowing of spreads reflects an increase in the level of
competition in the mortgage market. In recent discussions, the major UK lenders noted that competition remains very strong.

Can anybody please tell me where the £127 billion of funding given to the banks by the Term Funding Scheme may have gone? It does not seem to have gone here.

The perceived availability of credit to small businesses decreased slightly in 2018 Q1, according to respondents to the Federation of Small Businesses’ (FSB) Voice of Small Business Index.

Also if we return to the argument provided by Ben Broadbent that a separate FPC is vital I wonder what he and they think of where the biggest impact of their TFS has been.

 competition remains very strong
and since November has increased in the higher LTV market,………..Consistent with this, the difference
between quoted rates on two-year fixed rate 90% and 75%
LTV mortgages has narrowed from 90 basis points in August to 69 basis points in March. ( LTV = Loan To Value).

As I understand it this is officially called vigilance these days.

Consumer Credit

Another example of “vigilance” can be provided here from today’s survey. You may recall that the Bank of England has taken something of a journey on this subject after Governor Carney told us this in February 2017.

This is not a debt-fuelled consumer expansion
that we’re dealing with.

Now the survey tells us this.

There has been a modest tightening in the availability of
consumer credit over the past year.

This is a reining back from the promises of a reduction that we saw in the survey for the third and fourth quarters of last year which they are no doubt hoping we have forgotten. Of course we see a sign of the Term Funding Scheme at play yet again.

Lending spreads have tightened in recent months as interest rates remained broadly unchanged following the rise in Bank Rate.

This provides two problems for the Bank of England. Firstly it has boosted consumer credit with its “Sledgehammer” policies and now we will have to face the consequences. Next is a confirmation of the earliest theme of this blog which is that Bank Rate has very little and sometimes nothing to do with the interest-rates charged in this area. In effect therefore it is somewhat impotent.

 

Comment

Yet again our absent-minded professor has been somewhat forgetful. For example his own move from being an “external” member to an internal one at the Bank of England was clearly beneficial for him but was bad for the idea of external members bringing fresh ideas and dare I say it independence to the Bank. Now that Rubicon has been crossed they too may now be hoping for promotion and monetary gain and hence influenced in the same way their appointment was an attempt to avoid.

Also the empire building of the current Governor who has overseen inflation in the number of Deputy Governors such as Ben is clearly something that cannot be challenged within the Bank. For example I am no great fan of macro prudential policy as when it was used in the past it failed and I notice the fanfare in favour has gone much quieter as reality has replaced hype.

Moving to the interest-rate issue that presently seems to be the topic du jour every day the Bank of England is facing something of a crisis as its forward guidance has put it between a rock and a hard place. The rock is the increases seen and expected in US interest-rates and the hard place is the trajectory of the UK economy.

Nigeria

The honesty is admirable but it is hard not to smile as you read why Nigeria released its inflation data an hour early today. The Hat Tip is to @LiveSquawk

It will be shortly. I published one hour earlier by accident. Forgot Watch still on London time so I released 8am instead of 9am as published 😊😊. Probably need a break/holiday. My apologies

 

 

What is happening to US house prices?

If you are a believer that the extraordinarily stimulatory monetary policies of the credit crunch era have boosted house prices via their impact on asset prices then the United States currently provides food for thought. This is because of this.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

For younger readers the US Federal Reserve has raised official interest-rates to extraordinary heights and for older ones it has barely got into the foothills. Either way The Fed-Home as Google now describes us thinks this.

 The stance of monetary policy remains accommodative,

In addition to the series of increases in interest-rates we have seen and continue to expect we are now in what I guess we need to call the QT or Quantitative Tightening era or as Marketwatch described it last month.

Last fall, the Fed announced plans to slowly reduce its balance sheet on auto-pilot, allowing holdings to shrink by $20 billion each month this quarter and moving up to a maximum of $50 billion per month by the end of the year.

From the peak of US $4.5 trillion the balance sheet has shrunk from US $4.5 trillion at its peak to US $.4.4 trillion as of the latest update. So QT has had an impact in terms of a small flow reduction which has led to a small stock reduction. Thus we have gone from small up to small down if we look at it like that although of course in other terms US $100 billion or so was a lot of money.

If we look ahead then Marketwatch point out that we were given a hint of a possible future late last year.

The Fed has not announced how low it wants to shrink its balance sheet. New Fed Chairman Jerome Powell discussed a target range of $2.5 trillion to $2.9 trillion in his confirmation hearing last fall.

Okay what does this impact?

A central bankers heart will gladden when they see these numbers from Money Magnify.

In the second quarter of 2017, real estate values in the United States surpassed their pre- housing crisis levels. The total value of real estate owned by individuals in the United States is $24 trillion, and total mortgages clock in at $9.9 trillion. This means that Americans have $13.9 trillion in homeowners equity.12 This is the highest value of home equity Americans have ever seen.

As they do not let me point out that such value calculations have the flaw of using a marginal price for an average concept which looks great when prices rise but not to great when they fall. If we move on we also see a consequence of the credit crunch era.

Current homeowners have mortgage payments that make up an average of just 16.5% of their annual household income.

That will be changing but not in the way that you think as the US market is mostly one of fixed-rate mortgages. So whilst both the policy changes above may affect it we see that over time QT is likely to have the largest impact. This is because the main player is the 30 year fixed rate mortgage which means that the 30 year Treasury yield is more of a factor that short-term interest-rates. When you look at what it has done you see that in a broad sweep the US Fed helped reduce it by around 1% from 2013 to late 2016 and it then rose by 1% to the current 4.44%. Actually if you look at the chart it is hard not to have a wry smile as for all the rhetoric and talk about QT the main player seems to have been the Donald as most of the rise was around the election of President Trump. Humbling for central bankers and their dreams of ruling the world! If you want to know how this took place I looked at it on the 9th of November 2016.

Before I depart the economic situation let me point out that we may well end up discussing as so often two different markets.

Today, half of all borrowers put down 5% or less. More than 10% of borrowers put 0% down. As a result, the average loan-to-value ratio at origination has climbed to 87%

Manhattan

Is this a case of a perfect storm? We have the effect of the factors above although of course they affect the 0.1% much less than the rest of us. But the winds of change as we have seen in central London have been blowing against capital city ( in which category New York is unofficially if not officially) property prices after many years of plenty. Also there has been this according to the Financial Times.

Some buyers held off buying real estate as they grappled with the impact of President Donald Trump’s changes to the federal tax code, which introduced a cap on the deduction of state and local taxes, including property taxes, from federal tax bills. It also reduced the size of mortgages eligible for interest deductions. The change is expected to hit high earners in high-tax states including New York, particularly in New York City.

This has led to this.

The number of co-op and condominium sales in Manhattan fell nearly 25 per cent during the first quarter compared to the same period last year………..It was the largest annual decline in sales in nine years, according to the report.

Okay so what about prices?

The average sale price across Manhattan fell by 8.1 per cent from the year-earlier quarter, and the average price per square foot also recorded a sharp decline, falling by 18.5 per cent to $1,697.

Perhaps fearing a lack of sympathy amongst even its readers the FT takes its time to point out what this means.

The average sales price of a luxury apartment fell 15.1 per cent, down from $9.36m in the first quarter of 2017 to $7.94m in the first quarter of this year, and the number of sales was down 24.1 per cent. The number of newly built apartments that went into contract fell 54 per cent.

As to lack of sympathy that was at play in the comments.

So now the average luxury apartment in Manhattan costs only $8 million? Not yet a bargain then? ( Genghis)

As was some perspective.

1600 usd per sqf for prime ? Still a bargain compared to London (JP1)……..I know. And positively a steal compared to Hong Kong !! (observer).

Looking wider

You might from the above expect lower prices but in fact at the end of last week we were told this. From Zillow Research.

The continuing inventory pinch helped boost the U.S. national Case Shiller index 6.2 percent in January from a year earlier, down from a 6.3 percent gain in December. Case-Shiller’s 10-City Composite rose 6 percent, while the 20-City Composite climbed 6.4 percent year-over-year.

Some places are in fact red hot.

Home prices in Seattle, Las Vegas, and San Francisco posted the highest annual gains among the 20 cities, rising 12.9 percent, 11.1 percent and 10.2 percent, respectively.

Zillow remain of the view that house prices will continue to rise as I note that rather like us in the UK there is a perception that too few houses have and indeed are being built. For perspective I note that a different piece of research tells us this.

Home values rose 7.6 percent year-over-year to a median of $210,200, with the San Jose, Calif., metro posting astonishing annual home value growth of 26.4 percent, reaching a median of $1.25 million.

Comment

We find ourselves reflecting on the words of Glenn Frey again.

The heat is on

Except not in the way that economics 101 would have predicted as we continue to see house price rises if we ignore the “international effect”. According to the Brookings Institute there may be a deeper factor as human behaviour returns to what it was.

The Census Bureau’s annual county and metropolitan area estimates through 2017 reveal a revival of suburbanization and movement to rural areas along with Snow Belt-to-Sun Belt population shifts. In addition, the data show a new dispersal to large- and moderate-sized metro areas in the middle of the country—especially in the Northeast and Midwest. If these shifts continue, they could call into question the sharp clustering of the nation’s population—in large metropolitan areas and their cities—that characterized the first half of the 2010s.

So the suburbs are back in favour so let me leave you with the thoughts of Arcade Fire on the subject.

And all of the walls that they built in the seventies finally fall
And all of the houses they built in the seventies finally fall

Maybe they got onto the consumer society as well in a different song.

(Everything now!) I need it
(Everything now!) I want it
(Everything now!) I can’t live without
(Everything now!) I can’t live without
(Everything now!) I can’t live
(Everything now!)

Germany also faces ever more unaffordable housing

The economy of Germany has been seeing good times as Chic would put it and this morning has seen an indicator of this. From Destatis.

 The debt owed by the overall public budget (Federation, Länder, municipalities/associations of municipalities and social security funds, including all extra budgets) to the non-public sector amounted to 1,965.5 billion euros at the end of the fourth quarter of 2017. ……..Based on provisional results, the Federal Statistical Office (Destatis) also reports that this was a decrease in debt of 2.1%, or 41.3 billion euros, compared with the end of the fourth quarter of 2016.

We talk of Germany being a surplus economy and here is another sign of it as it applies to itself the medicine it has prescribed for others.

 Net lending of general government amounted to 36.6 billion euros in 2017…….. When measured as a percentage of gross domestic product at current prices (3,263.4 billion euros), the surplus ratio of general government was +1.1%.

Of course all of this is much easier in a growing economy.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

Thus the national debt to GDP ratio will have declined and I am sure more than a few of you will have noted that the total debt is a fair bit smaller than Italy’s for a larger economy. This parsimony has of course been helped by European Central Bank purchases of German Bunds which means that even five-year bonds have a negative yield ( -0.07%). Of course there is a chicken and egg situation here but 469 billion Euros of bond purchases in a growing economy lead to yields which would lead past computer models to blow up like HAL-9000 in the Film 2001 A Space Odyssey.

Trade

Whilst we are looking at surpluses there is this ongoing saga which continued last year.

Arithmetically, the balance of exports and imports had an effect of +0.8 percentage points on GDP growth compared with the previous year.

Ironically Germany did actually boost its imports ( 4.8%) but its export performance ( 5.6%) was even better. This meant that the same old song was being played.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 257.1 billion euros in 2017.

If we allow for the inaccuracies in the data and the latest “trade wars” debate mostly raised by President Trump has highlighted the issues here with some countries thinking they are both in surplus/deficit with each other the German surplus is a constant. This poses quite a few questions as of course on one line of thinking it was a cause of the credit crunch.

The International Monetary Fund (IMF) and the European Commission have for years urged Germany to lift domestic demand and imports in order to reduce global economic imbalances and fuel global growth, including within the euro zone.

As time has passed it is hard not to wonder about how much Germany could have helped its Euro area partners via this route. Of course a catch is that it would have to want what they produce which gets forgotten. Also I find a wry humour in organisations like the IMF and EC telling Germans to “spend,spend,spend” to coin a phrase and consume more and yet also warn regularly about climate change.

Labour Market

There is another sign of success if we note this.

The adjusted unemployment rate was 3.6% again in January 2018……….Compared with January 2017, the number of persons in employment increased by 1.4% (+631,000 people). Roughly 1.6 million people were unemployed in January 2018, 160,000 fewer than a year earlier.

So we see that the quantity numbers for the labour market are very good as the unemployment rate chases that of Japan. However if we move to the quality arena things look a little different. From Bloomberg.

The scramble for qualified workers has become an existential issue for companies across Germany, which are offering enticements ranging from overseas sojourns and ski outings to subsidized housing and sausage platters.

Let us park the issue of whether the sausages are delicious and consider the cause of this.

After years of robust growth, unemployment has dropped to a record low of 5.4 percent, and the country has 1.2 million unfilled jobs—nearly equivalent to the population of Munich. Manufacturing, construction, and health care are particularly stretched, and 1 in 4 businesses may have to hold back production as a result of the labor crunch, the European Union reports.

So our HAL-9000 would predict wage growth and of course if it was in a central bank it would be flashing “output gap negative” and predicting stellar wage growth. Meanwhile back in the real world.

The corporate largesse hasn’t dramatically boosted salaries, at least so far. Compensation in Germany rose 13 percent in the last five years as unions moderated wage demands to help their companies maintain an edge in the face of growing global competition.

There is another similarity here with Japan in that the financial media have been telling us that wages are about to soar or sometimes that agreements have been signed. So they must spend their lives being disappointed as whilst the German figures are better than Japan’s they are not what has been promised.

If we look into the detail of the report we see that in spite of strong circumstances companies these days seem to prefer one-off payments rather than wage rises. Have we changed that much in response to the credit crunch as in being less certain about the future or not believing what we are told in this case about economic strength? There is some logic behind that in an era of Fake News stretching to diesel engines and indeed hybrid performance if we consider areas especially relevant to Germany, Maybe wages measures should switch to earnings per hour.

the country’s biggest union this year accepted a lower increase in salaries in exchange for the right to work fewer hours.

But America already does that and it has not changed the picture but maybe still worth a go.

House Prices

I note that in February the Bundesbank picked out house prices and told us this.

According to current estimates, price
exaggerations in urban areas overall in 2017
amounted to between 15% and 30%. In
the big cities, where considerable overvaluations
had already been measured earlier,
the price deviations are likely to have increased
further to 35%.

Price “exaggerations” is a new one but presumably is being driven by this.

According to figures based on bulwiengesa AG
data residential property prices in urban
areas in Germany continued to increase
sharply by around 9%, and hence at a
somewhat faster pace than in the three
preceding years, when the increase averaged
7½%.

Indeed there may well be issues similar to the British buy to let problem.

As in 2016, the rate of inflation for rental
apartment buildings in the towns and cities
as well as in Germany as a whole was markedly
higher than for owner- occupied housing.

Comment

So we have good times in many respects as after all many would see rising house prices as that too. Of course I do not and let me now throw in the impact of easy monetary policy at a time of economic growth.

The average mortgage rate, which had already hit
an all- time low in the preceding year, settled
at 1.7%, which was slightly above its
2016 level.

Interestingly the cost of housing is soaring relative to wages however you try to play it.

The continuing sharp price rises for housing
in urban centres were accompanied by a
significant increase of 7¼% in rents in new
contracts, which are chiefl y the outcome of
rent adjustments in the case of repeat occupancies.

This poses a question for what would happen if later in 2018 we see an economic slowing as suggested by weaker monetary data and some lower commodity prices? We will have to see about that but much further ahead is the issue of Germany’s demographics which combine a low birth rate, rising life expectancy ( economics is clearly the dismal science here) and an aging population. This leaves the intriguing thought that travelling towards it just like in Japan leads to negative interest-rates, low wage growth and a trade surplus…….Yet the public finances are very different.

Cash is King

Something else that Germany shares with the UK. From the Bundesbank March report via Google Translate.

The value of accumulated net issuance of euro banknotes by the Bundesbank rose between the end of 2009 and the end of 2017 from € 348 billion to € 635 billion. Since 2010
On average, the Bundesbank gave an average of € 35.8 billion in euro banknotes a year.
This corresponds to an average annual growth rate of 7.8%.

Yet we keep being told that cash is so yesterday whereas we may still be in the adventures of Stevie V

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, oho
Money talks, money talks
Dirty cash I want you, dirty cash I need you, oho