Slowing growth and higher inflation is a toxic combination for the Euro area

Sometimes life comes at you fast and the last week will have come at the European Central Bank with an element of ground rush. It was only on the 30th of last month we were looking at this development.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19) and by 0.3% in the EU28 during the third quarter
of 2018,

Which brought to mind this description from the preceding ECB press conference.

Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The underlying strength of the economy continues to support our confidence ……..

There was an issue with broad-based as the Italian economy registered no growth at all and the idea of “underlying strength” did not really go with quarterly growth of a mere 0.2%. But of course one should not place too much emphasis on one GDP reading.

Business Surveys

However this morning has brought us to this from the Markit Purchasing Managers Indices.

Eurozone growth weakens to lowest in over two years

The immediate thought is, lower than 0.2% quarterly growth? Let us look deeper.

Both the manufacturing and service sectors
recorded slower rates of growth during October.
Following on from September, manufacturing
registered the weaker increase in output, posting its
lowest growth in nearly four years. Despite
remaining at a solid level, the service sector saw its
slowest expansion since the start of 2017.

There is a certain sense of irony in the reported slow down being broad-based. The issue with manufacturing is no doubt driven by the automotive sector which has the trade issues to add to the ongoing diesel scandal. That slow down has spread to the services sector. Geographically we see that Germany is in a soft patch and I will come to Italy in a moment. This also stuck out.

France and Spain, in contrast, have
seen more resilient business conditions, though both
are registering much slower growth than earlier in
the year.

Fair enough for Spain as we looked at only last Wednesday, but France had a bad start of 2018 so that is something of a confused message.

Italy

The situation continues to deteriorate here.

Italy’s service sector suffered a drop in
performance during October, with business activity
falling for the first time in over two years. This was
partly due to the weakest expansion in new
business in 44 months.

Although I am not so sure about the perspective?

After a period of solid growth in activity

The reality is that fears of a “triple-dip” for Italy will only be raised by this. Also the issue over the proposed Budget has not gone away as this from @LiveSquawk makes clear.

EU’s Moscovici: Sanctions Can Be Applied If There Is No Compromise On Italy Budget -Policy In Italy That Entails Higher Public Debt Is Not Favourable To Growth.

Commissioner Moscovici is however being trolled by people pointing out that France broke the Euro area fiscal rules when he was finance minister. He ran deficits of 4.8% of GDP, followed by 4.1% and 3,9% which were above the 3% limit and in one instance double what Italy plans. This is of course awkward but not probably for Pierre as his other worldly pronouncements on Greece have indicated a somewhat loose relationship with reality.

Actually the Italian situation has thrown up another challenge to the Euro area orthodoxy.

 

Regular readers will be aware I am no fan of simply projecting the pre credit crunch period forwards but I do think that the Brad Setser point that Italy is nowhere near regaining where it was is relevant. If you think that such a situation is “above potential” then you have a fair bit of explaining to do. Some of this is unfair on the ECB in that it has to look at the whole Euro area as if it was a sovereign nation it would be a situation crying out for some regional policy transfers. Like say from Germany with its fiscal surplus. Anyway I will leave that there and move on.

Ch-ch-changes

This did the rounds on Friday afternoon.

ECB Said To Be Considering Fresh TLTRO – MNI ( @LiveSquawk )

Targeted Long-Term Refinancing Operation in case you were wondering and as to new targets well Reuters gives a nod and a wink.

Euro zone banks took up 739 billion euros at the ECB’s latest round of TLTRO, in March 2017. Of this, so far 14.6 has been repaid, with the rest falling due in 2020 and 2021.

This may prove painful in countries such as Italy, where banks have to repay some 250 billion euros worth of TLTRO money amid rising market rates and an unfavorable political situation.

So the targets of a type of maturity extension would be 2020/1 in terms of time and Italy in terms of geography. More generally we have the issue of oiling the banking wheels. Oh and whilst the Italian amount is rather similar to some measures of how much they have put into Italian bonds there is no direct link in my view.

Housing market

If you give a bank cheap liquidity then this morning’s ECB Publication makes it clear where it tends to go.

The upturn in the euro area housing market is in its fourth year. Measured in terms of annual growth rates, house prices started to pick up at the end of 2013, while the pick-up in residential investment started somewhat later, at the end of 2014. The latest available data (first quarter of 2018) indicate annual growth rates above their long-term averages, for both indicators.

How has this been driven?

 In addition, financing conditions remained favourable, as reflected in composite bank lending rates for house purchase that have declined by more than 130 basis points since 2013 and by easing credit standards. This has given rise to a higher demand for loans for house purchase and a substantial strengthening in new mortgage lending.

Indeed even QE gets a slap on the back.

Private and institutional investors, both domestically and globally based, searching for yield may thus have contributed to additional housing demand.

It is at least something the central planners can influence and watch.

Housing market developments affect investment and consumption decisions and can thus be a major determinant of the broader business cycle. They also have wealth and collateral effects and can thus play a key role in shaping the broader financial cycle. The housing market’s pivotal role in the business and financial cycles makes it a regular subject of monitoring and assessment for monetary policy and financial stability considerations.

 

Comment

The ECB now finds itself between something of a rock and a hard place. If we start with the rock then the question is whether the shift is just a slow down for a bit or something more? The latter would have the ECB shifting very uncomfortably around its board room table as it would be facing it with interest-rates already negative and QE just stopping in flow terms. Let me now bring in the hard place from today’s Markit PMI survey.

Meanwhile, prices data signalled another sharp
increase in company operating expenses. Rising
energy and fuel prices were widely reported to have
underpinned inflation, whilst there was some
evidence of higher labour costs (especially in
Germany).

Whilst there may be some hopeful news for wages tucked in there the main message is of inflationary pressure. Of course central bankers like to ignore energy costs but the ECB will be hoping for further falls in the oil price, otherwise it might find itself in rather a cleft stick. It is easy to forget that its “pumping it up” stage was oiled by falling energy prices.

Yet an alternative would be fiscal policy which hits the problem of it being a bad idea according to the Euro area’s pronouncements on Italy.

 

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Decision day and the Inflation Report arrive at the Bank of England

Today brings us to what is called Super Thursday as not only does the Bank of England announce its policy decision but we get the latest Inflation Report. Actually the Bank of England has already voted in a change decided upon by Mark Carney so that the official Minutes can be released with the decision. The problem with that comes from the issue that there is plenty of time for any decision to leak. That is on my mind this morning because markets have seen moves and activity.

Sterling extended its gains on Thursday……….

The pound jumped 0.9 percent to as high as $1.2881  sending the currency to a five-day high.

Against the euro, it rose to 88.155 pence per euro  before settling up half a percent at 88.21 pence. The gains follow a rise for sterling on Wednesday.

Now let me switch to interest-rate markets.

Short Sterling being hit in monster clips this morning 20k plus sells. ( @stewhampton)

For those unaware Short Sterling is the future contract for UK interest-rates and is somewhere where I worked back in the day in its options market. The confusing name comes I guess because they were trying to describe short-term interest-rates for sterling and it all got shortened. Anyway @stewhampton has continued.

Continuation of yesterday’s price action, all sells. Smacks of a surprise BOE vote on the hawkish side to me.

Looking at the actual movements we see that the contract for September 2019 was some 0.05 lower at the worst. For comparison an actual Bank of England move is usually 0.25%.

The Shadow MPC

The Times newspaper runs a Shadow Monetary Policy Committee so let us take a look at what it decided.

Sir John Gieve, Charles Goodhart and Andrew Sentance, all former Bank ratesetters, called on the monetary policy committee to increase rates after the £103 billion of fiscal loosening over six years unveiled in Monday’s budget.

Sir Steve Robson, a former Treasury mandarin, Geoff Dicks, a former member of the Office for Budget Responsibility, and Bronwyn Curtis, a non-executive member of the OBR, agreed. All six also cited the tight labour market, with unemployment at a 43-year low of 4 per cent, and rising wages.

On a personal note it is nice to see that Charles Goodhart is still active as he wrote a fair few of the books I read on UK monetary policy as an undergraduate. Also not many people call for a rise in interest-rates at their own semi-retirement party as Andrew Sentance did on Tuesday!

Before I move on I would also like to note that some seem to be catching up with a suggestion I first made in City-AM a bit over five years ago.

Of those who voted to hold rates, Rupert Pennant-Rea, a former deputy governor at the Bank, said that the MPC should start unwinding the £435 billion quantitative easing programme — signalling a bias on The Times panel for tighter policy.Ms Curtis and Sir Steve also called for QE to be wound down.

Decision Day

These are always rather fraught when there is the remote possibility that something may happen. Back in the day that usually meant an interest-rate change and moves were regularly larger which we returned to for a while with the cuts post credit crunch. These days it can also reflect a change in the rhetoric of the Bank of England as well as its Forward Guidance. That is of course if anyone takes much notice of the Forward Guidance which has been wrong more often than it has been right.

But you can have some humour as this from @RANSquawk shows.

Lloyds on – Prices have reversed from the 1.2660 range lows, back through 1.2850 resistance – This, along with momentum back in bull mode, supports our view for a move back towards the top of the 1.2660-1.3320 range

Yes now it has gone up the only way is up and you can guess which song has been linked to on social media.

Doubts

If we now look at the other side of the coin there have been other factors at play over the past 24 hours. First there was the announcement by Brexit Secretary Dominic Raab of progress followed this morning by this.

The UK has struck a deal with the EU on post-Brexit financial services, according to unconfirmed reports.

The Times newspaper said London had agreed in talks with Brussels to give UK financial services firms continued access to the bloc. ( BBC)

On this road we see reasons to be cheerful for the UK Pound £ and also a possible explanation for the lower short sterling. After all a Brexit deal and a likely stronger Pound £ might mean the Bank of England might raise interest-rates again at some future date. Of course we are building up something of a Fleetwood Mac style chain here as we are relying on the words of journalists about the acts of politicians influencing an unreliable boyfriend. Oh well.

House Prices

Having gone to so much effort to raise house prices for which during the tenure of Governor Carney the only way has indeed been up this will worry the Bank of England.

October saw a slowdown in annual house price growth to
1.6% from 2.0% in September. As a result, annual house
price growth moved below the narrow range of c2-3%
prevailing over the previous 12 months. Prices flat month-on-month after accounting for seasonal effects. ( Nationwide)

Reuters have implictly confirmed my point about Mark Carney’s tenure.

That was the weakest increase since May 2013, before Britain’s housing market started to throw off the after-effects of the global financial crisis.

Manufacturing

There was also a downbeat survey from Markit released at 9:30 am.

The seasonally adjusted IHS Markit/CIPS Purchasing
Managers’ Index® (PMI®) fell to a 27-month low of 51.1,
down from September’s revised reading of 53.6 (originally
published as 53.8).

Of course that 27-month low was when they got things really rather wrong after the EU Leave vote and perhaps most significantly helped trigger a Bank of England rate cut. As to factors here I think it is being driven by the automotive sector and the worries about trade generally. In some ways this measure has in fact been a sort of optimism/pessimism reading on views about Brexit.

One slightly odd feature of the report was this as we recall that a number above 50 is supposed to be an expansion and  after all they do measure down to 0.1.

At current levels, the survey indicates that factory output could contract in the fourth quarter, dropping by 0.2%

 

Comment

As you can see there is much for the Bank of England to consider this morning as they advance from a full English ( Scottish & Welsh versions are available) breakfast to morning coffee and biscuits. After all having voted last night there is not much to do until the press conference at 12:30 and less than half of them have to attend that. But as to a rate rise today I think it is time for some Oasis.

Definitely Maybe

Whilst some might say it is on the cards I think that if we add in the weak monetary data we have been watching in 2018 it would be an odd decision. After all it is promising to raise interest-rates like this.

As little by little we gave you everything you ever dreamed of
Little by little the wheels of your life have slowly fallen off
Little by little you have to give it all in all your life
And all the time I just ask myself why you’re really here?

But of course they have made odd decisions before………

Me on Core Finance TV

 

 

The economy of Spain provides some welcome good news for the ECB

A rush of economic data over the past 24 hours allows us as to follow Sylvia’s “I’m off to sunny Spain”. This gives us another perspective as we switch from the third largest economy ( Italy) yesterday where economic growth has ground to a halt again whereas in the fourth largest it is doing this according to the statistics office.

The Spanish GDP registers a growth of 0.6% in the third quarter of 2018 to the previous quarter in terms of volume. This rate is similar to that registered in the second quarter of the year. The annual growth of GDP stands at 2.5%, a rate similar to that of the quarter preceding.

As you can see two countries which were part of the Euro area crisis are now seeing very different circumstances. At the moment Spain is a case of steady as she goes because quarterly growth has been 0.6% for each of 2018’s quarters so far.

If we back for some perspective we are reminded of the trouble that hit Spain. It did begin to recover from the initial impact of the credit crunch but then the Euro area crisis arrived at economic growth headed into negative territory in 2011-13 peaking at a quarterly decline of 1% at the end of 2013. This was followed by improvements in 2014 such that quarterly growth reached 1.2% in the first quarter of 2015. Since then quarterly growth has been strong for these times varying between the current 0.6% and the 0.9% of the opening of 2017.

So we see that Spain saw the hard times with annual economic growth falling to -3.5% late in 2012 but can rebound as illustrated by the 4.1% of late 2015. Those who have followed my updates on Greece will recall that I often refer to the fact that after its precipitous and sustained decline it should have had in terms of economic recovery a “V-shaped” rally in economic growth. Well Spain gives an example of that whereas Greece has not. If we switch to yesterday’s theme Spain is a much happier case for the “broad-based economic expansion” claims of Mario Draghi and the ECB because whilst economic growth has slowed it is still good and is pulling the Euro area average higher.

Inflation

If we continue with the mandate of the ECB we were told this by Spain statistics yesterday.

The annual change in the flash estimate of the CPI stands at 2.3% in October, the same registered in September
The annual rate of the flash estimate of the HICP is 2.3%.

So inflation is over target and has been picking up in 2018 with the current mix described below.

In this behavior, the decrease in the prices of electricity stand out, compared to the increase
registered in 2017, and the rise in gas prices.

From the point of the ECB if we look at inflation above target and the economic growth rate and point out that it is withdrawing the stimulus provided by monthly QE. However the water gets somewhat choppier if we look at another inflation measure.

The annual variation rate of the Housing Price Index (HPI) in the second quarter of 2018 increased six tenths, standing at 6.8%. By type of housing, the variation rate of new housing stood at 5.7%, remaining unchanged
as compared with the previous quarter. On the other hand, the annual variation of second-hand housing increased by seven tenths, up to 7.0%.

The first impact is the rate of annual change and this is more awkward for the ECB as it is hard not to think of the appropriateness of its -0.4% deposit rate for Spain. Its impact on mortgage rates especially when combined with the other monetary easing has put Spain on a road which led to “trouble,trouble,trouble” last time around. For those of you wondering what Spanish mortgage rates are here via Google Translate is this morning’s update.

In mortgages on homes, the average interest rate is 2.62% (4.3%) lower than August 2017) and the average term of 24 years. 59.8% of mortgages on housing is made at a variable rate and 40.2% at a fixed rate. Mortgages at a fixed rate they experience an increase of 3.9% in the annual rate. The average interest rate at the beginning is 2.43% for mortgages on variable-rate homes. (with a decrease of 5.5%) and 2.99% for fixed rate (3.1% lower).

As fixed-interest mortgages are only around half a percent per annum higher the number taking variable-rate ones seems high. However I have to admit my view is that Mario Draghi has no intention of raising interest-rates on his watch and the overall Euro area GDP news from yesterday backs that up. Of course we are switching from fact to opinion there and as a strategy I would suggest that any narrowing of the gap between the two types gives an opportunity to lock in what are in historical terms very low levels.

Labour Market

The economic growth phase that Spain has seen means we have good news here.

The number of employed increases by 183,900 people in the third quarter of 2018 compared to the previous quarter (0.95%) and stands at 19,528,000. In terms seasonally adjusted, the quarterly variation is 0.48%. Employment has grown by 478,800 people (2.51%) in the last 12 months.

Higher employment does not necessarily mean lower unemployment but fortunately in this instance it does.

The number of unemployed persons decreased this quarter by 164,100 people (-4.70%) and it stands at
3,326,000. In seasonally adjusted terms, the quarterly variation is -2.29%. In recent months unemployment has decreased by 405,800 people (-10.87%).  The unemployment rate stands at 14.55%, which is 73 hundredths less than in the previous quarter. In the last year this rate has fallen by 1.83 points.

But whilst the news is indeed better we get some perspective by the fact that the unemployment rate at 14.55% is not only still in double-digits but is well over that Euro area average. Indeed it is more than 10% higher than in the UK or US and around 12% higher than Japan.

As to the youth employment situation the good news is that the number of 16-19 year olds employed rose by nearly 12% to 165.500 over the past year. However some 137,800 are recorded as unemployed.

Comment

The Spanish economy has provided plenty of good news for the Euro area in the past few years, but that does not mean that there are no concerns. We have already looked at the issue of house prices and the past fears which arise from their development. Also for those who consider this to be because of the “internal competitiveness” model will be worried by this described by El Pais.

External demand, which helped in the worst moments to pull the Spanish economy, subtracted 0.5 points per year from GDP. And in the quarter, exports fell by 1.8%, entering for the first time negative rates since the third quarter of 2013. While it is true that imports also decreased by 1.2%.

Some of this no doubt relates to the automotive sector which for those who have not followed developments has been a success for Spain albeit that some of the gains have come from cannibalising production from elsewhere in the Euro area. An example of a troubled 2018 has been provided by Ecomotor today by revealing that VW Navarra has cut its production target by 10,000 cars for 2018. Oh and I nearly forgot to mention the Spanish banks especially the smaller ones hit by the court ruling on Stamp Duty.

But returning to the good news the economic growth means that Spain has seen the debt to GDP ratio that had nudged above 100% drop back to 98.3%. That is the road to a ten-year bond yield less than half that of Italy at 1.56% in spite of the fact that the planned fiscal deficit at 2.7% is higher.

The UK looks on course for some house price falls

As ever there is plenty of news about the UK housing market around but let us start with a consequence of government action which led to this reported by the BBC at the end of last week.

The boss of house building firm Persimmon has walked off in the middle of a BBC interview after being asked about his £75m bonus.

“I’d rather not talk about that,” Jeff Fairburn said, when asked if he had regrets about last year’s payout.

The £75m, which was reduced from £100m after a public outcry, is believed to be the largest by a listed UK firm.

The BBC even provides a pretty good explanation of why this is a hot topic.

A combination of rising house prices, low interest rates enabling people to borrow more cheaply and government incentive schemes have been credited with driving all housebuilder shares higher.

In particular we find ourselves looking at a bonus scheme set at £4 compared to a payout based on one of £24 in case you wonder how we got to such an eye watering amount. But the real problem is that Help To Buy provided what is called in economic theory excess profits for housebuilders. We have looked before at how it helped them to make high profits on the sale of each house and it also boosted volumes in a double whammy effect. So in turned into help for housebuilders profits and bonuses. Sadly it also showed the weakness of shareholders these days as only 48.5% of Persimmon shareholders voted against this at their annual general meeting, which begs the question of what would be enough greed to provoke a shareholder revolt.

What about now?

Here is the result of the latest Markit Household Finances survey.

UK households are generally projecting higher
house prices over the forthcoming 12 months in
October, but the degree of optimism regarding
property values dipped to the lowest since the
immediate aftermath of the EU referendum in July
2016.

Sadly for Markit recorded time seems to have started in July  2016 because if we look back we see some interesting developments. For example the reading in early 2014 at around 75 was the highest in that series. This means that those surveyed not only realised the UK economy was picking up but seemingly had figured out the determination of the Bank of England and UK government to drive house prices higher.

Also another piece of news hints at a change. From Financial Reporter.

The proportion of homes in England and Wales bought with cash fell to 29.6% in H1 2018, according to Hamptons International, the lowest figure since its records began in 2007.

In H1 2007, 33.6% of homes were purchased with cash, peaking in H2 2008 at 37.8%.

In H1 2018, 113,490 homes were cash purchases, totalling £25.3 billion in value according to Land Registry – the lowest level in five years and a drop of 21% compared to H1 2017.

You may not be heartbroken at the main reason why.

Hamptons International says the downward trend in the proportion of homes bought with cash reflects a drop off in investor and developer purchases. Countrywide data shows that in H1 2018 investors accounted for 24% of cash purchases, down from 32% in H1 2007 and a peak of 43% in H1 2008.

The same goes for developers who purchased just 2% of the homes bought with cash in H1 2018, down from 6% in H1 2007.

What about the house price indices?

The official data released last Wednesday told us this.

Average house prices in the UK have increased by 3.2% in the year to August 2018 (down from 3.4% in July 2018), remaining broadly stable at a national level since April 2018 .

So a welcome slowing from the period where annual growth remained about 5%. But the truth is that a lot of the change is represented by one place.

 The lowest annual growth was in London, where prices decreased by 0.2% over the year, down from being unchanged (0.0%) in the year to July 2018.

London has affected the area around it to some extent as well but much of the rest of the country has carried on regardless.

A somewhat different picture was provided on Friday by LSL Acadata.

At the end of September, annual house price growth stood at 0.9%, which is the lowest rate seen since April 2012, some
six and a half years ago.

They take the Land Registry data of which 35% is available now and have a model to project that as if 100% was in. They then update the numbers as for example around 80% should now be in for August. So taking what should be, model permitting, the latest data shows a much clearer turn in the market and they expect more.

Our latest outlook for the 2018 housing market suggests that the annual rate of house price growth will be in negative territory by the end of the year.

One reason for that is simply the trend is your friend.

This was the sixth month out of the last seven in which monthly rates have fallen, with the combined decline since February totalling some -2.0%. The average house price in England & Wales now stands at £302,626. This price is already some £2,240, or 0.7%, below the level of £304,866 seen last December, meaning that it will take a number of months of house price increases to make up this shortfall.

Also they point out that this has taken place in spite of the economic environment still being very house price friendly.

All this comes at a time when interest rates are at almost historic lows, mortgage supply is good, the number of people in work is higher than a year earlier, and average weekly earnings have increased by 2.4%, on a year-on-year basis. The housing market should be booming.

They would be even more bullish if they realised wage growth was 2.7% rather than 2.4%. There is also an element of “reality was once a friend of mine” below as we wonder what it would take for them to notice that this has been happening for some time?

While current initiatives (Help-to-Buy and Stamp
Duty relief) have relatively minimal overall effect on prices, as government continues to ratchet up the initiatives, the
risk is that these in turn could simply add to the affordability problem by causing prices to rise

This has particularly affected younger people which they do seem to have noted.

highlighted the falls in home ownership amongst 25-34-year-olds over the last 20 years, despite endless government initiatives to rectify the situation. As the report notes “Since 1997, the average property price in England has risen by 173% after adjusting for inflation, and by 253% in London. This compares with increases in real incomes of 25- to 34-year-olds of only 19% and in (real) rents of 38%.”

Some night think that raising prices some 173% above inflation was quite enough to cause an affordability problem!

Comment

UK house prices have proved to be very resilient and I mean that in the commonly used version of its meaning, not the central banking one. I thought that the real wage decline in 2017 would send annual growth negative but so far it has resisted that. However the LSL data set suggests it may finally be quite near.

As ever the danger is of the UK establishment panicking just like they did in 2012/3 and pumping it up, one more time. Or as LSL Acadata put it.

Announcements on Help-to-Buy, Starter Homes and possibly a Rent-to-Own programme based around giving CGT relief to landlords have all been mooted.

Personally I think we have had way too many announcements and initiatives which via windfalls to existing house owners and especially house builders have made the situation worse rather than better. For now the Bank of England at least seems stymied but of course this is the one area where they can be both inventive and innovative.

 

 

 

Inflation reality is increasingly different to the “preferred” measure of the UK

Today brings us a raft of UK data on inflation as we get the consumer, producer and house price numbers. After dipping my toe a little into the energy issue yesterday it is clear that plenty of inflation is on its way from that sector over time. I have a particular fear for still days in winter should the establishment succeed in persuading everyone to have a Smart Meter. Let us face it – and in a refreshing change even the official adverts now do – the only real benefit they offer is for power companies who wish to charge more at certain times. The “something wonderful” from the film 2001 would be an ability to store energy on a large scale or a green consistent source of it. The confirmation that it will be more expensive came here. From the BBC quoting Scottish Power.

We are leaving carbon generation behind for a renewable future powered by cheaper green energy.

We will likely find that it is only cheaper if you use Hinkley B as your benchmark.

Inflation Trends

We find that of our two indicators one has gone rather quiet and the other has been active. The quiet one has been the level of the UK Pound £ against the US Dollar as this influences the price we pay for oil and commodities. It has changed by a mere 0.5% (lower) over the past year after spells where we have seen much larger moves. This has been followed by another development which is that UK inflation has largely converged with inflation trends elsewhere. For example Euro area inflation is expected to be announced at 2.1% later and using a slightly different measure the US declared this around a week ago.

The all items index rose 2.3 percent for the 12 months ending September, a smaller increase than the 2.7-percent increase for the 12 months ending August.

There has been a familiar consequence of this as the Congressional Budget Office explains.

To account for inflation, the Treasury Department
adjusts the principal of its inflation-protected securities each month by using the change in the consumer price index for all urban consumers that was recorded two months earlier. That adjustment was $33 billion in fiscal year 2017 but $60 billion in the current fiscal
year.

The UK was hit by this last year and if there is much more of this worldwide perhaps we can expect central banks to indulge in QE for inflation linked bonds. Also in terms of inflation measurement whilst I still have reservations about the use of imputed rents the US handles it better than the UK.

The shelter index continued to rise and accounted for over half of the seasonally adjusted monthly increase in the all items index.

As you can see it does to some extent work by sometimes adding to inflation whereas in the UK it is a pretty consistent brake on it, even in housing booms.

Crude Oil

The pattern here is rather different as the price of a barrel of Brent Crude Oil has risen by 41% over the past year meaning it has been a major factor in pushing inflation higher. Some this is recent as a push higher started in the middle of August which as we stand added about ten dollars. Although in a startling development OPEC will now be avoiding mentioning it. From Reuters.

OPEC has urged its members not to mention oil prices when discussing policy in a break from the past, as the oil producing group seeks to avoid the risk of U.S. legal action for manipulating the market, sources close to OPEC said.

Seeing as the whole purpose of OPEC is to manipulate the oil price I wonder what they will discuss?

Today’s data

After the copy and pasting of the establishment line yesterday on the subject of wages let us open with the official preferred measure.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.2% in September 2018, down from 2.4% in August 2018.

For newer readers the reason why it is the preferred measure can be expressed in a short version or a ore complete one. The short version is that it gives a lower number the longer version is because it includes Imputed Rents where homeowners are assumed to pay rent to themselves which of course they do not.

The OOH component annual rate is 1.0%, unchanged from last month.

As you can see these fantasy rents which comprise around 17% of the index pull it lower and we can see the impact by looking at our previous preferred measure.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in September 2018, down from 2.7% in August 2018.

This trend seems likely to continue as Generation Rent explains.

The experience of the past 14 years suggests rents are most closely linked to wages – i.e. what renters can afford to pay.

With wage growth weak in historical terms then rent growth is likely to be so also and thus from an establishment point of view this is perfect for an inflation measure. This certainly proved to be the case after the credit crunch hit as Generation Rent explains.

As the credit crunch hit in 2008, mortgage lenders tightened lending criteria and the number of first-time buyers halved, boosting demand for private renting – the sector grew by an extra 135,000 per year between 2007 and 2010 compared with 2005-07.  According to the property industry’s logic, the sharp increase in demand should have caused rents to rise – yet inflation-adjusted (real) rent fell by 6.7% in the three years to January 2011.

Meanwhile if we switch to house prices which just as a reminder are actually paid by home owners we see this.

UK average house prices increased by 3.2% in the year to August 2018, with strong growth in the East Midlands and West Midlands.

As you can see 3.2% which is actually paid finds itself replaced with 1% which is not paid by home owners and the recorded inflation rate drops. This is one of the reasons why such a campaign has been launched against the RPI which includes house prices via the use of depreciation.

The all items RPI annual rate is 3.3%, down from 3.5% last month.

There you have it as we go 3.3% as a measure which was replaced by a measure showing 2.4% which was replaced by one showing 2.2%. Thus at the current rate of “improvements” the inflation rate right now will be recorded as 0% somewhere around 2050.

The Trend

This is pretty much a reflection of the oil price we looked at above as its bounce has led to this.

The headline rate of output inflation for goods leaving the factory gate was 3.1% on the year to September 2018, up from 2.9% in August 2018….The growth rate of prices for materials and fuels used in the manufacturing process rose to 10.3% on the year to September 2018, up from 9.4% in August 2018.

So we have an upwards shift in the trend but it is back to energy and oil again.

The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.

Comment

It is indeed welcome to see an inflation dip across all of our measures. It was driven by these factors.

The largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago…..Other large downward contributions came from transport, recreation and culture, and clothing.

Although on the other side of the coin came a familiar factor.

Partially offsetting upward contributions came from increases to electricity and gas prices.

Are those the cheaper prices promised? I also note that the numbers are swinging around a bit ( bad last month, better this) which has as at least a partial driver, transport costs.

Returning to the issue of inflation measurement I am sorry to see places like the Resolution Foundation using the government’s preferred measures on inflation and wages as it otherwise does some good work. At the moment it is the difference between claiming real wages are rising and the much more likely reality that they are at best flatlining and perhaps still falling. Mind you even officialdom may not be keeping the faith as I note this announcement from the government just now.

Yes that is the same HM Treasury which via exerting its influence on the Office for National Statistics have driven the use of imputed rents in CPIH has apparently got cold feet and is tweeting CPI.

What is happening to the economy of Germany?

This morning has brought news which will bring a smile of satisfaction to the central bankers at the ECB (European Central Bank). From the German statistics office.

The harmonised index of consumer prices (HICP) for Germany, which is calculated for European purposes, rose by 2.2% in September 2018 on September 2017. Compared with August 2018, the HICP increased by 0.4% in September 2018.

All the ECB’s efforts have got German inflation pretty much to where they want it to be. It has been quite an effort as the official deposit rate is still -0.4% and there are still around US $1.5 trillion of bonds with a negative yield in the Euro area. But we are near to the target and the extra 0.2% can be responded to by pointing out that the amount of monthly QE is on its way to zero.

The ordinary German consumer and worker may not be quite so keen as items downgraded to non-core by central bankers are important to them.

 Energy prices rose 7.7% in September 2018 on September 2017. The rate of energy price increase thus increased again (August 2018: +6.9%). ………Food prices rose above average (+2.8%) from September 2017 to September 2018. The year-on-year price increase thus accelerated slightly in September 2018 ( August 2018: +2.5%).  ( From the German CPI detail)

Indeed they may be wondering how to translate ” I cannot eat an I-Pad” into German?

Consumers benefited, among other things, of lower prices of telephones (-5.3%) and consumer electronics (-4.6%).

Those who think that rents are related to real wage growth will get a little food for thought from this.

 A major factor contributing to the increase in service prices was the development of net rents exclusive of heating expenses (+1.5%), as households spend a large part of their consumption expenditure on this item.

Travelling through the detail shows us that whilst the aggregate looks good in fact the inflation numbers have only moved to around the target level because of energy costs. All that monetary easing had little effect on consumer inflation but of course saw large wealth gains for those holding assets and subsidised government borrowing costs.

Asset Prices

This has been an area of satisfaction for the central banker play book as we note that in the first two quarters of 2018 house prices rose at an annual rate of 5.5% and 4.7%. The index set at 100 in 2015 has reached 115.1. So a win double for the establishment as it can claim wealth effects of between 4% and 5% whilst as we have observed above tell the ordinary person that via the use of fantasy imputed rents inflation in this area is only 1.5%.

Although as DW pointed out in May last year not even every central banker is a believer.

Bundesbank warns of German real estate bubble

Why might this be?

Due to mortgage interest rates of well below two percent, Germany has been experiencing a rapid transition towards home ownership in recent years, now creating fears familiar in many other property markets. Housing prices, which were relatively cheap compared with other European countries in the past, have risen sharply.

Real estate prices in cities like Berlin, Hamburg, Munich and Frankfurt have increased by more than 60 percent since 2010, according to recent estimates by the German central bank, the Bundesbank.

We look from time to time for examples of mortgage rates and DW provided us with one.

Commerzbank, the country’s second-largest lender, offers a mortgage with an ultra-cheap fixed rate of just 0.94 percent for a 10-year loan.

It is hard to over emphasise how extraordinary that is! Also should it carry on it may lead to quite a change in the structure of German life.

For many well-off Germans with permanent jobs renting no longer makes sense.

Since then house prices have continued to rise.

Economic growth

As recently as the middle of June the German Bundesbank was very upbeat.

Germany’s economic boom will continue. The already high level of capacity utilisation in the economy will increase up until 2020,

Although hang on.

although growth is unlikely to be quite as strong as in 2017. Growth in exports and business investment will be less strong. In addition, the rising shortage of skilled workers will increasingly dampen employment growth.

Indeed as we look at the specifics frankly it does not look much of a boom to me.

Against this backdrop, the Bundesbank‘s economists expect calendar-adjusted economic growth of 2.0% this year and 1.9% next year. In 2020, real gross domestic product (GDP) could increase by 1.6% in calendar-adjusted terms.

If we apply the rule that has been suggested in the comments on here that official economic growth needs to be 2% per annum for people to feel it then Germany may even be slipping backwards. This week as MarketWatch points out below has seen others fall in line with this growth but perhaps not as we know it scenario.

Germany’s economic growth is now expected to come in at 1.8% this year, rather than the 2.3% forecast previously, the government said Thursday in its autumn report. Next year’s expansion is now seen at 1.8% instead of 2.1%……..Earlier this week, the International Monetary Fund cut its growth forecasts for Germany to 1.9% for both this year and the next, decreases of 0.3 and 0.2 percentage points respectively.

We can bring this up to date by noting the industrial production figures released today by Eurostat. These show a flatlining in August meaning that the annual figure had declined by 0.5%.

Comment

After a good spell for the German economy ( which expanded by 2.2% in 2017) we are starting to wonder if that was as good as it gets? Regular readers will be aware of the way that money supply growth has been fading in the Euro area over the past year or so, and thus will not be surprised to see official forecasts of a boom if not fading to dust being more sanguine. As the money supply changes have as a major factor the fading of ECB QE we return to the theme of Euro area economies being monetary junkies which perhaps Mario Draghi has confirmed this morning.

*DRAGHI: SIGNIFICANT MONETARY POLICY STIMULUS IS STILL NEEDED

After all we are in official parlance still in a broad-based expansion. Moving back to Germany it is starting a little bit to feel like what happened to high streets when they lost individuality and became clones. Some economic growth accompanied by asset price rises whilst official inflation rises by less than you might have thought.Or the equivalent of finding Starbucks and various estate agents on every high street,or putting it another way look at this from the Bundesbank.

German economic growth will therefore consistently outstrip potential output growth,

Yes even the sub 2% economic growth is apparently too much just like most of us in Europe. One can go too far of course as there are the surpluses to consider in trade and government finances. The former was supposed to be something that was going to be dealt with post credit crunch but by now you know the familiar and some might think never-ending story. Sometimes life feels a bit like this experience for a City-AM journalist.

Hey . How am I meant to log into my account to report my lost phone when the login process requires sending a text to my phone?

As has been pointed out the concept of Catch-22 has reached Milennials. Let me leave you with something for the weekend which believe it or not is to promote Frankfurt.

 

 

UK Inflation is back on the rise

Today brings us the full panoply of official UK inflation data. But before we look domestically an international perspective has again emerged overnight. This has come from Governor Kuroda of the Bank of Japan.

JPY BoJ Kuroda: BOJ still wants to achieve 2% inflation target as soon as possible ( @DailyFXTeam )

*DJ BOJ GOV. KURODA: EXPECT PRICES TO GRADUALLY MOVE TOWARD 2% ( @DeltaOne)

In spite of an enormous monetary effort involving negative interest-rates and a bulging balance sheer Abenomics continues to fail to get consumer inflation to its target of 2% per annum. Whereas we in the UK pass it regularly and will today discover we are above 2% on the official measure and 3% on others. Abenomics has driven asset prices higher but not consumer inflation giving us a reminder that whilst there are similarities between Japan and ourselves there are also differences.

The Inflation Outlook

A factor providing some upwards pressure in 2018 has been the price of crude oil. The current price of US $79 for a barrel of Brent Crude replaces the US $56 of a year ago. The Russian energy minister has via Platts updated us on why this has happened.

“According to estimates by experts and companies, oil price will be at around $50/b in the long-term. That means that the current situation, when oil prices have risen to $70-80/b, is linked to the temporary situation on the market and includes a premium to the price linked to various risks associated with the introduction of sanctions and oil supply cuts,” Novak said, as reported by Russia’s Prime news agency.

The higher oil price has fed into the cost of petrol and diesel.

Fuel prices have risen for a 10th successive week. The average cost of a litre of unleaded stands at more than £1.30 at UK forecourts, with diesel exceeding £1.34, Government figures show. Fuel has not been more expensive than current levels since July 2014. Since April, the cost of filling up a typical 55-litre family car that runs on unleaded or diesel has risen by around £6. ( I News)

That trend continued in the latest data so it is now eleven weeks and the annual comparison is shown below.

The price of ULSP is 11.7p/litre higher and the price of ULSD is 14.0p/litre higher than the equivalent week in 2017.

It has also had an effect on domestic heating and lighting costs with this change included in this months numbers.

E.ON has announced that it is increasing its standard variable electricity and gas prices. On 16 August, the unit price of E.ON’s standard variable tariff will increase by an average of 4.8% or £55 for customers taking both fuels, 6.2% or £36 for electricity only customers and 3.3% or £19 for gas only customers

There are others already announced from EDF Energy which will be in the September numbers and British Gas which will be in October.

The UK Pound £

The recent performance has been quite good as shown below.

So far this month, GBP has been the best performing major vs. USD with +3.20% total-returns while JPY has been the worst with -1.66% ( @DailyFXTeam)

Sadly for the August numbers the turn came just about when the survey is made but it should help the September numbers. Looking backwards we were around 2.5% higher a year ago but the differences are now much smaller than the period after the EU Leave vote. I note that the recent Brexit report suggested that raised inflation by 1.7% which is slightly higher than my calculations (1.5%).

Another way of looking at the state of play here is to compare our inflation number with the Euro area one for August which was 2%.

Today’s data

We got confirmation that the rally in the Pound £ came too late for the August data from this.

The Consumer Prices Index (CPI) 12-month rate was 2.7% in August 2018, up from 2.5% in July 2018.

Some of that was confirmed by the detail as the number below was influenced by the price of package holidays.

Prices for recreation and culture rose by 3.6% between August 2017 and August 2018, the highest 12-month rate since January 2010.

Also there was this.

Transport continues to make the largest upward contribution to the rate, with prices rising by 6.0% in the year to August 2018, the highest 12-month rate since April 2017. The largest contribution within the transport group continues to come from motor fuels.

What is on the horizon?

There was some better news here which started with this.

The headline rate of output inflation for goods leaving the factory gate was 2.9% on the year to August 2018, down from 3.1% in July 2018.

So a weakening of pressure around the corner which was accompanied by a weakening further up the road.

The growth rate of prices for materials and fuels for manufacturing (input prices) slowed to 8.7% on the year to August 2018, down from 10.3% in July 2018.

So much of this is driven by a factor we looked at earlier which is the price of crude oil.

The annual rate was driven by crude oil prices, which fell to 39.4% in August 2018 from 49.6% in July 2018, but maintains 26 months of positive annual inflation.

What about house prices?

Average house prices in the UK have increased by 3.1% in the year to July 2018 (down slightly from 3.2% in June 2018). This is the lowest UK annual rate since August 2013 when it was 3.0%. The annual growth rate has slowed since mid-2016 and has remained under 5%, with the exception of October 2017, throughout 2017 and into 2018.

The second sentence will echo around the corridors of the Bank of England as that is when the Funding for Lending Scheme began to push house prices higher. First-time buyers will be pleased to note that prices may still be increasing but are not doing so at past rates.

How is this reflected in the headline inflation data?

We get plenty of rhetoric from the Office for National Statistics.

The CPIH is the most comprehensive measure of inflation. It extends the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax.

Sounds good doesn’t it? But really it is a heffalump trap which is a national embarrassment. The catch is that the measure used does not exist and is never paid. What happens is that it is assumed that if you own your own home you pay rent to yourself and it is that “rent” which is used. Why? Well if you take a look at the number you will get a powerful clue.

Private rental prices paid by tenants in Great Britain rose by 0.9% in the 12 months to August 2018, unchanged from the 12 months to July 2018.

As the owner occupied housing sector is around 17% of the CPIH measure you can see why it has consistently been below the other inflation measures. Even worse there are more than a few statisticians who think that via a poor balance between new and old rents the official rents data is too low anyway. That is to some extent backed up by the way the official rents series has weakened when we are told wage growth is rising.

So a series which is under serious question ( rents) is then used to measure inflation for those who by definition do not pay rent.

Comment

The establishment view was that inflation was in modern language, like so over. For example the NIESR published some new analysis last month suggesting it was heading straight back to its target. Yet today reminds us that unlike Japan we are an inflation nation as we are prone to it. To my mind that is one of the reasons why there has been such a campaign against the RPI because it produces numbers like this.

The all items RPI annual rate is 3.5%, up from 3.2% last month

Rather than engaging with people like me who support the RPI we have got rhetoric and propaganda. Just because I support it does not mean I think it is perfect but it is better than the woeful CPIH which the UK establishment has lined up behind.

Another example of establishment’s being economical with the truth has been provided today by Andy Haldane of the Bank of England in Estonia.

The first is so-called “forward guidance” about monetary policy………. By contrast, if you are a company or household considering whether to spend, a general idea
of the direction and destination of interest rates is likely to be sufficient.

The problem though is what he omits from the bit below.

The MPC first used the words “limited and gradual” in 2014 when describing the likely future course of
interest rates rises……….When the MPC did come to raise interest rates, in November 2017 and again in August 2018, it is interesting to see how well these were understood by companies and households.

This view presents matters as being well handled via the omission of the interest-rate cut and QE of August 2016 which punished those who acted on the original forward guidance. But apparently it is all part of this.

Central banks were put on earth to serve the public