What can we expect from the Bank of England in 2018?

Today we find out the results of the latest Bank of England policy meeting which seems set to be along the lines of Merry Christmas and see you in the new year. One area of possible change is to its status as the Old Lady  of Threadneedle Street a 200 year plus tradition. From City AM.

The Bank will use further consultations to remove “all gendered language” from rulebooks and forms used throughout the finance sector, a spokesperson said.

Perhaps it will divert attention from the problems keeping women in senior positions at the Bank as we have seen several cases of “woman overboard” in recent times some for incompetence ( a criteria that could be spread to my sex) but not so in the case of Kristin Forbes. There does seem to be an aversion to appointing British female economists as opposed to what might be called “internationalists” in the style of Governor Carney.

Moving onto interest-rates there is an area where the heat is indeed on at least in relative terms. From the US Federal Reserve last night.

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 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative

The crucial part is the last bit with its clear hint of more to come which was reinforced by Janet Yellen at the press conference. From the Wall Street Journal.

Even with today’s rate increase, she said the federal-funds rate remains somewhat below its neutral level. That neutral level is low but expected to rise and so more gradual rate hikes are likely going forward, she said.

The WSJ put the expectation like this.

At the same time, they expect inflation to hold steady, and they maintained their expectation of three interest-rate increases in 2018.

Actually if financial markets are any guide that may be it as the US Treasury Bond market looks as though it is looking for US short-term interest-rates rising to around 2%. For example the yield on the five-year Treasury Note is 2.14% and the ten-year is 2.38%.

But the underlying theme here is that the US is leaving the UK behind and if we look back in time we see that such a situation is unusual as we generally move if not in unison along the same path. What was particularly unusual was the August 2016 UK Bank Rate cut.

Inflation Targeting

What is especially unusual is that the Fed and the Bank of England are taking completely different views on inflation trends and indeed targeting. From the Fed.

 Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In spite of the fact that consumer inflation is below target they are raising interest-rates based on an expectation ( incorrect so far) that it will rise to their target and in truth because of the improved employment and economic growth situation. A bit of old fashioned taking away the punch bowl monetary policy if you like.

The Bank of England faces a different inflation scenario as we learnt on Tuesday. From Bloomberg.

The latest data mean Carney has to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

If you were a Martian who found a text book on monetary policy floating around you might reasonably expect the Bank of England to be in the middle of a series of interest-rates. Our gender neutral Martian would therefore be confused to note that as inflation expectations rose in the summer of 2016 it cut rather than raised Bank Rate. This was based on a different strategy highlighted by a Twitter exchange I had with former Bank of England policymaker David ( Danny) Blanchflower who assured me there was a “collapse in confidence”. To my point that in reality the economy carried on as before ( in fact the second part of 2016 was better than the first) he seemed to be claiming that the Bank Rate cut was both the fastest acting and most effective 0.25% interest-rate reduction in history. If only the previous 4% +  of Bank Rate cuts had been like that…….

 

Even Norway gets in on the act

For Norges bank earlier today.

On the whole, the changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the September Report.

China is on the move as well as this from its central bank indicates.

On December 14, the People’s Bank of China launched the reverse repo and MLF operation rates slightly up 5 basis points.

I am slightly bemused that anyone thinks that a 0.05% change in official interest-rates will have any effect apart from imposing costs and signalling. Supposedly it is a response to the move from the US but it is some 0.2% short.

The UK economic situation

This continues to what we might call bumble along. In fact if the NIESR is any guide ( and it has been in good form) then we may see a nudge forwards.

Our monthly estimates of GDP suggest that output expanded by 0.5 per cent in the three months to November, similar to our estimate from last month.

The international outlook looks solid which should help too. This morning’s retail sales data suggested that the many reports of the demise of the UK consumer continue to be premature,

When compared with October 2017, the quantity bought in November 2017 increased by 1.1%, with household goods stores showing strong growth at 2.9%……..The year-on-year growth rate shows the quantity bought increased by 1.6%.

As ever care is needed especially as Black Friday was included in the November series but Cyber Monday was not. Although I note that there was yet another signal of the Bank of England’s inflation problem.

Total average store prices increased by 3.1% in November 2017 when compared with the same period last year, with price increases across all store types, in particular food stores had the largest price increase of 3.6% since September 2013.

Comment

The Bank of England finds itself in a similar position to the US Federal Reserve in one respect which is that it had two dissenters to its last interest-rate increase. The clear difference is that the Fed is in the middle of a series of rises whereas the Bank of England has so far not convinced on this front in spite of saying things like this. From the Daily Telegraph.

“We’ve said, given all the things we assume in our forecast, many of which will be misses – there are always unknown things and unpredictable things happening – but given our outlook currently, we anticipate we will need maybe a couple more rate rises, to get inflation back on track, while at the same time supporting the economy,” Ben Broadbent told the BBC’s Today programme.

I wonder if he even convinced himself. Also it is disappointing that we will not get the formal letter explaining the rise in inflation until February as it is not as if Governor Carney has been short of time.

So it seems we will only see action from the Bank of England next year if its hand is forced and on that basis I am pleased to see that Governor Carney plans to get about.

Me on Core Finance

http://www.corelondon.tv/inflation-employment-uk/

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Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.

U.K. GAS FUTURES SURGE ON BAUMGARTEN EXPLOSION, NORWAY OUTAGE………front month futures jump about 20%.

Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),

Comment

There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.

 

 

Ironically falling UK car registrations are impacting on French manufacturers

Yesterday afternoon saw some good news for my topic of the day. It came from a sector of the UK economy which over the past decade has seen an extraordinary boom which is premiership football. From the BBC.

Crystal Palace’s chairman has unveiled plans to increase Selhurst Park’s capacity to more than 34,000.

Steve Parish said the expansion, expected to cost between £75m-£100m, would be an “icon” for south London.

The full revamp is expected to take three years to complete, and work could begin “within 12 months”.

KSS, the architects behind the project, have previously redeveloped sporting venues including Anfield, Twickenham and Wimbledon.

If you travel past the ground then without wishing to upset Eagles fans it is to put it politely in sore need of redevelopment. But as well as a boost and if you make the usually safe assumption that it ends up costing the higher end of the estimate we see that each extra seat costs something of the order of £12,500. Is that another sign of inflation in the UK or good value.?

If we continue on the inflation beat then this morning has bought grim news for railway commuters as the BBC points out.

Train fares in Britain will go up by an average of 3.4% from 2 January.

The increase, the biggest since 2013, covers regulated fares, which includes season tickets, and unregulated fares, such as off-peak leisure tickets.

The Rail Delivery Group admitted it was a “significant” rise, but said that more than 97% of fare income went back into improving and running the railway.

A passenger group said the rise was “a chill wind” and the RMT union called it a “kick in the teeth” for travellers.

The rise in regulated fares had already been capped at July’s Retail Prices Index inflation rate of 3.6%.

We see a clear example of my theme that the UK is prone to institutionalised inflation in the way that the rises are capped at the highest inflation measure they could find. Suddenly the “not a national statistic” Retail Prices Index or RPI is useful when it can be used for something the ordinary person is paying in the same way it applies to student loans. Whereas when it is something that we receive or the government pays then the lower ( ~1% per annum) Consumer Prices Index or CPI is used.

The rail industry is an unusual one where booming business is a problem.

Here’s some examples. Passenger numbers on routes into King’s Cross have rocketed by 70% in the past 14 years. On Southern trains, passenger numbers coming into London have doubled in 12 years…….There is a push to bring in new trains, stations and better lines, but it’s difficult to upgrade things while keeping them open and it’s seriously expensive.

Ah inflation again! Of course railways suffer from fixed costs due to their nature but we never seem to get to the stage where maximising use reduces costs do we?

The economic outlook

If we look at the business surveys from Markit ( PMIs) we see that the UK economy continues to grow at a steady pace with according to the surveys construction and particularly manufacturing doing well.

On its current course, manufacturing production is rising at a quarterly rate approaching 2%, providing a real boost to the pace of broader economic expansion…….

This morning has brought the services data which you might think would be good following them but of course things are often contrary.

November data pointed to a setback for the UK
service sector, with business activity growth easing
from the six-month peak seen in October. Volumes
of new work also increased at a slower pace, while
the rate of staff hiring was the joint-slowest since
March.

So growth continued but at a slower rate as the reading fell to 53.8 in November from 55.6 in October. Also there were inflation concerns being reported.

Sharp and accelerated rise in prices charged by
service providers.

This is very different to the official data although it only covers the period to September.

The annual inflation rate in the latest quarter was above the average for the period, at 1.3%.

The average is for the credit crunch era.

This means that according to the business surveys the UK economy is doing this.

The survey data are so far consistent with the economy growing at a quarterly rate of 0.45% in the closing months of 2017.

I did challenge the spurious accuracy here and got this in response from their chief economist Chris Williamson.

Hi Shaun – October UK PMI was consistent with +0.5% GDP while November signalled +0.4%. Seemed sensible to split the difference!

Car Trouble

Regular readers will be aware that the boom in this sector has faded and perhaps turned to dust in 2017. This morning the Society of Motor Manufacturers and Traders has reported this.

The UK new car market declined for an eighth consecutive month in November, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,541 vehicles were registered, down -11.2% year-on-year, driven by a significant fall in diesel demand.

The fall was led by businesses.

Business, fleet and private registrations all fell in the month, down -33.6%, -14.4% and -5.1% respectively. Registrations fell across all body types except specialist sports, which grew 6.7%. The biggest declines were seen in the executive and mini segments, which decreased -22.2% and -19.8% respectively, while demand in the supermini segment contracted by -15.4%.

This means that the state of play for the year so far is this.

Overall, registrations have declined -5.0% in the eleven months in 2017, with 2,388,144 cars hitting British roads so far this year.

Hitting the roads? Well hopefully not but the economic consequences are ironically being felt abroad as much as in the UK. From the UK point of view there is a fall in consumption and to the extent of some business use a fall in investment. But we mostly import our cars so in terms of a production impact it will mostly be felt abroad. As it turns out the major impact will be felt in France as so far this year we see registrations have fallen by 18% for Citroen, 16% for Peugeot and 17% for Renault totalling around 38,000 cars for the sector. Individually the worst hit of the main manufacturers seems to be Vauxhall which is down 22% this year.

As to the type of car that has been worst hit then I am sure you have already guessed it.

heavy losses for diesel, falling -30.6%.

On that subject the SMMT seems lost in its own land of confusion.

Diesel remains the right choice for many drivers, not least because of its fuel economy and lower CO2 emissions.

That ( and the tax advantages) persuaded me to get what I thought was a new green and clean diesel only to discover that instead I have been poisoning the air for myself and other Londoners. So I guess more than a few are singing along to the Who these days.

Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

We await to see how this impacts on all the car loans and note that the UK is not alone in this if the Irish Motor Industry is any guide.

New car sales year to date (2017)131,200 (2016) 146,215 -10%

Comment

There is a fair bit to consider so let us start with the car market. Whilst there is an impact on consumption and perhaps a small impact on production ironically the impact on our trade and current account position will be beneficial as explained by this from HM Parliament.

The value of exports totalled £31.5 billion in 2016, but imports totalled £40.3 billion, so a trade deficit of £8.8 billion was recorded.

So the impact on UK GDP is not as clear as you might think especially if we continue to export well.

UK car manufacturing rises 3.5% in October with 157,056 cars rolling off production lines.Exports up 5.0% – but domestic demand falls -2.9% as lower consumer confidence continues to impact market.

The main problem for the UK would be if the current inflation surge continues so let us cross our fingers that it is fading. Otherwise 2017 has been remarkably stable in terms of economic growth driven by two factors which are the lower Pound £ and the fact that the world economy is having a better year.

Meanwhile I will leave the central bankers and their acolytes to explain why a development like this is bad news. From Bloomberg.

Among the coconut plantations and beaches of South India, a factory the size of 35 football fields is preparing to churn out billions of generic pills for HIV patients and flood the U.S. market with the low-cost copycat medicines.

 

 

 

 

 

 

 

Is the UK construction sector in a recession?

So far 2017 has been a year of steady but unspectacular growth for the UK economy. However one sector has stood out on the downside and that is construction. Of course this is the opposite of what the unwary might think as we are regularly assailed with official claims that house building in particular is a triumph. But the pattern of the official data series is certainly not a triumph.

Construction output contracted by 0.9% in the three-month on three-month series in September 2017…….This fall of 0.9% for Quarter 3 (July to September) follows a decline of 0.5% in Quarter 2 (April to June), representing the first consecutive quarter-on-quarter decline in current estimates of construction output since Quarter 3 2012.

Whilst our official statisticians avoid saying it this is the criteria for a recession with two quarterly falls in a row and in fact they had revised it a bit deeper.

The estimate for construction growth in Quarter 3 2017 has been revised down 0.2 percentage points from negative 0.7% in the preliminary estimate of gross domestic product (GDP), which has no impact on quarterly GDP growth to one decimal place.

The last month in that sequence which was September showed little or no sign of any improvement.

Construction output fell 1.6% month-on-month in September 2017, stemming from falls of 2.1% in repair and maintenance and 1.3% in all new work.

September detail

Here is an idea of the scale of output.

Total all work decreased to £12,628 million in September 2017. This fall stems from decreases in both all new work, which fell to £8,209 million, and total repair and maintenance, which fell to £4,419 million.

And here are the declines.

Construction output fell by £361 million in September 2017. This fall stems predominantly from a £236 million decrease in private commercial new work, as well as a fall of £165 million from total housing repair and maintenance.

There may be some logic in new commercial work being slow but the fall in repair and maintenance seems odd to say the least. The issues for the former might be that there has been so much building in parts of London combined with uncertainty looking ahead in terms of slower economic growth and what the Brexit deal may look like.

Maybe we are seeing some growth in new house building if we look at the longer trend.

Elsewhere, the strongest positive contributions to three-month on three-month output came from housing new work, with private housing growing £138 million and public housing expanding by £65 million.

Boom Boom

This weaker episode followed what had been a very strong phase for the UK construction industry. The nadir for it if we use 2015 as 100 was 85.3 in October 2012 as opposed to the 105.9 of September this year.  Over this period it has been even stronger than the services sector which has risen from 93.7 to 104.4 over the same period. Of course at 6.1% of the UK economy as opposed to 79.3% the total impact is far smaller but relatively it has been the fastest growing of the main UK economic categories in recent times.

If we look back to possible factors at play in the turnaround it is hard not to think yet again of the Funding for Lending Scheme of the Bank of England which was launched in the summer of 2012. There is a clear link in terms of private housing in terms of the way it lowered mortgage rates by more than 1% and the data here makes me wonder if some of the funding flowed into the commercial building sector as well. At this point we do see something of an irony as of course the FLS was supposed to boost lending to smaller businesses but sadly many of those in the construction sector were wiped out by the onset of the credit crunch.However this from the TSB suggests an impact.

As part of our participation in the Funding for Lending Scheme*, we have reduced the interest rate by 1% on all approved business loan and commercial mortgage applications.

Indeed some loans were made although as Co Star reported in January 2013 maybe not that many.

The Lloyds FLS-funded senior loan funded last Friday. Kier said the “competitively-priced” £30m loan will be used in connection with its infrastructure and related projects.

This is understood to be only the second commercial real estate loan drawn by Lloyds’ Commercial Banking division under the FLS scheme, after the bank drew down a further £2bn under the scheme before Christmas, taking its total capacity to £3bn.

The issue is complex as the Bank of England itself was worried about the state of play in 2014.

 The majority of the aggregate fall in net lending in 2014 Q1 was accounted for by a continued decline in lending to businesses in the real estate sector (Chart 2).

One area that I think clearly did see growth but is pretty much impossible to pick out of the data is lending to what are effectively buy-to let businesses.

Looking ahead

There has been a flicker of winter sunshine this morning from the Markit PMI business survey.

November data pointed to a moderate rebound in
UK construction output, with business activity rising
at the strongest rate since June. New orders and
employment numbers also increased to the greatest
extent in five months.

Indeed in an example of the phrase “there is a first time for everything” the government may this time be telling the truth about house building.

House building projects were again the primary
growth engine for construction activity. Survey
respondents suggested that resilient demand and a
supportive policy backdrop had driven the robust and
accelerated upturn in residential work.

Whilst the overall growth was not rapid at 53.1 ( where 50 in unchanged) at least we seem to have some and it was reassuring to have another confirmation of my theme that the 2016 fall in the UK Pound £ is wearing off.

However, cost inflation eased to its least marked for 14 months, with some firms reporting signs that exchange-rate driven price rises had started to lose intensity.

Comment

So the overall picture is of a boom which then saw a recession and hopefully of the latest surveys are correct a short shallow one. However not everyone is entirely on board with the recession story as this from Construction News last month points out.

Industry activity continued to grow between July and September, according to a new survey by the Construction Products Association.

The official data series in the UK for construction has been troubled to put it politely. The official version is this.

The Office for Statistics Regulation has put out a request for feedback and comments from users of these statistics, as part of the process for re-assessing the National Statistic status for Construction statistics: output, new orders and price indices.

In essence you cannot say what real output is until you have some sort of grip on the price level. Also  the excellent Brickonomics pointed out several years ago that some of the improvement in the data was via simply transferring a large business from services to construction. Solved at the stroke of a pen? Also this year there were large revisions to last year which is not entirely reassuring.

The annual growth rate for 2016 has been revised from 2.4% to 3.8%.

If that error was systemic then this years recession could easily be revised away. The truth is that there is way too much uncertainty about this which is surprising in the sense that the industry relies on physical products many of which are large. A few weeks back I counted the number of cranes along Nine Elms ( 24) for example in response to a question asked in the comments.

So we had a boom ( maybe) followed by a recession (maybe) and are now recovering (maybe). Hardly a triumph for the information era…..

Some Music

Here is a once in a lifetime opportunity to hear Donald Trump as a Talking Head.

 

 

The ECB has it successes but also plenty of problems

Let is continue the central banking season which allows us to end the week with some good news. As this week has developed there has been good news about economic growth in the Euro area.

The Federal Statistical Office (Destatis) reports that, in the third quarter of 2017, the gross domestic product (GDP) rose 0.8% on the second quarter of 2017 after adjustment for price, seasonal and calendar variations. In the first half of 2017, the GDP had also increased markedly, by 0.6% in the second quarter and 0.9% in the first quarter.

It has been a strong 2017 so far for the German economy but of course whilst analogies about it being the engine of the Euro area economy might be a bitter thinner on the ground due to dieselgate there are still elements of truth about it. But we know that a rising tide does not float all economic boats so ECB President Mario Draghi will have been pleased to see this about a perennial struggler.

In the third quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.5 per cent with respect to the second quarter of 2017 and by 1.8 per cent in comparison with the third quarter of 2016.

Of course Mario will be especially pleased to see better news from his home country of Italy especially at a time when more issues about the treatment of non-performing loans at its banks are emerging. Also this bank seems to be running its own version of the never-ending story, from the Financial Times.

A group of investors in the world’s oldest bank, Italy’s Monte dei Paschi di Siena, have filed a lawsuit in Luxembourg after it announced bonds would be annulled as part of a state-backed recapitalisation.

But in Mario’s terms he is likely to consider the overall numbers below to be a delivery on his “whatever it takes” speech and promise.

Seasonally adjusted GDP rose by 0.6% in the euro area…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.5% in the euro
area.

Inflation

This is a more problematic area for Mario Draghi as this from his speech in this morning indicates.

According to a broad range of measures, underlying inflation has ticked up moderately since the start of this year, but it still lacks clear upward momentum.

This matters because unlike the Bank of England the ECB takes inflation targeting seriously and a past President established a rather precise estimate of it at 1.97% per annum. We seem unlikely now to ever find out how Mario Draghi would deal with above target inflation but he finds himself in what for him maybe a sort of dream. Economic growth has recovered with inflation below target so he can say this.

This recalibration of our asset purchases, supported by the sizeable stock of acquired assets and the forthcoming reinvestments, and by our forward guidance on interest rates, helps to maintain the necessary degree of accommodation and thereby to accompany the economic recovery in an appropriate way.

So we will get negative interest-rates ( -0.4%) for quite a while yet as he has hinted in the past that they may persist past the end of his term. Also of course whilst at a slower rate ( 30 billion Euros a month) the QE ( Quantitative Easing) programme continues. Even that has worked out pretty well for Mario as continuing at the previous pace seemed set to run out of German bonds to buy.

Consequences

However continuing with monetary expansion into a boom is either a new frontier or something which later will have us singing along with Lyndsey Buckingham.

(I think I’m in)(Yes) I think I’m in trouble
(I think I’m in) I think I’m in trouble

Corporate Bonds

When you buy 124 billion Euros of corporate bonds in a year and a few months there are bound to be consequences.

“Tequila Tequila” indeed. What could go wrong with this.?

OK, we are officially in la la land. A BBB rated company just borrowed 500 million EUR for 3 years with a negative yield of -0.026 %. A first..  ( h/t @S_Mikhailovich )

You can take your pick whether you think that Veolia is able to issue debt at a negative interest-rate or at only 0.05% above the swaps rate is worse.

Mario Draghi explained this sort of thing earlier in a way that the Alan Parsons Project would have described as psychobabble.

By accumulating a portfolio of long-duration assets, the central bank can compress term premia by extracting duration risk from private investors. Via this “duration extraction” effect, the central bank frees up risk bearing capacity in markets, spurs a rebalancing of private portfolios toward the remaining securities, and thus lowers term premia and yields across a range of financial assets.

Moral hazard anyone?

The dangers of this sort of thing have been highlighted by what has happened to Carillion this morning.

The wages problem

It is sometimes argued in the UK that weak wage growth is a consequence of high employment and low unemployment. But we see that there are issues too in the Euro area where the latter situations whilst improved are still poorer.

A key issue here is wage growth.Since the trough in mid-2016, growth in compensation per employee has risen, recovering around half of the gap towards its historical average. But overall trends remain subdued and are not broad-based.

Indeed if we look back to late May Mario gave us a rather similar reason to what we often here in the UK as an explanation of weak wages growth.From the Financial Times.

Mr Draghi also acknowledged concerns that sinking unemployment was not leading to a recovery in well-paid permanent jobs………….Mr Draghi said he agreed. “What you say is true,” he said. “Some of this job creation is not of good quality.”

The Italian Job

As I hinted earlier in this piece there are ever more signs of trouble in the Italian banking sector. There have been many cases of can kicking in the credit crunch era but this has been something of a classic with of course a dash of Italian style and finesse. From the FT.

Mid-sized Genoan bank Carige’s future looked uncertain this week after a banking consortium pulled its support for a €560m capital increase demanded by European regulators. Shares in another mid-sized bank Credito Valtellinese fell 8.5 per cent to a market value of €144m after it announced a larger than anticipated €700m capital raising to shore up its balance sheet.

There are issues with banks elsewhere as investors holding bonds which were wiped out insist on their day in court.

Comment

As you can see there is indeed good news for Mario Draghi to celebrate as not only is the Euro area seeing solid economic growth it is expected to continue.

From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward.

The problem though is where does it go from here? Even Mario himself worries about the consequences of monetary policy which has been so easy for so long and is now pro cyclical rather than anti cyclical before of course dismissing them. But unless you believe that growth will continue forever and recessions have been banished there is the issue of how do you deal with the latter when you already have negative interest-rates and ongoing QE?

Also the inflation target problem is covered up by describing it is price stability when of course it is anything but.

Ensuring price stability is a precondition for the economy to be able to grow along a balanced path that can be sustained in the long run.

Wage growth would be improved in real terms if inflation was lower and not higher.

Also Mario has changed his tune on the fiscal situation which he used to regularly compare favourably to elsewhere.

This means actively putting our fiscal houses in order and building up buffers for the future – not just waiting for growth to gradually reduce debt. It means implementing structural reforms that will allow our economies to converge and grow at higher speeds over the long-term.

Number Crunching

This from Bloomberg seemed way too high to me.

Italy’s failure to qualify for the soccer World Cup finals for the first time in 60 years may cost the country about 1 billion euros ($1.2 billion), the former chairman of the national federation said.

Me on Core Finance

http://www.corelondon.tv/2-uk-growth-cap-unreliable-predictive-bodies-bad/

 

 

 

 

 

Has UK inflation peaked?

Yesterday we heard from Bank of England Chief Economist Andy Haldane.

On 3 November, I visited Greater Manchester on the latest of my Townhall tours.

He makes himself sound like a rock band doesn’t he? It is good to see him get out and about after years and indeed decades of being stuck in a bunker in the depths of the Bank of England. Although sadly for him the hopes of becoming Governor via a “man of the people” approach seem to be just hopes. I do hope that he takes the message below back to his colleagues as not only would some humility be welcome but the reality encapsulated in it would be too.

For most of the people I spoke with, small adjustments in the cost of borrowing were unlikely to have a significant impact on their daily lives.  The borrowing costs they faced for access to consumer credit were largely unaffected by changes in Bank Rate

The latter point was one of my earliest themes when I started this website which had its 7th anniversary over the weekend so you can see that our Andy is not the quickest to pick things up.

Moving to today’s theme of inflation Andy did have some thoughts for us.

It is well-known that increases in the cost of living hit hardest those on lowest incomes.  Rising inflation worsens the well-known “poverty premium” the poorest in society already face in the higher costs they pay for the everyday goods and services they buy.

I hope that Andy thought hard about the role his “Sledgehammer QE” and “muscular” monetary easing in August 2016 had in making the lot of these people worse by contributing to the fall of the UK Pound and raising UK inflation prospects. Speaking of inflation prospects what does he think now?

 Price rises across the whole economy are currently running well above the 2% inflation target and are expected to remain above-target for the next few years.

That is not cheerful stuff from Andy but there are several problems with it. Firstly you cannot forecast inflation ahead like that in the credit crunch era as for example you would have been left with egg on your face when oil prices dropped a couple of years ago. In addition Andy’s own record on forecasting or if you like Forward Guidance is poor as in his role of Chief Economist he forecasts an increase in wage inflation every year and has yet to be correct. Of course when you take out a lottery ticket like that you will eventually be correct but that ignores the years of failure.

International Trends

This mornings data set seems to indicate a clear trend although there is a lack of detail as to why Swedish inflation fell so much.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.7 percent in October 2017, down from 2.2 percent in September.

Germany saw a smaller decline but a decline nonetheless.

Consumer prices in Germany were 1.6% higher in October 2017 than in October 2016. The unflation rate, as measured by the consumer price index, was +1.8% in both September and August 2017.

Today’s data

This will be received in mixed fashion at the Bank of England.

The all items CPI annual rate is 3.0%, unchanged from last month.

The Governor Mark Carney will be pleased that his quill pen and foolscap paper will not be required for an explanatory letter to the Chancellor of the Exchequer whereas Andy Haldane will mull that his Forward Guidance has not started well as a rise was forecast this month.

The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.

The factors keeping inflation up were as shown below/

In October 2017, the food category, which grew by 4.2% since October 2016, contributed 0.3 percentage points to the overall 12-month growth rate……Recreation and culture, with prices rising by 0.5% between September and October 2017, compared with a smaller rise of 0.2% a year earlier.

There was also a rise in electricity prices. On the other side of the coin we saw transport and furniture and household services pulling in a downwards fashion on the annual inflation rate.

CPIH

The additional factor in CPIH which is the addition of rents which are never paid to the owner occupied housing sector did its planed job one more time in October.

Housing and household services, where owner occupiers’ housing costs had the largest downward effect, with prices remaining unchanged between September 2017 and October 2017, having seen a particularly large increase of 0.4% in the same period a year ago.

This is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.5% in the 12 months to October 2017; this is down from 1.6% in September 2017.

I would be interested to know if those who rent are seeing lower inflation but also you can see how this pulls down the annual inflation rate. Fair enough ( if accurate as our statisticians have had problems here) for those who rent but the  impact is magnified by the use of Imputed Rent for those who own their property so the measure of inflation is pulled down even more.

The OOH component annual rate is 1.6%, down from 1.9% last month.

This means that what our official statisticians call our “most comprehensive” measure tells us this.

The all items CPIH annual rate is 2.8%, unchanged from last month.

Now let me take you to a place “far,far away” where instead of fictitious prices you use real ones like those below. What do you think the effect would be?

Average house prices in the UK have increased by 5.4% in the year to September 2017 (up from 4.8% in August 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Thus the inflation measure would be higher with the only caveat being the numbers are a month behind the others. As owner occupied housing costs are 17.4% of the measure you can see that it would have a big effect. Up is the new down that sort of thing.

The whole episode here has reflected badly on the UK statistics establishment as this new measure is mostly being ignored and CPI is used instead as this from the BBC demonstrates.

The UK’s key inflation rate remained steady at a five-and-a-half-year high of 3% in October, according to official figures.

The use of the word “key” is a dagger to the heart of the plans of the Office for National Statistics.

The trend

This mornings producer price dataset suggested that the inflation peak has passed.

The input Producer Prices Index (input PPI) grew by 4.6% in the 12 months to October 2017, down from 8.1% in the 12 months to September 2017. The output Producer Prices Index (output PPI) grew by 2.8% in the 12 months to October 2017, down from 3.3% in the 12 months to September 2017.

So there is good news there for us although awkward again for Andy Haldane. On the other side of the coin there has been around an US $5 rise in the price of Brent Crude Oil since October so that will impact the November data if it stays there. Also more political crises could weaken the Pound like they did only on Monday.

Comment

We find ourselves in the peak zone for UK inflation as we may get a nudge higher but the bulk effect of the fall in the UK Pound £ has pretty much completed now. Back in late summer 2016 I suggested that its impact would be over 1% and if we look at the numbers for Germany and Sweden today that looks to be confirmed. Last year saw monthly CPI rise by 0.2% in November and 0.5% in December as inflation rose so the threshold is higher.

However we remain in a mess as to how we calculate inflation as the Retail Price Index measure has it at 4% as opposed to 3% and of course the newer effort CPIH is at 2.8%. So a few more goes and they may record it at 0% and we could have an “unflation rate”!

I have argued against CPIH for five years now for the reasons explained today and warned the National Statistician John Pullinger of the dangers of using it earlier this year. Meanwhile former supporters such as the economics editor of the Financial Times Chris Giles ( who was on the committee which proposed CPIH) now longer seem to be keeping the faith as this indicates.

CPIH is (probably) better since it has a big proxy for housing services of owner occupiers, but with hindsight I worry occasionally that it doesn’t proxy security of tenure well. And security of tenure is a big service you acquire when buying not renting.

 

 

 

 

 

Why are we told some inflation is good for us?

A major topic in the world of economics is the subject of inflation which has been brought into focus by the events of the past 2/3 years or so. First we had the phase where a fall in the price of crude oil filtered through the system such that official consumer inflation across many countries fell to zero per cent on an annual basis and in some cases below that. If you recall that led to the deflation scare or it you will excuse the capitals what much of the media presented as a DEFLATION scare. We were presented with a four horsemen of the apocalypse style scenario where lower and especially negative inflation would take us to a downwards spiral where wages and economic activity fell as well along the line of this from R.E.M.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

I coined the phrase “deflation nutter” to cover this because as I pointed out, Greece the subject of yesterday suffered from quite a few policy errors pushing it into depression and that on the other side of the coin for all its problems Japan had survived years and indeed decades of 0% inflation. Indeed on the 29th of January 2015 I wrote an article on here explaining how lower consumer inflation was boosting consumption across a range of countries via the positive effect it was having on real wages.

 if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

 

Relative prices

The comfortable cosy world of central bankers and theoretical economists told us and indeed continues to tell us that we need positive inflation so that relative prices can change. That leads us to the era of inflation targets which are mostly set at 2% per annum although of course there is a regular cry for inflation targets to be raised. However 2015/16 torpedoed their ship as if we just look at the basic change we saw a large relative price adjustment for crude oil leading to adjustments directly to other energy costs and a lot of other changes. Ooops! Even worse for the theory we saw two large sectors of the economy respond in opposite fashion. A clear example of this was provided by my own country the UK where services inflation barely changed and ironically for a period of deflation paranoia was quite often above the inflation target. But the goods sector saw substantial disinflation as it was it that pulled the overall measure down to around 0%.

We can bring this up to date by looking at the latest data from the Statistics Bureau in Japan.

  The consumer price index for Ku-area of Tokyo in October 2017 (preliminary) was 100.1 (2015=100), down 0.2% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

So not only is there no inflation here there has not been any for some time. Yet the latest monthly update tells us that food prices fell by 2.4% on an annual basis and the sector including energy fuel and lighting rose by 7.1%. Please remember that the next time the Ivory Towers start to chant their “we need inflation so relative prices can adjust” mantra.

Reality

This is that central banks are in the main failing to reach their inflation targets. For example if we look at the US economy the Federal Reserve targets the PCE ( Personal Consumption Expenditure) inflation measure which was running at an annual rate of 1.6% in September and even that level required an 11.1% increase in energy prices.

So we see central banks and establishments responding to this of which the extreme is often to be found in Japan. From @lemasabachthani yesterday.

JAPAN PM AIDE HONDA: INAPPROPRIATE TO REAPPOINT BOJ GOV KURODA, BOJ NEEDS NEW LEADERSHIP TO ACHIEVE 2 PCT INFLATION TARGET

Poor old Governor Kuroda whose turning of the Bank of Japan into the Tokyo Whale was proving in his terms at least to be quite a success. From the Financial Times.

Trading was at its most eye-catching in Japan. Tokyo’s Topix index touched its highest level since November 1991, only to end down on the day after a volatile session. At its peak, the index reached the fresh high of 1,844.05 with gains across almost all major segments, taking it more than 20 per cent higher for the year to date. But it faded back in late trade to close at 1,817.75.

It makes me wonder what any proposed new Governor would be expected to do?! QE for what else?

Whereas in this morning’s monthly bulletin the ECB ( European Central Bank) has told us this.

Following the decision made on 26 October 2017 the monthly pace will be further reduced to €30 billion from January 2018 and net purchases will be carried out until September 2018. The recalibration of the APP reflects growing confidence in the gradual convergence of inflation rates towards the ECB’s inflation aim, on account of
the increasingly robust and broad-based economic expansion, an uptick in measures of underlying inflation and the continued effective pass-through of the Governing
Council’s policy measures to the financing conditions of the real economy.

So we see proposals for central banking policy lost in  a land of confusion as the US tightens, the Euro area eases a little less and yet again the establishment in Japan cries for more, more, more.

Comment

There is a lot to consider here as we mull a world of easy and in some cases extraordinarily easy monetary policy with what is in general below target inflation. Of course there are exceptions like Venezuela which as far as you can measure it seems to have an inflation rate of the order of 2000% + . But in general such places are importing inflation via a lower currency exchange rate which means that someone else’s is reduced. Also we need to note that 2017 is looking like a good year for economic growth as this morning’s forecasts from the European Commission indicate.

The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%)……..at 2.1% in 2018 and at 1.9% in 2019.

So then of course you need an excuse for easy monetary policy which is below target inflation! Of course this ignores two technical problems. The first is that at the moment if we get inflation it is mostly from a higher oil price as we mull the likely effects of Brent Crude Oil which has moved into the US $60s. The second is that there is inflation to be found if you look at asset prices as whilst some of the equity market highs we keep seeing is genuine some of it is simply where all the QE has gone. Also there is the issue of house prices where even in the Euro area they are growing at an annual rate of 3.8% so if they were in an inflation index even more questions would be asked about monetary policy.

In a world where wages growth is not only subdued but has clearly shifted onto a lower plane the obsession with raising inflation will simply make the ordinary person worse off via its effect on real wages. Sadly this impact is usually hardest on the poorest.

Me on Core Finance TV

http://www.corelondon.tv/uk-housing-market-house-party-keeps-going/