Even the UK consumer can not always spend “more more more”

The issue of retail sales is one that has become a signal of our times in various ways. It has long been considered a support for economic growth especially in my home country the UK. However there are places where economics would like more of it such as in the surplus countries Germany and Japan which would then help with rebalancing world trade via higher imports. In more recent times the green agenda clearly implies lower retail sales although something which is likely to be as unpopular is that tends not to get much publicity. Finally there is the issue of the decline of the high street and the rise of online shopping. It is hard for shops to compete with companies willing to deliver even at 9 o’clock on a Sunday evening as I have observed recently.

Measuring such things is complex and let me illustrate with a story which starts well. From the US Census Bureau.

Advance estimates of U.S. retail and food services sales for December 2019, adjusted for seasonal
variation and holiday and trading-day differences, but not for price changes, were $529.6 billion, an
increase of 0.3 percent (±0.4 percent)* from the previous month, and 5.8 percent (±0.7 percent) above
December 2018

I have highlighted the bit which shows that these are turnover or nominal rather than real figures. But there is more to it than meets the eye as whilst these look good there were downwards revisions I gather which mean that the Atlanta Fed GDP Nowcast thinks this.

 After this morning’s retail sales release from the U.S. Census Bureau, the nowcast of fourth-quarter real personal consumption expenditures growth declined from 2.3 percent to 1.6 percent.

As Avril Lavigne pointed out.

Why’d you have to go and make things so complicated?

The UK

The background has been provided by the British Retail Consortium.

Total sales for 2019 decreased by 0.1%, compared with 1.2% growth in 2018. This is the worst year on record…………Taking November and December together to iron out the Black Friday distortions, Total sales declined 0.9% compared with the same period in 2018…….Taking November and December together to iron out the Black Friday distortions, Like-for-Like sales declined 1.2% compared with the same period in 2018.

This is what produced the headlines which were copied across social media that this had been the worst year for UK retail since 1995. This was not the media’s finest hour as this was plainly rubbish to anyone who has any knowledge of the official data. Let us be generous and say that such a view is true for some of the department stores and so on struggling to compete with the virtual world.

Today’s data

We have been observing a slowing of the rate of growth as 2019 had developed and this continued in December.

Comparing the three months to December 2019 against the same three months a year ago, growth in the quantity bought increased by 1.6% in December 2019, despite a strong decline of 2.2% for department stores.

Along the way we get a reminder that department stores are essentially in a depression, which is backed up by this next bit,

Online sales as a proportion of all retailing was 19.0% in December 2019, compared with the 18.6% reported in November 2019.

Actually whilst we still have annual growth if we look more recently we have moved into a decline.

Looking at the three-month on three-month growth rate, the quantity bought in retail sales has not experienced growth for three consecutive months. The three months to October 2019 remained flat, while the three months to November and December fell by 0.5% and 1.0% respectively.

Indeed and it was a case of and the beat goes on if we look at December itself.

The quantity bought in December 2019 fell by 0.6% when compared with the previous month; the fifth consecutive month of no growth.

I am not quite sure why they say/write “no growth” when there is a perfectly useful word like decline available. Anyway we get very little detail for December but do from the three-monthly detail get more of a grip about what has happened in 2019.

Declines were seen across most sectors except for household goods stores and fuel. The strong decline of 3.2% in non-store retailing was largely because of a fallback from very strong growth in the previous three months for September at 4.0%, this included large monthly growth in July of 7.3%, which was attributed to large promotions in the sector. The quantity of goods bought in non-store retailing increased on the latest month by 1.0%.

This is a sort of a doppelganger of the situation in the US we observed earlier. There we saw December misleading as the trend whereas in the UK it was the surge in July and subsequent associated fall back which has muddied the water.

Also if we widen our perspective from pure economics perhaps the pressure on providers and sellers of cheap fashion clothing is having an impact.

Clothing experienced strong declines both on the month at negative 2.0% and in the three months to December at negative 2.3%. This is the sixth consecutive month of no growth for clothing stores for the three-month on three-month movement.

Comment

The situation regarding UK Retail Sales has been “slip-sliding away” as Paul Simon put it in the latter part of 2019. Care is needed as it had previously been very strong and it cannot keep surging. Even the UK consumer must tire eventually. But there are consequences from the apparent shift and clear food for thought is provided by the fact that an already weak last quarter of 2019 will have a downwards pull on its GDP of the order of 0.05%.

That then turns eyes to Threadneeedle Street and the Bank of England which told us this earlier this week. From Monday.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

The Retail Sales release is likely to have him at least singing along with Prince.

She’s never satisfied (She’s never satisfied)
Why do we scream at each other
This is what it sounds like
When doves cry

In a more sophisticated world where they are supposed to look forwards they should be noting that the sentiment reports have shown a post election rally. But back in the real world they have an itchy-finger for interest-rate cuts if the summer of 2016 is any guide. Although the Governor’s focus has changed.

Mark Carney said: “It’s an honour to be supporting the Prime Minister as the UK invites almost 200 countries to Glasgow in November to address the climate threat. This COP 26 Summit will be a critical moment for climate action.”

Will they fly in so that they can tell the rest of us not to fly?

If we return to the “worst year since 1995” release then even today’s weak numbers have scotched that. The lust for clickbait so often trumps reasoning and thought.

 

 

 

 

Even better than expected UK GDP seems unlikely to stop the Bank of England cutting interest-rates

Today brings the UK back into focus as we have what is called a theme day with data across a wide range of economic influences such as production, manufacturing,services ,construction. trade and most of all GDP ( Gross Domestic Product). Yes it is too many in one go and monthly GDP has already demonstrated a track record of being erratic but that has not deterred our official statisticians. But before we get to that the Bank of England has continued its campaign to talk the UK Pound £ lower over the weekend. Here is the Financial Times from yesterday.

An influential member of the Bank of England’s monetary policy committee has said he would vote for a cut in interest rates later this month if key data do not show a bounce in the economy following the December general election.

Have you guessed who it is? I have to say I would be far from sure as my view is that the other 8 members of the monetary policy committee or MPC exist to say “I agree with Mark (Carney)”. Mind you the Financial Times does love to flatter the establishment as we note that my theme that the other 8 members serve little or no useful purpose these days gets another tick in the box. Anyway here it is.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

That does not rule out a move this month as the meeting is at the end of it with the announcement on the 30th although of course they vote on the evening before. For “live” meetings this so-called improvement by Governor Carney is a really bad idea which has been reinforced recently by the news that hedge funds were receiving an “early wire” during press conferences.

We then get more of an explanation.

“Personally I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other and the next few [MPC] meetings are absolutely live,” he told the Financial Times. “I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.”

You might think that after the post EU leave vote debacle when it mistakenly rushed to cut interest-rates because of the surveys  the Bank of England might steer clear of relying on them so much.

We will get a lot of information as soon as the end of January,” said Mr Vlieghe. ““We’ll get a lot of business and some household surveys that cleanly relate to the period after the election, so that will give us an initial read as to how people are responding.”

We do get a slightly odd section which suggests that someone at the Financial Times has actually believed all the Forward Guidance mumbo-jumbo.

Financial markets are not currently pricing any movement in rates above the current 0.75 per cent over the next five years.

If you look at the five and two year Gilt yields in a broad sweep they have been suggesting a cut for some months now as regular readers will be aware.

Of course the media keep fooling for this as they get their moment in the headlines as we recall this from Dharshini David of the BBC last May.

Today the Bank of England’s Governor admitted to me that rates are likely to rise faster than the markets expect. So when can we expect the first move? My analysis for 

She fell for the promises of the unreliable boyfriend hook line and sinker and in response has blocked me on Twitter.

Forward Guidance

It is hard not to have a wry smile at the Bank of England moves as the basic data has turned out better than expected. Let is open with today’s main number.

Rolling three-month growth was 0.1% in November 2019, down from an upwardly revised 0.2% in October.

Not much I admit but in the circumstances any growth is okay. Also that sentence is both true and misleading because October was originally reported as 0% but there have been ch-ch-changes since.

The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture.

We previously were told that both 3 monthly and monthly growth were 0% whereas now they are 0.2% and 0.1% respectively. So we are ahead of where we thought we were in spite of this.

Monthly gross domestic product (GDP) fell by 0.3% in November 2019, driven by falls in both services and production. This followed growth of 0.1% in both September and October 2019.

The monthly numbers are unreliable and are showing hints of a downwards bias as explained below.

However, both September and October 2019 have been revised up by 0.2 and 0.1 percentage points respectively, giving extra strength to the most recent rolling three-month estimate. The revisions to September were predominantly driven by new construction data, whereas October’s revisions were driven by new data in services and production.

It is good that the numbers are improved but the truth is that the variation is presently too high for them to be useful.

As to upwards surprises well the GDP number reinforces one from later on last week.

The latest survey of UK Chief Financial Officers shows an
unprecedented rise in business sentiment. The fourth quarter survey took place in the wake of the UK general election, between 13th December and 6th January. Confidence has seen the largest increase in the 11-year history of the survey taking it to its highest
ever level. ( Deloittes )

Manufacturing

If we look for the other side of the coin there is this from this morning.

The monthly decrease of 1.7% in manufacturing output was because of downward contributions from 10 of the 13 subsectors; led by notable falls from transport equipment (3.4%), chemicals and chemical products (4.7%) and food, beverages and tobacco (1.8%).

The November data meant that the last 3 months were poor too.

 compared with the three months to August 2019; this was led by manufacturing output, which fell by 0.8%.

If we look into the detail of the November data there is more than a little hope that it was driven lower by factors which we have got used to and in the latter case has been doing well overall.

the motor vehicles, trailers and semi-trailers industry (6.1%), which was impacted by factory shutdowns during November 2019…….widespread weakness from chemicals and chemical products (4.7%), following on from the impact of maintenance and shutdowns.

But the reason I have pointed this out is not only to show the other side of the coin but because this area is seeing quite a severe depression.

Manufacturing output in the UK remained 2.9% lower for the three months to November 2019 than the pre-downturn peak for the three months to March 2008.

It looked for a while that we might escape it but the impact of the trade war left our fingers grasping at air as we now face this.

Additionally, the current three-monthly rolling index level is the lowest since July 2017.

Comment

Regular readers will be aware that I thought the Bank of England was readying itself for an interest-rate cut last year. Now with its usual impeccable timing it seems to be forming up as a group just as the economic news shows a hint or two of being brighter. In addition to the data above this months Markit PMI showed an improvement as well albeit to somewhere around flatlining. The Deloittes survey was potentially especially revelant as it relates to business investment which has been weak and thus could have a spell of “catch up” now the political  and Brexit element looks clearer. As ironically Gerthan Vlieghe pointed out.

His main expectation was that the UK outlook would improve because there was a reduction in no-deal Brexit risks, plans for increased public spending and better news about a stabilised global economy.

But there is more to it than this as there is the fundamental issue of whether another 0.25% cut will make any difference. Having watched the latest prequel to the Alien(s) series of films over the weekend I am reminded of the words of the little girl Newt.

It won’t make any difference.

If we look at the weakest sector manufacturing all the interest-rate cuts we have seen have not turned things around and prevented a depression. Indeed if we look to Germany as we did only last week even an official interest-rate of -0.5% has not shielded its sector from the present trade war.

Podcast

The Bank of England gets ready for another cut interest-rate cut

Yesterday saw Bank of England Governor Mark Carney in full flow at the Bank of England itself in a type of last hurrah. I am grateful to him for being kind enough to exhibit at least 4 of the themes of this blog in one go! That is quite an achievement even for him. I will start by looking at something of a swerve which was introduced by the then Chancellor George Osborne and it has never received the prominence I think it deserves.

A major improvement to the inflation targeting framework itself was to confirm explicitly beginning with the
2013 remit that the MPC is required to have regard to trade-offs between keeping inflation at the target and
avoiding undesirably volatility in output. In other words, the MPC can use the full flexibility of inflation
targeting in the face of exceptionally large shocks to return inflation to target in a manner that provides as
much support as possible to employment and growth or, if necessary, promotes financial stability.

I make the point because you could argue from that date the Bank of England was acknowledging that its priority was no longer inflation targeting. Some of this was accepting reality as back in 2010 it had “looked through” inflation over 5%. To be more specific it is now concerned about inflation under target but much less so if it is above it. This is confirmed in the speech in part of the section on the period after the EU Leave vote.

Inflation rose well above the 2% target, eventually peaking at 3.1% in late 2017, an overshoot entirely due to
the referendum-induced fall in sterling.
UK growth dropped from the fastest to the slowest in the G7.

He cut interest-rates in this period in spite of the fact that the lower UK Pound £ meant that inflation would go in his words well above the 2% target. Actually tucked away on the speech is something of a confession of this.

In the wake of the referendum, the MPC’s
aggressive monetary easing, despite a sharply depreciating currency and rising inflation,

The Unreliable Boyfriend

It seems he cannot escape behaving like this and this week he has given us a classic example. We only need to go back to Wednesday for this.

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

Yet a mere 24 hours or so later things were really rather different.

Of course, the effectiveness of unconventional policies means that there is considerable total policy space.
In the UK, the MPC can increase its purchases of both gilts and corporate bonds, providing stimulus through
a number of channels including portfolio rebalancing……..All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.

Glen Campbell must be a bit disappointed as he famously took 24 hours to get to Tulsa whereas Governor Carney has managed the road to Damascus in the same time. Perhaps the new Governor Andrew Bailey had been on the phone. Anyway however you spin it “running out of ammunition” morphed into “considerable total policy space”.

Cutting Interest-Rates

Regular readers will be aware that I have been suggesting for a while now that the next move from the Bank of England will be to return us to a 0.5% Bank Rate. This was regarded as an emergency official interest-rate at the time but as so often language has been twisted and manipulated as it turned out to be long-lasting. I will discuss Forward Guidance in detail in a moment but for the moment let us just remind ourselves that Mark Carney has regularly promised interest-rate rises during his Governorship. Whereas yesterday we were given a hint of another U-Turn.

This rebound is not, of course, assured. The economy has been sluggish, slack has been growing, and
inflation is below target. Much hinges on the speed with which domestic confidence returns. As is entirely
appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the
expected recovery in UK growth and inflation.

For newer readers central bankers speak in their own language and in it this is a clear hint of what is on its way.

Forward Guidance

The Governor cannot avoid a move which backfired rather quickly in his term.

The message the Committee gave UK households and businesses was simple: the MPC would not even
think about tightening policy at least until the unemployment rate had fallen below 7%, consistent with the creation of around three quarter of a million jobs.

The simple sentence below must have stung as he wrote it and later spoke it.

In the event, the unemployment rate fell far faster than the MPC had expected, falling below 7% in February
2014.

I will spare you the re-writing of history that the Governor indulges in but he cannot avoid confirming another issue I have raised many times.

As part of these exercises, the MPC revised down its (hitherto private) estimate of equilibrium unemployment rate from 6½% in August 2013 to 5½% in August 2014,

Actually the “hitherto private” claim is not true either as we knew. Also the equilibrium unemployment rather according to the Bank of England continued to fall and is now 4.25%. Thus as a concept it is effectively meaningless not only because it became a laughing stock but it’s use as an anchor was undermined by all the changes.

Anyway as we approach the end of the week it is opportune to have some humour, at least I hope this is humour.

 People understood the conditionality of guidance, as they and the MPC had learnt that there was still considerable
spare capacity in the economy.

I do love the idea that the (wo)man on the Clapham Omnibus had any idea of this! For a start it would have left them better informed than the Governor himself.

Inflation Targeting

I have argued many times that it needs reform and a major part of this should be to realise the influence of asset prices both pre and post credit crunch. On that road house prices need to go into the consumer inflation measure.

But apparently things have gone rather well.

This performance underscores that the bar for changing the regime is high.

I am not sure where to start with this.

Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.

After all the Bank of England’s own survey told us this only last month.

 Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.6%, up from 3.1% in August.

Comment

We can continue the humour with some number crunching Mark Carney style.

At present, there is sufficient headroom to at least
double the August 2016 package of £60 billion asset purchases, a number that will increase with further gilt
issuance. That would deliver the equivalent of around a 100 basis point cut to Bank Rate on top of the near
75 basis points of conventional policy space. Forward guidance at the ELB adds to this armoury. All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.

So if 1% is from QE and 0.65% from an interest-rate cut to his “lower bound” of 0.1% then that means he is claiming that Forward Guidance can deliver the equivalent of 0.85% of interest-rate cuts. That really is something from beyond even the outer limits of credibility. Oh and I have no idea why he says “near 75 basis points of conventional policy space” when it is 0.65%.

As I have been writing this article a fifth theme of mine has been in evidence which is that these days Monetary Policy Committee members only seem to exist to say ” I agree with Mark”.

“If uncertainty over the future trading arrangement or subdued global growth continued to weigh on UK demand then my inclination is towards voting for a cut in bank rate in the near term,” she says. ( The Guardian)

That is Silvano Tenreyro who has rushed to be in line and it is especially disappointing as she is an external member. It is the internal members that have historically been the Governor’s lapdogs.

Has there been a more unreliable boyfriend than Mark Carney?

After looking this week at the trend toward negative interest-rates and the establishment lust for higher inflation today we can take a look at some of the case for their defence. It comes from Bank of England Governor Mark Carney and he will be relaxed as he has been able to do so in its house journal the Financial Times. Although I note that even it does not label him as a “rock star” central banker anymore and there does not seem to be any mention of film star good looks. Mind you film stars I guess are not what they were after this from Stella McCartney after the Golden Globes.

This man is a winner… wearing custom Stella because he chooses to make choices for the future of the planet. He has also chosen to wear this same Tux for the entire award season to reduce waste. I am proud to join forces with you… x Stella #JoaquinPhoenix
#GoldenGlobes

Saving the planet one tux at a time.

Monetary Policy

Governor Carney opens with this.

The global economy is heading towards a “liquidity trap” that would undermine central banks’ efforts to avoid a future recession, according to Mark Carney, governor of the Bank of England.

As ever he is trying to lay a smoke screen over reality so let us break this down. Actually we have been in a type of “liquidity trap” for quite some time now. A major driver of it has in fact been central banking terror of a future recession which means that zombie companies and especially banks have been propped up. There has been little or none of the “creative destruction” of Josef Schumpeter where capitalism clears up many of its failures. Bad at the time but it also provides some of the fertile ground for new companies and growth. The deflection element is that by claiming a liquidity trip is in the future it deflects from his role in where we are now.

Er, who fired the ammunition?

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

If we look at it we see that if we just look at interest-rates there is 0.65% left according to Governor Carney. That is the current 0.75% Bank Rate to his view of the lower bound which was 0.5% but is now 0.1%. Sadly he is not challenged on this allowing him to imply this is a worldwide problem.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” he said.

An opportunity was missed here to expose the Governor’s rather odd thinking. The blanket view that there is less ammunition has sub-plots. For example the European Central Bank or ECB has an interest-rate of -0.5% and considered -0.6% and yesterday we looked at the Swiss National Bank with its -0.75% official interest-rate. So suddenly we have up to an extra 0.85% compared to his “lower bound”. Also the ECB and SNB could cut further.

I am not sure the explanation about a liquidity trap helps much as it describes a situation we have been in for some time.

A liquidity trap occurs on the rare occasions when monetary policy loses all effectiveness to manage economic swings and looser policy does not encourage any additional spending.

Somehow the editor of the FT Lionel Barber and its economics editor Chris Giles seem to have missed that the credit crunch era has seem many examples of a liquidity trap as highlighted by the use of “rare occasions”

Alternatives

Is there any other sphere where people who have asked for tools used them far more than expected but with little success would be given even more powers?

That meant there was a need to look for supplements to monetary tools, including interest rate cuts, quantitative easing and guidance on future interest rates, he said. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space.”

It is nice that the FT below confirms the central banking group think or if you prefer they borrow the same brain cell.

Mr Carney echoed other central bankers, such as the European Central Bank’s Mario Draghi and his successor, Christine Lagarde, in recommending that governments consider fiscal policy tools, such as tax cuts or public spending increases when tackling a downturn. However, he accepted “it’s not [central bankers’] job to do fiscal policy”.

Also this is something that Paloma Faith sang about.

I’ll tell you what (I’ll tell you what)
What I have found (what I have found)
That I’m no fool (that I’m no fool)
I’m just upside down (just upside down)

Central banks were supposed to be independent and run monetary policy yet a confession of failure seems to make them think they can tell elected politicians what to do. I would call it mission creep but it is more of a leap than a creep.

But I’m a creep, I’m a weirdo
What the hell am I doing here?
I don’t belong here
I don’t belong here ( Radiohead )

Mind you the unreliable boyfriend seems to be having doubts about his commitment to his own statement.

The governor said monetary policy was not yet a spent force internationally, with US and eurozone interest rate cuts last year encouraging borrowing and spending. “We’re starting to see that stimulus flow to the global economy.”

Indeed suddenly we find that his successor has loads of room.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

“The Precious! The Precious!”

Oh and weren’t we raising the banks capital requirements to make the system safer? The unreliable boyfriend does seem to enjoy a U-Turn.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

Being the FT the failures of his initial period of tenure get skated by.

Demand returned in 2013, just as he took up his position.

The 7% unemployment rate debacle gets a new spin.

how many people could be employed without inflation

I am sure that readers think it is really unfair that the Bank of England had to deal with a changing situation.

The monetary policy committee also had to grapple with structural difficulties

I like the use of “grapple” to describe confusion and inertia as it would be hard to be more misleading. The reality is that the chance to raise interest-rates around 2014 was missed and the boat sailed with the Governor still on the shore dithering over whether to buy a ticket.

Comment

It is perhaps most revealing that the Governor sets out the challenges for the Bank of England without mentioning monetary policy at all.

Amid these economic uncertainties, the main task of the BoE, according to the governor, was to finish core reforms to the global financial system and react appropriately to the political upheavals of the Scottish and Brexit referendums and the challenges of climate change. Mr Carney insists that rather than be too political, as his predecessor Mervyn King has suggested, the BoE had to get involved because it now had a duty to preserve financial stability.

Also there seems to be some form of amnesia about the fact that Governor Carney got into trouble for playing politics when he was at the Bank of Canada.

But frustrations of UK life in the crosshairs of polarised political debate will also haunt him in the search of a new job. “This role is just much more public than the same role in Canada,” said Mr Carney.

Oh and did I mention mission creep?

But he was clear that the financial sector could not mitigate global warming alone and without wider agreements to limit global warming and action to enforce targets.

The Investing Channel

Yet another scandal unfolds at the Bank of England

Sometimes the news just leaps at you off the page and overnight this has happened concerning a warning I have made in the past about the Bank of England. So let us get straight to the Financial Times on the subject.

The Bank of England has referred to the UK’s financial watchdog the revelation that an audio feed of its market-sensitive press conferences was supplied to high-speed traders before the events were officially broadcast.

This is disgraceful on two counts. Firstly in an era of computer driven algorithm driven trading an edge like this is quite something for them as we mull exactly who was more equal than others? To coin a phrase. Next is the fact that this happened at the ECB several years ago and after such a warning someone should have been dispatched to make sure that it could not happen at the Old Lady. So we can add laziness to the incompetence.

As ever the PR machine is in full flow and has opened its batting with an attempt to put the blame elsewhere.

Following a rapid internal investigation, the central bank confirmed what it called a “wholly unacceptable” use of its back-up audio feed of press conferences by a third party supplier, which it has refused to name citing legal reasons.  The BoE was responding to an article in The Times, which reported that hedge funds had been eavesdropping on press conferences a few seconds before others heard the words of governor Mark Carney.

The spinning starts with the report of a “rapid investigation” which surely is in fact a really tardy one as the ECB scandal was several years ago now! Also did no-one wonder why this was set-up?

The audio feed was installed only to act as a back-up in case the video feed failed, but the BoE said it had recently discovered — “following concerns raised with the bank” — that the feed had been misused by the supplier since earlier this year.  “This wholly unacceptable use of the audio feed was without the bank’s knowledge or consent, and is being investigated further,” the BoE said in a statement. Those who received the audio feed had a five to eight-second advantage over people who watched the main video feed, the Times reported.

Have you noted how a “few seconds” seems to have suddenly morphed into a ” five to eight-second advantage”? Also the attempt to shift blame to the supplier is really rather weak. Did nobody wonder why funds were willing to pay the amounts suggested below?

Clients were charged between £2,500 and £5,000 per press conference for access to the audio feed, the newspaper reported, adding that high-speed audio services were also offered for similar events at the European Central Bank, the US Federal Reserve and the Bank of Canada.

Even the Financial Times which like more than a few parts of the media has lauded Governor Carney as a “rock star” central banker have to admit this.

However, this is embarrassing for the BoE. Comments made by Mr Carney and other senior BoE officials at the press conferences that follow meetings of the monetary policy committee and financial stability committee often move sterling and gilt prices: having a start of a few seconds would allow traders to pre-empt the rest of the market.

As to any resolution well in true Yes Prime Minister style the ball is licked into the long grass.

On Thursday, the BoE said it had referred the matter to the Financial Conduct Authority to investigate whether rules had been broken and trading had occurred on the basis of early information from the feed.

How about yes and yes as the answers to those questions?! Indeed in the replies IronKnee seems to understand the game.

You don’t understand the system, it’s the City

We have a long investigation, then take a few traders to Court (great if they are from the EU27 or have excess melanin) because the Executives couldn’t possible know what their staff were doing and can’t be held responsible.

Indeed the higher up you are the less responsible you are for anything. Yet in other areas…..

#ECJ : An airline is liable for the harm caused by a spilt cup of hot coffee #nikiluftfahrt

Let me now link this back to my theme and what I consider to be an even more serious issue so let us step back in time to August 2nd 2018 and I have added some emphasis.

 Actually one way or another the decision has already been made as the Monetary Policy Committee voted last night. This was a rather unwise change made by Governor Carney as it raises the risk of leaks or what is called the early wire as the official announcement is not made until midday. As you can see from the chart below the BBC seems to think that the decision is a done deal or knows it is ( h/t @Old_Grumpy_Dave ).

Retail Sales

We can continue the Bank of England theme as we note that last time around 2 members voted for an interest-rate cut and would likely be further confirmed by today’s Retail Sales release.

The quantity bought in November 2019 fell by 0.6% when compared with the previous month, with only household goods stores reporting growth…….In the three months to November 2019, the quantity bought in retail sales decreased by 0.4% when compared with the previous three months; this is the first decline since April 2018.

The state of play is summed up by this bit.

There has been a slowdown in the rate of growth in recent months, with October 2019 increasing at just 0.1%. November 2019 saw a decline of 0.4%; this is the first decline since April 2018, which reported a fall of 0.2%.

Indeed the annual comparison has weakened too.

Year-on-year growth in the quantity bought increased by 1.0% in November 2019; this is the lowest growth since October 2017, owing to a decline of 1.1% in non-food stores.

So there does seem to be something going on although there is a catch as whilst the official view is that this is covered by the seasonal adjustment I am much more doubtful.

In 2019, the official Black Friday was on 29 November and outside our November reporting period, which covers four weeks from 27 October to 23 November; our seasonally adjusted estimates account for this shift in timing.

Comment

As the term of Bank of England Governor Mark Carney comes to an end I am reminded of the Yes Prime Minister view that an intelligent and honest Governor would be an “innovation”. Added to that has been the accusations that he has played politics in the Brexit debate which was frankly hardly a surprise for a man accused of playing politics when he was Governor of the Bank of Canada. Sadly such issues got covered in a smokescreen provided by a fawning media who presumably are hoping today that people have short memories.

However there are 2 deeper issues which are as follows. The Bank of England has proved to be somewhat scandal ridden as we note the Li(e)bor and various other scandals. Next is the fact that this matters ever more because central bankers have intervened in so many new areas. Indeed that has been highlighted this morning by the Riksbank in Sweden which ran negative interest-rates in a boom and now responds to rising unemployment with this.

Therefore, in line with the assessment in October, the Executive Board has decided to raise the repo rate from –0.25 per cent to zero per cent. The forecast for the repo rate is unchanged, and the repo rate is expected to remain at zero per cent in the coming years.

Yet they mostly escape criticism for this shambles. Perhaps if Governor Carney could stick to the day job that might help.

 

 

What happens now to UK house prices?

It was only on Friday that I looked at something potentially beneficial for UK house prices which is a Bank of England interest-rate cut. That could come as soon as this week and later in the day markets adjusted to this as the Gilt market rallied and a ten-year yield of 0.86% has been replaced by one of 0.77% this morning. So maybe some cheaper mortgage rates are on their way.

London

This morning the Financial Times has moved onto one of its favourite topics and here it comes.

Agents for high-end London property have reported a bounce in multi-million-pound home sales after Boris Johnson’s election victory. Buying and selling agents said purchasers were committing to buy homes worth up to £50m after the decisive Conservative win provided political clarity. Overseas buyers also want to pre-empt a stamp duty surcharge planned by Mr Johnson’s government.

So even if we allow for some estate agent hype the new government and the prospect of some Brexit certainty does seem to have had a impact. We also got some more specific details.

Camilla Dell, founder of the buying agency Black Brick, said many of her clients had waited to exchange contracts until after the vote, including one buying a £3.8m newly built apartment in St John’s Wood. She said most of her company’s pipeline of £50m in home purchases would now proceed quickly. “They all want to get on and exchange, and not just because of potential stamp duty changes. A more confident market will make sellers more bullish on price,” she said.

Actually when we look at the next quote £50 million can go quite quickly.

Trevor Abrahmsohn, managing director of Glentree International — which specialises in super-prime north London homes — said an Asian buyer had committed on Friday to buying a £28m home and another purchaser to spending £5m on a property. “This is a shot of adrenalin in a market that was comatose,” he said.

So far you may note that these are commitments relying on estate agent’s word rather than actual purchases. To be fair it is so soon after the election that actual purchases are unlikely. But there does seem to be something going on as the often reliable Henry Pryor has tweeted this.

I’ve got a dozen clients looking for new homes with £25m between them bit.ly/35scLtK plus a group of others with a pot of £50m for post-Election, pre-Brexit, pre-Budget opportunities.

If we ask the Carly Simon question which is Why? We see that there are some factors at play. The settled election result is one although I note that Henry Pryor seems dubious about this concept.

 I even heard of deals going through with a ‘Corbyn clause’ where the contracts could be rescinded if Labour got in . .

Also there is this.

In November the Conservatives pledged to charge overseas buyers an additional 3 per cent of the purchase price in stamp duty when they buy homes in England. This would add to an existing 3 per cent surcharge for buyers of second and additional homes.

The Asian buyer above should he/she exist would have to pay an extra £840,000 which feels eye-watering.

Context

Whilst there is no doubt some hype in the above there is probably something going on. However there is a catch as it faces quite a lot of extra supply in central London. For example I went for a run yesterday and passed through the Battersea Power Station site where there is a large advert for Battersea Roof Garden with 600 flats being built. The roof garden is a nice touch but the description of “much needed green space” raises a smile once you know it is about 100 years from Battersea Park.

Added to this is the rest of the Nine Elms development and the Qatari development on Chelsea Bridge Road. Of course there is bias here as the main developments are in my area but the scale of them is significant and will require what are at those prices a significant number of purchasers as time passes.

Builders Share Prices

It would seem that investors on Friday were mulling a new version of Help To Buy.

In early trading, Taylor Wimpey shares rose 15% to 200p, while Barratt Developments and Berkeley Homes both registered rises of 13%, taking their share prices to 755p and 5,084p respectively.

Persimmon and Bellway were up 11%, to 2,784p and 3,086p, while Bovis and Redrow saw their stocks rise by 9% to 1,363p and 746p respectively. ( Building Magazine)

So there may be some support from that looking ahead. Whilst many developments in central London are too expensive to qualify some studio flats are priced within its range.

Rightmove

They have also joined the fray today.

LONDON (Reuters) – Asking prices for British houses fell this month by the smallest amount for any December since 2006, a survey showed on Monday, pointing to some upside for a housing market subdued by Brexit and election uncertainty.

Rightmove said asking prices, which are not seasonally adjusted, fell by 0.9% on a monthly basis after a bigger-than-normal 1.3% drop in November.

Indeed they go further with this.

Rightmove forecasts a 2% rise in asking prices in 2020.

That is a fascinating conclusion for an organisation which thinks this!

“With much of the political uncertainty removed, we expect that the number of properties for sale will recover as more new sellers come to market, making up some of this year’s lost ground,” Rightmove director Miles Shipside said.

So more sellers will lead to higher prices. Really?

Comment

The media seem to be starting something of a campaign on this front as even the i newspaper was on the case on Friday.

Property experts now expect those who have been holding off to go back to doing deals potentially driving house prices up.

“Expect a sharp uplift in transaction levels starting early in 2020, as buyers and sellers who have played it safe put their plans into motion,“ said Andrew Montlake, managing director of mortgage broker Coreco, adding that a ”huge amount“ of pent-up demand out there looks set to be unleashed on the market next year.

They should introduce Mr.Montlake to Rightmove as his “huge amount” of buyers could meet all their sellers.

However some factors have been in play all along. For example if you trusted the polls and bought UK property when the UK Pound £ was at US $1.19 and various FT journalists were saying on social media it was going lower you now have a solid return ( US $1.33. It will vary between foreign buyers as to how strong the exchange rate influence is but for some it will be major. Asian buyers may note that against the Japanese Yen there has been a rally from 127 to 146 already.

Thus my conclusion is that any rally in UK house prices will require more government and Bank of England intervention/ Otherwise we are on a road to nowhere with possible falls. I welcome that as with real wages rising finally affordability is heading in the right direction.

Podcast

A Bank of England interest-rate cut is now in play

This certainly feels like the morning after the night before as the UK has a new political landscape. The same party is the government but now it is more powerful due to the fact it has a solid majority. As ever let us leave politics and move to the economic consequences and let me start with the Bank of England which meets next week. Let us remind ourselves of its view at its last meeting on the 7th of November.

Regarding Bank Rate, seven members of the Committee (Mark Carney, Ben Broadbent, Jon Cunliffe, Dave
Ramsden, Andrew Haldane, Silvana Tenreyro and Gertjan Vlieghe) voted in favour of the proposition. Two
members (Jonathan Haskel and Michael Saunders) voted against the proposition, preferring to reduce Bank
Rate by 25 basis points.

That was notable on two fronts. The votes for a cut were from external ( appointed from outside the Bank of England ) members. Also that it represented quite a volte face from Michael Saunders who regular readers will recall was previously pushing for interest-rate increases. Staying with the external members that makes me think of Gertjan Vlieghe who is also something of what Americans call a flip-flopper.

What has changed since?

The UK Pound

At the last meeting the Bank of England told us this.

The sterling exchange rate index had
increased by around 3% since the previous MPC meeting, and sterling implied volatilities had fallen back
somewhat,

So monetary conditions had tightened and this has continued since. The effective or trade weighted index was 79 around then whereas if we factor in the overnight rally it could be as high as 83 when it allows for that. In terms of individual currencies we have seen some changes as we look at US $1.34, 1.20 versus the Euro and just under 147 Yen.

This represents a tightening of monetary conditions and at the peak would be the equivalent of a 1% rise in Bank Rate using  the old Bank of England rule of thumb. Of course the idea of the current Bank of England increasing interest-rates by 1% would require an episode of The Outer Limits to cover it but the economic reality is unchanged however it may try to spin things. Also this is on top of the previous rise.

Inflation

There are consequences for the likely rate of inflation from the rise of the Pound £ we have just noted. The Bank of England was already thinking this.

CPI inflation remained at 1.7% in September
and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated
energy and water prices.

There are paths now where UK CPI inflation could fall below 1% meaning the Governor ( presumably not Mark Carney by then) would have to write an explanatory letter to the Chancellor.

A factor against this is the oil price should it remain around US $65 for a barrel of Brent Crude Oil but even so inflation looks set to fall further below target.

Also expectations may be adjusting to lower inflation in the offing.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.9%, compared to 3.1% in August.

Question 2a: Median expectations of the rate of inflation over the coming year were 3.1%, down from 3.3% in August.

Question 2b: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, down from 3.0% in August.    ( Bank of England this morning)

It is hard not to have a wry smile at the fact that those asked plainly are judging things at RPI type levels.

Gilt Yields

These have been rising driven by two factors. They have been rising generally across the developed world and an additional UK factor based at least partly on the likelihood of a higher fiscal deficit. The ten-year Gilt yield is 0.86% but more relevant for most as it influences fixed-rate mortgages is the five-year which is 0.64%.

The latter will bother the Bank of England as higher mortgage-rates may affect house prices adversely.

The economy

There was a time when Bank of England interest-rate moves fairly regularly responded to GDP data. Food for thought when we consider this week’s news.

The UK economy saw no growth in the latest three months. There were increases across the services sector, offset by falls in manufacturing with factories continuing the weak performance seen since April.

Construction also declined across the last three months with a notable drop in house building and infrastructure in October.

There is a swerve as they used to respond to quarterly GDP announcements whereas whilst this is also for 3 months it is not a formal quarter. But there is a clear message from it added to by the monthly GDP reading also being 0%.

Last week the Markit business survey told us this.

November’s PMI surveys collectively suggest that the UK
economy is staggering through the final quarter of 2019,
with service sector output falling back into decline after a
brief period of stabilisation……….Lower manufacturing production alongside an absence of growth in the service economy means that the IHS Markit/CIPS Composite Output Index is consistent with UK GDP declining at a quarterly rate of around 0.1%.

The Bank of England has followed the path of the Matkit business surveys before. Back in the late summer of 2016 the absent minded professor Ben Broadbent gave a speech essentially telling us that such sentiment measures we in. Although the nuance is that it rather spectacularly backfired ( the promised November rate cut to 0.1% never happened as by then it was apparent that the survey was incorrect) and these days even the absent minded professor must know that as suggested below.

Although business survey indicators, taken together, pointed to a contraction in GDP in Q4, the relationship between survey responses and growth appeared to have been weaker at times of uncertainty and some firms may have considered a no-deal Brexit as likely when they had
responded to the latest available surveys.

It is hard not to think that they will expect this to continue this quarter and into 2020.

Looking through movements in volatile components of GDP, the Committee judged that underlying growth
over the first three quarters of the year had been materially weaker than in 2017 and 2018.

Comment

If we look at the evidence and the likely triggers for a Bank of England Bank Rate cut they are in play right now. I have described above in what form. There are a couple of factors against it which will be around looser fiscal policy and a possible boost to business investment now the Brexit outlook is a little clearer. Policies already announced by the present government were expected to boost GDP by 0.4% and we can expect some more of this. Even so economic growth looks set to be weak.

Looking at the timing of such a move then there is an influence for it which is that it would be very Yes Prime Minister for the Bank of England to give the “new” government an interest-rate cut next week. Although in purist Yes Prime Minister terms the new Governor would do it! So who do you think the new Bank of England Governor will be?