Good UK Retail Sales trip up the Bank of England

The morning has bought some better news for the UK economy which is welcome in these pandemic driven hard times. However it has been something of a problem for the Bank of England which tripped up yesterday. It decided to send a signal to markets via this section from its Monetary Policy Committee meeting Minutes.

The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular,
in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of
years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative
Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point
during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will
begin structured engagement on the operational considerations in 2020 Q4.

We learn something from the language as the group of people who have cut interest-rates describe it as “the decline in global equilibrium interest rates over a number of
years.” So we immediately learn that they do not think it has gone well as otherwise they would be taking the credit themselves. After all if it is really like that then they are redundant and we could use a formula to set interest-rates.

Next comes something which is perhaps even more embarrassing which is that only now  around 6 months after the pandemic peak ( which in economics terms was March 19th) have they been briefed on implementing negative interest-rates. What have they been doing? I would have expected it in the first week if not on day one. For the reasons I have explained over time on here I would vote no given such a chance, but at least I know that and I also know why I think that.

Finally they will wait until the next quarter to discuss it with the Prudential Regulation Authority?

The Economic Outlook

There was a conceptual problem with all of this because the view as expressed in the Minutes was that the economy was doing better than they have previously thought.

For 2020 Q3 as a whole, Bank staff expected GDP to be around 7% below its 2019 Q4 level, less weak
than had been expected in the August Report.

This brings us back to the issues I have raised above. Why did they not prepare for negative interest-rates where the outlook was worse than now?

UK Retail Sales

Things got better for us but worse for the Bank of England this morning as the retail sales numbers were released.

In August 2020, retail sales volumes increased by 0.8% when compared with July; this is the fourth consecutive month of growth, resulting in an increase of 4.0% when compared with February’s pre-pandemic level.

The UK shopper has returned to his/her pattern of growth and ironically we are now doing better than the previous period because if you recall annual growth was dropping then whereas now we have solid growth.

Indeed there was even more woe for the inflationistas at the Bank of England in the detail.

In August, retail sales values increased by 0.7% when compared with July and 2.5% when compared with February.

The amount spent is lower than the volume increase meaning that prices have fallen. This is another piece of evidence for the argument I first made on here on the 29th of January 2015 that lower prices led to higher sales volumes. Meanwhile the Bank of England is trying to raise prices.

The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the
UK monetary policy framework.

Actually they are also not telling the truth as raising prices by 2% per annum would not only reduce any retail sales growth it is not price stability. It is very sad that the present policy is to pick policymakers who all toe the party line rather than some who think for themselves. The whole point of having external members has been wasted as the Bank of England has in effected reverted to being an operating arm of HM Treasury.

Retail Sales Detail

The obvious question is to ask why is the retail sector exemplified by the high street in such trouble?The report does give insight into that.

In August, there was a mixed picture within the different store types as non-store retailing volumes were 38.9% above February, while clothing stores were still 15.9% below February’s pre-pandemic levels.

As you can see there has been quite a shift there and it is not the only one. Fuel volumes are still only at 91.3% of the February level. That is somewhat surprising from the perspective of Battersea but there is context from the issue with Hammersmith Bridge and now Vauxhall Bridge.

Also one area and I am sure you have guessed it has seen quite a boom.

Looking at the year-on-year growth in Table 2, total retail sales increased by 51.6%, with strong increases across all sectors. This shows that while we see declines on the month, online sales were at significantly higher levels than the previous year.

We have fallen back from the peak but the trend was up anyway as pre pandemic volumes were around 50% higher than in 2016. In August they were 125.9% higher than in 2016.

Eat Out To Help Out

In case you were wondering this was not part of the growth today and may well have subtracted from it according to The Guardian.

Britons spent £155m less in supermarkets in August than in the previous month as many returned to workplaces and the government’s eat out to help out scheme encouraged visiting restaurants and cafes.

Alcohol sales in supermarkets dipped month on month, with wine down 5% and beer down 10%, as the scheme encouraged people to swap Zoom catch-ups for trips to bars and restaurants, according to market research firm Kantar.

Comment

It has been a curious 24 hours when our central banking overlords have displayed their leaden footedness. The issue of negative interest-rates is something we have been prepared for and with both the UK 2 and 5 year bond yields already negative markets have adjusted to. For a while the UK Pound £ fell and the bond market rallied but the Pound has rallied again. So what was the point?

Also as Joumanna Bercetche of CNBC reminded me Governor Andrew Bailey told her this on the 16th of March.

On negative interest rates – Evaluated the impact on banks/ bldg societies carefully “there is a reason we cut 15bps”. Bailey: “I am not a fan of negative interest rates and they are not a tool I would want to use readily”. Banks are in position to support the economy.

Never believe anything until it is officially denied……

 

The Central Banks can enrich themselves and large equity investors but who else?

We are in a period of heavy central bank action with the US Federal Reserve announcement last night as well as the BCB of Brazil and the Bank of England today. We are also in the speeches season for the European Central Bank or ECB. But they have a problem as shown below.

(Reuters) – London-listed shares tracked declines in Asian stock markets on Thursday as the lack of new stimulus measures by the U.S. Federal Reserve left investors disappointed ahead of a Bank of England policy meeting.

Is their main role to have equity markets singing along with Foster The People?

All the other kids with the pumped up kicks
You’d better run, better run, faster than my bullet
All the other kids with the pumped up kicks
You’d better run, better run, outrun my gun

We can continue the theme of central planning for equity markets with this from Governor Kuroda of the Bank of Japan earlier.

BOJ GOV KURODA: ETF PURCHASES ARE NOT TARGETING SPECIFIC STOCK MARKET LEVELS. ( @FinancialJuice )

In fact he has been in full flow.

BOJ’S GOV. KURODA: I DON’T SEE JAPAN’S STOCK MARKET GAINS AS ABNORMAL.  ( @FinancialJuice)

I suppose so would I if I owned some 34 Trillion Yen of it. We also have an official denial that he is aiming at specific levels. He might like to want to stop buying when it falls then. Some will have gained but in general the economic impact has been small and there are a whole litany of issues as highlighted by ETFStream.

Koll says the sheer weight of BoJ involvement is off-putting for others who might wish to get involved in the market. “When I go around the world, (the size of the BoJ’s holdings is) the single biggest push back about Japan from asset allocators,” he says. “This is the flow in the market.”

As the Bank of Japan approaches 80% of the ETF market I am sure that readers can see the problem here. In essence is there a market at all now? Or as ETFStream put it.

So how can the BoJ extricate itself from the ETF market without crashing the stock market?

Also it is kind of theme to back the long-running junkie culture theme of mine.

As it stands, the market has become as hooked as any addict.

You also have to laugh at this although there is an element of gallows humour about it.

The recent slackening off in ETF buying might be an attempt to end this cycle of dependency,

That was from February and let me remind you that so much of the media plugged the reduction line. Right into the biggest expansion of the scheme! As an example another 80 billion Yen was bought this morning to prevent a larger fall in the market. It was the fourth such purchase this month.

The US Federal Reserve

It has boxed itself in with its switched to average ( 2% per annum) inflation targeting and Chair Powell got himself in quite a mess last night.

Projections from individual members also indicated that rates could stay anchored near zero through 2023. All but four members indicated they see zero rates through then. This was the first time the committee forecast its outlook for 2023. ( CNBC )

This bit was inevitable as having set such a target he cannot raise interest-rates for quite some time. Of course, we did not expect any increases anyway and this was hardly a surprise.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. ( Federal Reserve)

So there is no real change but apparently it is this.

Powell, asked if we will get more forward guidance, says today’s update was ‘powerful’, ‘very strong’, ‘durable’ forward guidance. ( @Newsquawk).

He has boxed himself in. He has set interest-rates as his main measure and he cannot raise them for some time and the evidence is that negative interest-rates do not work. So all he can do is the “masterly inaction” of the apocryphal civil servant Sir Humphrey Applebym or nothing. Quite how that is powerful is anyone’s guess.

Brazil

The same illogic was on display at the Banco Central do Brasil last night.

Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to maintain the Selic rate at 2.00% p.a.

They have slashed interest-rates to an extraordinary low level for Brazil and seem to think they are at or near the “lower bound” for them.

The Copom believes that the current economic conditions continue to recommend an unusually strong monetary stimulus but it recognizes that, due to prudential and financial stability reasons, the remaining space for monetary policy stimulus, if it exists, should be small.

But telling people that is a triumph?

To provide the monetary stimulus deemed adequate to meet the inflation target, but maintaining the necessary caution for prudential reasons, the Copom considered adequate to use forward guidance as an additional monetary policy tool.

Seeing as nobody is expecting interest-rate increases telling them there will not be any will achieve precisely nothing. Let’s face it how many will even know about it?

ECB

They too are indulging in some open mouth operations.

ECB’s Rehn: Fed’s New Strategy Will Inevitably Have An Impact On The ECB, “We Are Not Operating In A Vacuum”

Regular readers will recall him from back in the day when he was often telling the Greeks to tighten their belts and that things could only get better. Nobody seems to have told poor Ollie about the last decade.

ECB’s Rehn: There Is A Risk That Inflation Will Continue To Remain Too Low Sees Risk That Euro Zone Will Fall In A Trap Of Slow Growth And Low Inflation For A “Long Time”

So we see more ECB policymakers correcting ECB President Christine Lagarde on the issue of the exchange rate. Also as the news filters around there is this.

Three month Euribor fixes at -0.501% … below the ECB’s deposit rate for the first time! ( StephenSpratt)

He is a little confused as of course this has happened before but whilst it is a very minor move we could see another ECB interest-rate cut. It will not do any good but that has not stopped the before has it?

Bank of England

There is this doing the rounds.

LONDON (Reuters) – The Bank of England is expected to signal on Thursday that it is getting ready to pump yet more stimulus into Britain’s economy as it heads for a jump in unemployment and a possible Brexit shock.

Actually nothing has changed and the Bank of England is at what it has called the lower bound for interest-rates ( 0.1%) and is already doing £4.4 billion of bond buying a week.

Still not everybody is seeing hard times.

Former Bank of England (BoE) governor Mark Carney has joined PIMCO’s global advisory board, which is chaired by former Federal Reserve chairman Ben Bernanke.

Carney, who was appointed UN Special Envoy on climate action and finance in December 2019, is one of seven members of the global advisory board, alongside former UK Prime Minister and Chancellor Gordon Brown, and ex-president of the European Central Bank Jean-Claude Trichet. ( investmentweek.co.uk )

As Dobie Gray put it.

I’m in with the in crowd
I go where the in crowd goes
I’m in with the in crowd
And I know what the in crowd knows

Comment

We have arrived at a situation I have long feared and warned about. The central bankers have grandly pulled their policy levers and now are confused it has not worked. Indeed they have pulled them beyond what they previously thought was the maximum as for example the Bank of England which established a 0.5% interest-rate as a “lower bound” now has one of 0.1%. Now they are trying to claim that keeping interest-rates here will work when the evidence is that they are doing damage in more than a few areas. In terms of economics it was described as a “liquidity trap” and they have jumped into it.

Now they think they can escape by promising action on the inflation rates that as a generic they have been unable to raise since the credit crunch. Here there is an element of “be careful which you wish for” as they have put enormous effort into keeping the prices they can raise ( assets such as bonds,equities and houses) out of the inflation measures. So whilst they can cut interest-rates further and frankly the Bank of England and US Federal Reserve are likely to do so in any further downtown they have the problem highlighted by Newt in the film Aliens.

It wont make any difference.

That is why I opened with a discussion of equity purchases as it is more QE that is the only game in town now. Sooner or later we will see more bond purchases from the US Federal Reserve above the present US $80 billion a month. Then the only move left will be to buy equities. At which point we will have a policy which President Trump would set although of course he may or may not be President by them.

Oh and I have missed out one constant which is this sort of thing.

ECB Banking Supervision allows significant banks to temporarily exclude their holdings of banknotes, coins and central bank deposits from leverage ratio calculations until 27 June 2021. This will increase banks’ leverage ratios.

The Precious! The Precious!

 

 

 

Why I still expect UK house prices to fall

This morning has brought another example that to quote Todd Terry “there’s something going on” in the UK housing market. Of course there is an enormous amount of government and Bank of England support but even so we are seeing a curious development.

House prices rebound further to reach record
high, challenging affordability.

That is from the Halifax earlier who are the latest to report on this trend where the initial effect of the Covid-19 pandemic has been not only to raise recorded house prices, but to give the rate of growth quite a shove. Indeed prices rose by nearly as much this August on its own as in the year to last August.

“House prices continued to beat expectations in August, with prices again rising sharply, up by 1.6% on a
monthly basis. Annual growth now stands at 5.2%, its strongest level since late 2016, with the average
price of a property tipping over £245,000 for the first time on record.”

I would not spend to much time on the average price per see as each house price index has its own way of calculating that. But the push higher in prices is unmistakable as we look for the causes.

“A surge in market activity has driven up house prices through the post-lockdown summer period, fuelled
by the release of pent-up demand, a strong desire amongst some buyers to move to bigger properties, and
of course the temporary cut to stamp duty.”

I think maybe the stamp duty cut should come first, but the desire for larger properties is intriguing. That may well b a euphemism for wanting a garden which after the lock down is no surprise, but at these prices how is it being afforded? Wanting if one thing, be able to afford it is another.

Bank of England

It’s combination of interest-rate cuts. QE bond buying, and credit easing has led to this.

The mortgage market showed more signs of recovery in July, but remained weak in comparison to pre-Covid. On net, households borrowed an additional £2.7 billion secured on their homes. This was higher than the £2.4 billion in June but below the average of £4.2 billion in the six months to February 2020. The increase on the month reflected a slight increase in gross borrowing to £17.4 billion in July, below the pre-Covid February level of £23.7 billion and consistent with the recent weakness in mortgage approvals.

As you can see it has got things on the move but both gross and net levels of activity are lower and especially the gross one. That may well be a lock down feature as there are lags in the process.  But if the approvals numbers are any guide they are on their way

The number of mortgages approvals for house purchase continued recovering in July, reaching 66,300, up from 39,900 in June. Approvals are now 10% below the February level of 73,700 (Chart 3), but more than seven times higher than the trough of 9,300 in May.

Michael Saunders

It seems that the Monetary Policy Committee may have further plans for the housing market.

Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two
and a longer period of excess supply than the forecast in the August MPR. If these risks develop,
then some further monetary loosening may be needed in order to support the economy and prevent
a persistent undershoot of the 2% inflation target. ( MPR = Monetary Policy Report )

Seeing as interest-rates are already at their Lower Bound and we are seeing QE bond buying as for example there will be another £1.473 billion today. it does make you wonder what more he intends? Although in a more off the cuff moment he did say this.

Review of negative rates is not finished: Not theologically oppsed to neg rates. ( ForexFlow)

He seems genuinely confused and frankly if he and his colleagues were wrong in August they are likely to be wrong in September as well! Oh and is this an official denial?

But I wouldn’t get too carried away by this prospect of money-fuelled inflation pressures.

He did however get one thing right about the money supply.

In other words, the crisis has lifted the demand for money
– the amount of deposits that households and businesses would like to hold – as well as the rise in the
supply of money described above.

That is a mention of money demand which is more of an influence on broad money than supply a lot of the time. Sadly though he fumbled the ball here.

All this has been backed up by the BoE’s asset purchase programme, which (to the extent that bonds have
been bought from the non-bank private sector) acts directly to boost broad money growth.

It acts directly on narrow money growth and affects broad money growth via that.

Another credit crunch

Poor old Michael Saunders needs to get out a bit more as this shows.

And, thanks to the marked rise in their capital ratios during the last decade, banks have been much better
placed than previously to meet that demand for credit.

Meanwhile back in the real world there is this.

Barclays has lowered its loan to income multiples to a maximum of 4.49 times income.

This applies to all LTVs, loan sizes and income scenarios except for where an LTV is greater than 90 per cent and joint income of the household is equal to or below £50,000, and where the debt to income ratio is equal to or above 20 per cent.

In these two cases the income multiple has been lowered to 4 times salary. ( Mortgage Strategy)

There has been a reduction in supply of higher risk mortgages and such is it that one bank is making an offer for only 2 days to avoid being swamped with demand.

Accord Mortgages is relaunching it’s 90 per cent deals for first-time buyers for two days only next week. ( Mortgage Strategy)

Also according to Mortgage Strategy some mortgage rates saw a large weekly rise.

At 90 per cent LTV the rate flew upward by 32 basis points, taking the average rate from 3.22 per cent to 3.54 per cent…….Despite the overall average rate dropping for three-year fixes there was one large movement upwards within – at 90 per cent LTV the average rate grew from 3.26 per cent to 3.55 per cent.

Comment

If we start with the last section which is something of a credit crunch for low equity or if you prefer high risk mortgages then that is something which can turn the house price trend. I would imagine there will be some strongly worded letters being sent from the Governor of the Bank of England Andrew Bailey to the heads of the banks over this. But on present trends this and its likely accompaniment which is surveyors reducing estimated values will turn the market. Indeed even the Halifax is btacing itself for falls.

“Rising house prices contrast with the adverse impact of the pandemic on household earnings and with
most economic commentators believing that unemployment will continue to rise, we do expect greater
downward pressure on house prices in the medium-term.”

What can the Bank of England do? Short of actually buying houses for people there is really only one more thing. Cut interest-rates into negative territory and offer even more than the current £113 billion from the Term Funding Scheme ( to save the banks the inconvenience of needing those pesky depositors and savers). Then look on in “shock” as the money misses smaller businesses as it floods the mortgage market. But these days the extra push gets smaller because it keeps pulling the same lever.

Also can HM Treasury now put stamp duty back up without torpedoing the market?

Podcast

 

Australia sees a GDP plunge whilst it prepares for a trade war

This morning has brought us much more up to date on the state of economic play in a land down under. Even what we have come to call the South China Territories could not keep up its record of economic expansion this year.

Gross Domestic Product (GDP) fell a historic 7.0% this quarter, as the COVID-19 pandemic and the corresponding movement restrictions continued to impact economic activity. The June quarter release records the first annual estimate of GDP for 2019/20, which fell 0.2%,ending Australia’s longest streak of continuous growth, 28 years. ( Australia Statistics)

We find ourselves in curious times as we note two things. Firstly that this is a depression which will only end when output regains the lost ground. Also that a quarterly fall of 7% is a relatively good performance which does question some of the things we keep being told as locked down Australia has done better than the more laissez faire Sweden. Curiously the media seem to be concentrating on this being a recession ( GDP fell by 0.3% in the first quarter) which seems to be quite an under playing of it.

The Detail

We see a familiar pattern of a sharp decline in private demand.

Private demand detracted 7.9 percentage points from GDP, with household final consumption expenditure driving the fall. Public demand partly offset the fall, contributing 0.6 percentage points, as government increased spending in response to COVID-19.

Indeed so much of what has happened was a consumption plunge.

Household final consumption expenditure fell a record 12.1%, detracting 6.7 percentage points from GDP. Household expenditure fell 2.6% for the 2019/20 financial year, the first annual fall in recorded history.

The next bit is intriguing as we have seen elsewhere rises in purchases of food as a type of stockpiling.

Spending on services fell 17.6% reflecting temporary shutdown of businesses and movement restrictions. Spending on goods fell 2.8% driven by record falls in operation of vehicles and clothing and footwear, while spending on food recorded the biggest decline since June 1983.

There was something of a space oddity in the trade data however. One might reasonably think that as China was something of an epicentre for the pandemic then supplying it with resources was not going to be a winner. But net trade provided a boost.

The record fall in imports (-12.9%) was greater than the fall in exports (-6.7%). Imports of goods fell 2.4%, reflecting reduced imports of consumption and capital goods. Imports of services fell 50.5% with travel services falling 98.7% in response to travel bans. Exports of goods fell 3.5%, driven by falls in non-rural and rural goods due to a fall in global demand. Exports of services fell 18.4%, reflecting the travel bans.

Whilst no-one will be surprised at the travel data we know that national accounts struggle to measure services trade with any degree of accuracy. It seems more than a little curious that in a pandemic physical trade was barely affected whereas services and especially imports of services were hammered. If we put the number below back we get close to what Sweden did.

Net exports contributed 1.0 percentage point to GDP

There was another curiosity in the shop.

Health care and social assistance value added experienced its greatest fall since September 1997, down 7.9% in June quarter. The fall was driven by a decline in both private and public health services with reduced demand for medical aids, hospital services and allied health services as face to face visits to practitioners were limited.

The last bit is really rather Orwellian as a reduction in supply is reported as a reduction in demand! This issue of course goes way beyond Australia as whilst some health care areas were flat out others pretty much shut down. It looks quite a mess frankly.

Savings and Wages

There are two separate trends here as some did well.

The household saving to income ratio rose to 19.8%, the highest rate since June 1974. This was driven by the record fall in consumption. Gross disposable income rose 2.2%, driven by an historic 41.6% increase in social assistance benefits, due to both an increase in the number of recipients and additional COVID-19 support payments.

But the wages numbers suggest the well-off may have done okay but the poorest did not. The emphasis is mine.

Compensation of employees fell a record 2.5% this quarter. Average compensation per employee rose an 3.1% this quarter reflecting a compositional shift in the work force with reduced employment in part-time and lower paid jobs.

Reserve Bank of Australia

It seems that the RBA has its eyes on the housing market.

Investment in new and used dwellings fell 7.3% in the quarter due to weakened demand and COVID-19 restrictions, the largest fall since December 2000. ( Australia Statistics)

This is because yesterday it announced new moves to pump it up as it copies the Bank of England.

Under the expanded Term Funding Facility, authorised deposit-taking institutions (ADIs) will have access to additional funding, equivalent to 2 per cent of their outstanding credit, at a fixed rate of 25 basis points for three years. ADIs will be able to draw on this extra funding up until the end of June 2021………To date, ADIs have drawn $52 billion under the Term Funding Facility and further drawings are expected over coming weeks. Today’s change brings the total amount available under this facility to around $200 billion.

The first point is that “banks” are so unpopular now that they have apparently had their name changed to “authorised deposit-taking institutions ” or ADIs. That is curious when we are discussing lending rather than depositing. I see the RBA looking at its impact like this.

There is a very high level of liquidity in the Australian financial system and borrowing rates are at historical lows.

Let us go straight to the heat of the action as the RBA is repeating a policy designed to get mortgage interest-rates lower. We see why it has announced an expansion as we note mortgage rates. Variable rates for new borrowers were 3.5% in July last year and were 2.92% this. So we have two contexts of which the first is that they have not moved much when we consider the Cash Rate was also cut to 0.25% and we are seeing QE (of which more later). Also they are relatively high if we look internationally.

The picture looks better for the RBA if we look at fixed-rate mortgages. If we look at ones for up to three-years we see that it fell over the year to June from 3.43% to 2.3% making fixed-rates look attractive to say the least. Apologies for the way they have one set of numbers for the year to July and another to June but I think we get the picture.

There is a chart comparing these rates with swap rates so the cost of the banks intermediation is in fact 2% of the 2.3%.

Comment

There are some particularly Australian features here. Let me address the issue of a boost from trade via this I spotted from @chigrl

India, Australia and Japan on Tuesday agreed to launch an initiative to ensure the resilience of supply chains in the Indo-Pacific, with the move coming against the backdrop of tensions created by China’s aggressive actions across the region.

The creation of the “Supply Chain Resilience Initiative” was mooted by Japan amid the Covid-19 crisis, which has played havoc with supply and manufacturing chains,  ( Hindustan Times)

I doubt that will be welcomed by Australia’s largest customer and that has clear trade implications.

Next let me return to the RBA. As I am a polite man I will call this quite a cheek.

 Government bond markets are functioning normally, alongside a significant increase in issuance.

In fact they are so normal they had to buy a barrel load…….Oh hang on.

Over the past month, the Bank bought a further $10 billion of Australian Government Securities (AGS) in support of its 3-year yield target of 25 basis points. Since March, the Bank has bought a total of $61 billion of government securities. Further purchases will be undertaken as necessary.

Number Crunching

The Governor of the Bank of England Andrew Bailey will be interviewed by the Treasury Select Committee and I have put in a question request.

With Apple now worth more than the UK FTSE 100 will someone please ask the Governor why he is buying Apple Corporate Bonds?

Can the Bank of England pull UK house prices out of the bag again?

Whilst the UK was winding up for a long weekend the Governor of the Bank of England was speaking about his plans for QE ( Quantitative Easing) at the Jackson Hole conference. He said some pretty extraordinary stuff in a somewhat stuttering performance via videolink. Apparently it has been a triumph.

So what is our latest thinking on the effects of QE and how it works? Viewed from the depth of the Covid
crisis, QE worked effectively.

Although as he cannot measure it so we will have to take his word for it.

Measuring this effect precisely is of course hard, since we cannot easily identify what the counterfactual would have been in the absence of QE.

He seems to have forgotten the impact of the central bank foreign exchange liquidity swaps of the US Federal Reserve. By contrast we were on the pace back on the 16th of March.

But QE clearly acted to break a dangerous risk of transmission from severe market stress to the macro-economy, by avoiding a sharp tightening in financial conditions and thus an increase in effective interest rates.

The next bit was even odder and I have highlighted the especially significant part.

QE is normally thought to work through a number of channels: including signalling of future central bank
intentions and thus interest rates; so called ‘portfolio balance’ effects (i.e. by changing the composition of
assets held by the private sector); and improving impaired market liquidity.

As he has cut to what he argues is the “lower bound” for UK interest-rates how can he be signalling lower ones? After all that would take us to the negative interest-rates he denies any plans for.

Fantasy Time

Things then took something of an Alice In Wonderland turn. Before you read this next bit let me remind you that the Bank of England started QE back in 2009 and not one single £ has ever been repaid.

First, a balance sheet intervention aimed solely at market
functioning is likely to be more temporary, in terms of the duration of its need to be in place.

Also the previous plan if I credit it with being a plan was waiting for this.

and once the Bank Rate
had risen to around 1.5%, thus creating more headroom for the future use of Bank Rate both up and down.

Whilst it was none too bright ( as you force the price of the Gilts held down before selling them) it was never going to be used. This was clear from the way Nemat Shafik was put in charge of this as you would never give her that important a job. Even the Bank of England eventually had to face up to her competence and she left her role early to run the LSE. This meant that she was part of the “woman overboard” problem that so dogged the previous Governor Mark Carney.

The new plan for any QE unwind is below.

We need to work through what lessons this may have for the appropriate future path of central bank balance sheets, including the pace and timing of any future unwind of asset
purchases.

How very Cheshire Cat.

“Alice asked the Cheshire Cat, who was sitting in a tree, “What road do I take?”

The cat asked, “Where do you want to go?”

“I don’t know,” Alice answered.

“Then,” said the cat, “it really doesn’t matter, does it?”

The only real interest the Governor has here is in doing more QE and he faces a potential limit ( if we did not know that we learn it from his denial). So he thinks that one day he may unwind some QE so he can do even more later. For the moment the limit keeps moving higher as highlighted by the fact that the UK issued another £7.4 billion of new bonds or Gilts last week alone.

Today’s Monetary Data

Let me highlight this referring to the Governor’s speech. He tells us that QE has been successful.

The Covid crisis to date has demonstrated that QE and forward guidance around it have been effective in a
particular situation.

Meanwhile borrowers faced HIGHER and not LOWER interest-rates in July

The interest rate on new consumer credit borrowing increased 22 basis points to 4.64% in July, while rates on interest-charging overdrafts increased 1.6 percentage points to 14.84%.

This issue is one which is a nagging headache for Governor Bailey this is because he had the same effect in his previous role as head of the Financial Conduct Authority. It investigated unauthorised overdraft rates in such a way they have risen from a bit below 20% to 31.63% in July. Some have reported these have doubled so perhaps the data is being tortured here.There is a confession to this if you look hard enough.

Rates on interest-charging overdraft rose by 1.6 percentage points to 14.84% in July. Between April and June, overdraft rates have been revised up by around 5 percentage points due to changes in underlying data.

Oh and just as a reminder the FCA was supposed to be representing the borrowers and not the lenders.

QE

As the Governor trumpets his “to “go big” and “go fast” decisively” action we see a clear consequence below.

Private sector companies and households continued increasing deposits with banks at a fast pace in July. Sterling money (known as M4ex) rose by £26.3 billion in July, more than in June (£16.8 billion), but less than average monthly increase of £53.4 billion between March and May. The increase in July is strong relative to the £9.4 billion average of the six months to February 2020.

This means that annual broad money growth ( M4) is at a record of 12.4%. Care is needed as I can recall a previous measure ( £M3) so the history is shorter than you might think. But there has been a concerted effort by the Bank of England to sing along with Andrea True Connection.

(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?

Or perhaps Britney Spears.

Gimme, gimme more
Gimme more
Gimme, gimme more
Gimme, gimme more
Gimme more

Consumer Credit

The sighs of relief out of the Bank of England were audible when this was released.

Net consumer credit borrowing was positive in July, following four months of net repayments (Chart 2). An additional £1.2 billion of consumer credit was borrowed in July, around the average of £1.1 billion per month in the 18 months to February 2020.

Although there is still this to send a chill down its spine.

 Net repayments totaled £15.9 billion between March and June. That recent weakness meant the annual growth rate remained negative at -3.6%, similar to June and it remains the weakest since the series began in 1994.

Comment

Quite a few of my themes have been in play today. For example QE looks ever more like a “To Infinity! And Beyond!” play. Governor Bailey confirms this by repeating the plan for interest-rates. They were only ever raised ( and by a mere 0.25% net in reality) so they could cut them later. So QE will only ever be reduced ( so far net progress is £0) so that they can do more later. He does not mention it but any official interest-rate increase looks way in the distance although as we have noticed the real world does see them. That was my first ever theme on here.

Next let me address the money supply growth. The theory is that it will in around 2 years time boost nominal GDP by the same amount. We therefore will see both inflation and growth. That works in broad terms but we have learnt in the past that the growth/inflation split is unknown as are the lags. Also of course which GDP level do we start from? I can see PhD’s at the Bank of England sniffing the chance to produce career enhancing research but for the rest of us we can merely say we expect inflation but much of it may end up here.

House prices at the end of the year are expected to be 2% to 3% higher than at the start.

The annual rate of UK house price growth slowed to 2.5% in July, from 2.7% in June. ( Zoopla )

I find that a little mind boggling but unlike central banking research we look at reality on here.

Finally let me cover something omitted by the Governor and many other places. This is the strength of the UK Pound £ which has risen above US $1.34. Whilst US Dollar weakness is a factor it is also now above 142 Yen ( and the Yen has been strong itself). I would place a quote from the media if I could find any. In trade-weighted terms from the nadir just below 73 as the crisis hit it will be around 79 at these levels. Or if you prefer the equivalent according to the old Bank of England rule of thumb is a 1.5% rise in Bank Rate. Perhaps nobody has told the Governor about this…..

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Time for some Bank of England Bingo for savers

Earlier this morning the Bank of England announced that it was taking the advice of the apocryphal civil servant Sir Humphrey Appleby by applying some “masterly inaction”

At its meeting ending on 4 August 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to continue with its existing programmes of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, maintaining the target for the total stock of these purchases at £745 billion.

Let me first focus on an interest-rate of 0.1% and take you back to the 28th of September 2010.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”  ( Deputy Governor Charlie Bean)

Savers will be eating “into their capital a bit” more these days as the “swings and roundabouts” never turned up but there was a slide with Bank Rate now 0.1% compared to the emergency 0.5% back then, That provides something of a contradiction to something else our Charlie said.

The Deputy Governor said the Bank’s 0.5  per cent base rate was part of an “aggressive policy” to deal with a “once-in-a-century” financial crisis.

What do you do with someone who gets the future completely wrong?

Sir Charles joined the OBR in January 2017 and also holds a part-time Professorship at the London School of Economics.

Yes you give them a job forecasting the economy. This is along the lines of Yes Prime Minister where an individual who does not even have a television is suggested as a perfect Governor for the BBC. You may note that rather than the slide that savers are on Sir Charles has been on a roundabout of other establishment jobs to top up his already substantial RPI linked pension. Yes the same RPI which is officially a bad measure of inflation until it applies personally.

Negative Interest-Rates.

In some ways it is hard to know where to start with this.

Some central banks have judged their ELB to be below
zero, and have implemented negative policy rates as a tool to stimulate the economy. In recent years, the MPC has
judged that the ELB for Bank Rate is close to but just above zero. But that judgement can change, and in the past
has changed.

Actually I have had two minor successes here. Firstly they admit negative interest-rates exist as believe it or not past analysis ignored the fact that merely crossing either The Channel or the Irish Sea took interest-rates to -0.6% and -1% for banks. Also that the view on the Effective Lower Bound or ELB switched overnight from 0.5% to 0.1%. Laughable really but nor as wild as the swings at the Bank of Canada.

The reality is that they are preparing us for a move to a negative Bank Rate. This is because the brighter ones there know they are in trouble.

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

But they are not bright enough to realise it is a trap of their own making. Meanwhile the PR spinning goes on.

The global fall in central bank interest rates to very low levels in part reflects falls in the ‘equilibrium interest rate’
— the interest rate at which monetary policy is neither expansionary nor contractionary.

So all the interest-rate cuts are nothing at all to do with them really, which is curious as only a couple of paragraphs earlier it is up to them.

The MPC is currently considering whether the ELB for Bank Rate could be below zero; that is whether a negative
policy rate could provide economic stimulus.

Indeed just on the wires as I type this comes another entry in my theme of never believe anything until it is officially denied.

BOE’s Bailey, negative rates are in the toolbox but no plans to use them ( @mhewson_CMC )

Quantitative Easing

There will be some ch-ch-changes here starting next week.

The Bank intends to purchase evenly across the three gilt maturity sectors.  For operations scheduled between 11 August 2020 and 16 December 2020 the planned size of auctions will be £1,473mn for each maturity sector. This auction size includes the reinvestment of the £7.0bn cash flows associated with the maturity on 7 September 2020 of a gilt owned by the APF.

So we see that a weekly rate of purchases of £6.9 billion will fall to slightly over £4.4 billion and if we allow for the Operation Twist style refinancing that is a bit below 60% of what it was.

Forecasts

It seems that the spirit of Professor Sir Charles Bean lives on.

The UK economic slump caused by Covid-19 will be less severe than expected, but the recovery will also take longer, the Bank of England has said.

It expects the economy to shrink by 9.5% this year.

While this would be the biggest annual decline in 100 years, it is not as steep as the Bank’s initial estimate of a 14% contraction. ( BBC)

Of course our valiant Knight’s present employer has done even worse. Who could possibly have expected this?

Housing Market

The Bank of England will have been fully behind this.

An overhaul of the country’s outdated planning system that will deliver the high-quality, sustainable homes communities need will be at the heart of the most significant reforms to housing policy in decades, the Housing Secretary has announced today (6 August 2020).

The landmark changes will transform a system that has long been criticised for being too sluggish in providing housing for families, key workers and young people and too ineffectual in obligating developers to properly fund the infrastructure – such as schools, roads and GP surgeries – to support them. ( UK Government)

There is even time for some smaller businesses rhetoric.

The changes will be a major boost to SME builders currently cut off by the planning process.

Are they the same ones which were supposed to be boosted by the Funding for Lending Scheme of the summer of 2012? How has that been going?

The current system has shown itself to be unfavourable to small businesses, with the proportion of new homebuilding they lead on dropping drastically from 40% 30 years ago to just 12% today.

Comment

Let me open with the economic view which is that 2020 so far has turned out not to be as bad as the Bank of England previously thought. That is welcome and we have seen a spread of better news. That means that their panic-stricken rush to cut Bank Rate to 0.1% was yet another policy mistake which they seem set to compound by cutting to negative interest-rates. Of course they have already inflicted negative bond yields on us ( up to around the 7 year maturity) via their financing of the UK government with total QE purchases now some £645 billion.

I am ignoring their forecasts for 2021 because the have just demonstrated they know not a lot about 2020 so how they know 2021? Also the next real clue comes when the furlough scheme runs out later this year.

Meanwhile since the Bank of England has gone quiet on the policy front one thing has improved which is the value of the UK Pound £. The headline of nearly US $1.32 flatters it as the real move in effective or trade-weighted terms has been from 73 to 78. Actually that shift itself is welcome as the anti-inflationary move versus the US Dollar has been larger than elsewhere. That leaves the intellectual titans at the Bank of England in quite a quandary because they want inflation higher so they can make people and savers worse off. You think that is too silly for them? Not in a world where the Governor of the Bank of England can publicly state cutting interest-rates works in an upswing.

BoE’s Bailey: Effectiveness Of Negative Rates Depends On What Point Of Cycle They Are Used, ECB Research Suggests Most Effective In An Upswing ( @LiveSquawk)

Is that how the ECB ended up with a deposit rate of -0.6%? If so the Euro area economy must have seen quiet a boom…..Oh wait.

The Investing Channel

 

 

More QE will be on the agenda of the US Federal Reserve

Later today the policymakers of what is effectively the world’s central bank meet up to deliberate before making their policy announcement tomorrow evening UK time. Although there is a catch in my description because the US Federal Reserve goes through sustained periods when it effectively ignores the rest of the world and becomes like the US itself can do, rather isolationist. The Financial Times puts it like this.

US coronavirus surge to dominate Federal Reserve meeting…..Central bank policymakers face delicate decision on best way to deliver more monetary support.

As it happens the coronavirus numbers look a little better today. But there are clearly domestic issues at hand which is a switch on the initial situation where on the middle of March the US Federal Reserve intervened to help the rest of the world with foreign exchange liquidity swaps. We were ahead of that game on March 16th. Anyway, that was then and now we see the US $446 billion that they rose to is now US $118 billion and falling.

The US Dollar

There has been a shift of emphasis with Aloe Blacc mulling a dip in royalties from this.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

This was represented back in the spring not only by a Dollar rally that especially hit the Emerging Market currencies but the Fed response I looked at above. Since then we have gone from slip-sliding away to the Fallin’ of Alicia Keys. Putting that into numbers the peak of 103.6 for September Dollar Index futures on March 19th has been replaced by 93.9 this morning.

If we look at the Euro it fell to 1.06 versus the Dollar and a warning signal flashed as the parity calls began. They had their usual impact as it is now at 1.17. Actually there were some parity calls for the UK Pound $ too so you will not be surprised to see it above US $1.28 as I type this. In terms of economic policy perhaps the most significant is the Japanese Yen at 105.50 because the Bank of Japan has made an enormous effort to weaken it and looks increasingly like King Canute.

There are economic efforts from this as I recall the words of the then Vice-Chair Stanley Fischer from 2015.

Figure 3 uses these results to gauge how a 10 percent dollar appreciation would reduce U.S. gross domestic product (GDP) through the net export channels we have just discussed. The staff’s model indicates that the direct effects on GDP through net exports are large, with GDP falling over 1-1/2 percent below baseline after three years.

We have seen the reverse of that so a rise in GDP of 1.5%. Of course such moves seem smaller right now and they need the move to be sustained but a welcome development none the less.

Whilst the US economy is less affected in terms of inflation than others due to the role of the US Dollar as the reserve currency in which commodities are prices there still is an impact.

This particular model implies that core PCE inflation dips about 0.5 percent in the two quarters following the appreciation before gradually returning to baseline, which is consistent with a four-quarter decline in core PCE inflation of about 0.3 percent in the first year following the shock.

Again this impact is the other way so inflation will rise. For those unaware PCE means Personal Consumption Expenditures and as so familiar for an official choice leads to a lower inflation reading than the more widely known CPI alternative.

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Interest-Rates

This is a troubled area for the US Federal Reserve which resembles the shambles of General Custer at Little Big Horn. We we being signposted to a “normalisation” where the new interest-rate would be of the order of 3%+ or what was called r*. I am pleased to report I called it out at the time as the reality was that the underpinnings of this particular Ivory Tower crumbled as the eye of Trump turned on it. The pandemic in this sense provided cover for the US Federal Reserve to cut to around 0.1% ( strictly 0% to 0.25%).

Back on March 16th I noted this and you know my view in official denials.

#BREAKING Fed’s Powell says negative interest rates not likely to be appropriate ( @AFP )

I also not this from Reuters yesterday,

With U.S. central bank officials resisting negative interest rates,

How are they resisting them? They could hardly have cut much quicker! This feels like a PR campaign ahead of applying them at some future date.

Yield Curve Control

This is the new way of explaining that the central bank is funding government policy. Although not on the scale some are claiming.

Foreigners have levelled off buying US Debt. Federal Reserve buying has gone parabolic. This tells us all this additional debt the govt is issuing by running HUGE budget deficits is being purchased by directly the Fed. That is what they do in “banana republics”. #monetizethedebt

That was from Ben Rickert on Twitter and is the number one tweet if you look for the US Federal Reserve. Sadly for someone who calls himself The Mentor actual purchases of US government bonds have declined substantially.

the Desk plans to continue to increase SOMA holdings of Treasury securities at that pace, which is the equivalent of approximately $80 billion per month.  ( New York Fed.)

That is less in a month than it was buying some days as I recall a period when it was US £125 billion a day.

If Ben had not ramped up his rhetoric he would be on the scent because Yield Curve Control is where the central bank implicitly rather than explicitly finances the government. Regular readers will have noted my updates on the Bank of Japan doing this and there have been several variations but the sum is that the benchmark ten-year yield has been kept in a range between -0.1% and 0.1%.

There is an obvious issue with the US ten-year yield being around 0.6% and we may see tomorrow the beginning of the process of getting it lower. On the tenth of this month I pointed out that some US bond yields could go negative and if we are to see a Japanese style YCC then the Fed needs to get on with it for the reasons I will note below.

Comment

As the battleground for the US Federal Reserve now seems to be bond yields it has a problem.

INSKEEP: Senator, our time is short. I’ve got a couple of quick questions here. Is there a limit to how much the United States can borrow? Granting the emergency, its another trillion dollars here. ( NPR)

Even in these inflated times that is a lot and the Democrat opposition want treble that. With an election around the corner we are likely to see more grand spending schemes. But returning to the Fed that is a lot to fund and $80 billion a month looks rather thin in response. So somewhere on this yellow brick road I am expecting more QE.

Oh and if you look at Japan if it has done any good it is well hidden. But that seems not to bother policymakers much these days. Also another example of Turning Japanese is provided by giving QE  new name. After all successes do not need one do they?

Still at least the researchers at the Kansas City Fed have kept their sense of humour.

Based on the FOMC’s past use of forward guidance, we argue that date-based forward guidance has the potential to deliver much, though not all, of the accommodation of yield curve control.

“All bets are off” as the Bank of England holds a “secret” press conference

Today is the turn of the Bank of England to take centre stage. On a personal level it raises a wry smile as when I was a market maker in UK short sterling options (known as a local) on the LIFFE floor it was the most important day of the month and often make or break. At other times it has been a more implicit big deal. Actually there is no likely change to short-term interest-rates on the cards. Perusing my old stomping ground shows that in fact not much action is expected at all with a pretty flat curve out to March 2024 when maybe a rise to the giddy heights of 0.25% is expected. Personally I think there is a solid chance we will see negative interest-rates first but that is not how the market is set this morning. Also I note that volumes are not great suggesting they are not expecting much today either.

If course some may be “more equal than others” to use that famous phrase as the Monetary Policy Committee voted last night following one of the previous Governor’s ( Mark Carney) “improvements”. He was of the opinion that getting his Minutes and PR prepared was more important than the risk of the vote leaking. Whereas the reality is that central banks are in fact rather leaky vessels.

Nationwide

There will have been consternation at the Bank of England when this news arrived at its hallowed doors. From the BBC.

The UK’s biggest building society has tripled the minimum deposit it will ask for from first-time buyers. The Nationwide will lower its ceiling for mortgage lending to new customers in response to the coronavirus crisis.It said the change, from Thursday, was due to “these unprecedented times and an uncertain mortgage market”.

I do not know if the new Governor Andrew Bailey has the same sharp temper as his predecessor Mark Carney but if he does it would have been in display. After all policy is essentially to get the housing market going once we peer beneath the veneer. Nearly £118 billion of cheap funding ( at the Bank Rate of 0.1%) has been deployed via the Term Funding Scheme(s) to keep the housing market wheels oiled. Also the news looks timed to just precede the MPC meeting.

In terms of detail there it is aimed at first-time buyers which is only likely to anger the Governor more.

First-time buyers are likely to be the most significantly affected because they often have smaller amounts saved to get on the property ladder.

Nationwide has reduced the proportion of a home’s value that is willing to lend from 95% to 85%.

So for example, if a property costs £100,000, a new buyer would now need a £15,000 deposit rather than a £5,000 deposit.

If we look back in time this is a familiar feature of house price falls. As mortgage borrowing becomes more restrained that by its very nature tends to pull house prices lower. For larger falls then it usually requites surveyors to join the party by down valuing some properties which as they are pack animals can spread like wildfire. The quote below shows that the situation is complex.

Some lenders, such as HSBC, still have mortgages with a 90% loan-to-value ratio. However, there is more demand for that type of mortgage than many banks have the capacity to deal with at the moment, he said.

Policy

We have already seen an extraordinary set of moves here. We have a record low interest-rate of 0.1% which is quite something from a body which had previously assured us that the “lower-bound” was 0.5%. There is a link to today’s news from this because it was building societies like the Nationwide and their creaking IT systems which got the blame for this, although ironically I think they did us a favour.

Next comes a whole barrage of Quantitative Easing and Credit Easing policies. The headliner here is the purchases of UK bonds ( Gilts) which by my maths passed the £600 billion mark just before 2 pm yesterday as it progresses at a weekly rate of £13.5 billion. This means that they are implicitly financing the UK public-sector right now, something I pointed out when the Ways and Means issue arose. We see that as I note that the UK Debt Management Office has issued some £14.4 billion of new UK bonds or Gilts this week. Whilst the Bank of England did not buy any of these it did oil the wheels with its purchases which means that the net issuance figure is £900 million which is rather different to £14.4 billion. On that road we see how both the two-year yield ( -0.07%) and the five-year yield ( -0,02%) are negative as I type this. Even the fifty-year yield is a mere 0.38%.

There has also been some £15 billion of Corporate Bond buying so far. This policy has not gone well as so desperate are they to find bonds to buy that they have bought some of Apple’s bonds. Yes the company with the enormous cash pile. Also I sure the Danes are grateful we are supporting their shipping company Maersk as it appears to need it, but they are probably somewhat bemused.

As to credit easing I have already noted the Term Funding Scheme and there is also the Covid Financing Facility where it buys Commercial Paper. Some £16.3 billion has been bought so far. Those who like a hot sausage roll may be pleased Greggs have been supported to the tune of £30 million, although North London is likely to be split on tribal lines by the £175 million for Spurs.

Comment

These days central banks and governments are hand in glove. Operationally that is required because the QE and credit easing measures require the backing of the taxpayer via HM Treasury. More prosaically the Chancellor Rishi Sunak can borrow at ultra low levels due to Bank of England policies and will do doubt raise a glass of champagne to them. Amazingly some put on such powerful sunglasses that they call this independence. Perhaps they were the ones who disallowed Sheffield United’s goal last night.

However the ability to help the economy is more problematical and was once described as like “pushing on a string”. This is not helped by the issues with our official statistics as we not inflation has been under recorded as I explained yesterday as has unemployment ( it was 5% + not the 3.9% reported) and the monthly drop of 20.4% in GDP has a large error range too. Because of that I have some sympathy for the MPC but I have no sympathy for the “secret” press conference it is holding at 1 pm. Then its “friends” will be able to release the details at 2:30 pm with no official confirmation until tomorrow.

So there are two issues. That is a form of corruption and debases what is left of free markets even more. Next it is supposed to be a publicly accountable institution with transparent policy. Along the way it means that the chances of a more aggressive policy announcement have just risen or as the bookie says in the film Snatch.

All bets are off

Can US house prices bounce?

The US housing market is seeing two tsunami style forces at once but in opposite directions. The first is the economic impact of the Covid-19 virus pandemic on both wages (down) and unemployment (up). Unfortunately the official statistics released only last week are outright misleading as you can see below.

Real average hourly earnings increased 6.5 percent, seasonally adjusted, from May 2019 to May 2020.
The change in real average hourly earnings combined with an increase of 0.9 percent in the average
workweek resulted in 7.4-percent increase in real average weekly earnings over this period.

We got a better idea to the unemployment state of play on Thursday as we note the scale of the issue.

The advance unadjusted number for persons claiming UI benefits in state programs totaled 18,919,804, a decrease of 178,671 (or -0.9 percent) from the preceding week.

The only hopeful bit is the small decline. Anyway let us advance with our own view is that we will be seeing much higher unemployment in 2020 although hopefully falling and falling real wages.

The Policy Response

The other tsunami is the policy response to the pandemic.

FISCAL STIMULUS (FEDERAL) – The U.S. House of Representatives passed a $2.2 trillion aid package – the largest in history – on March 27 including a $500 billion fund to help hard-hit industries and a comparable amount for direct payments of up to $3,000 to millions of U.S. families.

That was the Reuters summary of the policy response which has been added to in the meantime. In essence it is a response to the job losses and an attempt to resist the fall in wages.

Next comes the US Federal Reserve which has charged in like the US Cavalry. Here are their words from the report made to Congress last week.

Specifically, at two meetings in March, the FOMC lowered the target range for the federal funds rate by a total of 1-1/2 percentage points, bringing it to the current range of 0 to 1/4 percent.

That meant that they have now in this area at least nearly fulfilled the wishes of President Trump. They also pumped up their balance sheet.

The Federal Reserve swiftly took a series of policy actions to address these developments. The FOMC announced it would purchase Treasury securities and agency MBS in the amounts needed to ensure smooth market functioning and the effective transmission of monetary policy to broader financial conditions. The Open Market Desk began offering large-scale overnight and term repurchase agreement operations. The Federal Reserve coordinated with other central banks to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements and announced the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with additional central banks.

Their explanation is below.

 Market functioning deteriorated in many markets in late February and much of March, including the critical Treasury and agency MBS markets.

Let me use my updated version of my financial lexicon for these times. Market function deteriorated means prices fell and yields rose and this happening in the area of government and mortgage borrowing made them panic buy in response.

Mortgage Rates

It seems hard to believe now but the US ten-year opened the year at 1.9%, Whereas now after the recent fall driven by the words of Federal Reserve Chair Jerome Powell it is 0.68%. Quite a move and it means that it has been another good year for bond market investors. The thirty-year yield is 1.41% as we note that there has been a large downwards push as we now look at mortgage rates.

Let me hand you over to CNBC from Thursday.

Mortgage rates set new record low, falling below 3%

How many times have I ended up reporting record lows for mortgage rates? Anyway we did get some more detail.

The average rate on the popular 30-year fixed mortgage hit 2.97% Thursday, according to Mortgage News Daily……..For top-tier borrowers, some lenders were quoting as low as 2.75%. Lower-tier borrowers would see higher rates.

Mortgage Amounts

CNBC noted some action here too.

Low rates have fueled a sharp and fast recovery in the housing market, especially for homebuilders. Mortgage applications to purchase a home were up 13% annually last week, according to the Mortgage Bankers Association.

According to Realtor.com the party is just getting started although I have helped out with a little emphasis.

Meanwhile, buyers who still have jobs have been descending on the market en masse, enticed by record-low mortgage interest rates. Rates fell below 3%, to hit an all-time low of 2.94% for 30-year fixed-rate loans on Thursday, according to Mortgage News Daily.

Mortgage demand is back on the rise according to them.

For the past three weeks, the number of buyers applying for purchase mortgages rose year over year, according to the Mortgage Bankers Association. Applications shot up 12.7% annually in the week ending June 5. They were also up 15% from the previous week.

Call me suspicious but I thought it best to check the supply figures as well.

Mortgage credit availability decreased in May according to the Mortgage Credit Availability Index (MCAI)………..The MCAI fell by 3.1 percent to 129.3 in May. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit.

So a decline but still a lot higher than when it was set at 100 in 2012. The recent peak at the end of last year was of the order of 185 and was plainly singing along to the Outhere Brothers.

Boom boom boom let me here you say way-ooh (way-ooh)
Me say boom boom boom now everybody say way-ooh (way-ooh)

What about prices?

As the summer home-buying season gets underway, median home prices are surging. They shot up 4.3% year over year as the number of homes for sale continued to dry up in the week ending June 6, according to a recent realtor.com® report. That’s correct: Prices are going up despite this week’s announcement that the U.S. officially entered a recession in February.

Comment

As Todd Terry sang.

Something’s goin’ on in your soul

The housing market is seeing some surprises although I counsel caution. As I read the pieces about I note that a 4.3% rise is described as “shot up” whereas this gives a better perspective.

While that’s below the typical 5% to 6% annual price appreciation this time of year, it’s nearly back to what it was before the coronavirus pandemic. Median prices were rising 4.5% in the first two weeks of March before the COVID-19 lockdowns began. Nationally, the median home list price was $330,000 in May, according to the most recent realtor.com data.

But as @mikealfred reports there is demand out there.

Did someone forget to tell residential real estate buyers about the recession? I’m helping my in-laws buy a house in Las Vegas right now. Nearly every house in their price range coming to market sees 40+ showings and 5+ offers in the first few days. Crazy demand.

Of course there is the issue as to at what price?

So there we have it. The Federal Reserve will be happy as it has created a demand to buy property. The catch is that it is like crack and if they are to keep house prices rising they will have to intervene on an ever larger scale. For the moment their policy is also being flattered by house supply being low and I doubt that will last. To me this house price rally feels like trying to levitate over the edge of a cliff.

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Christine Lagarde and the ECB have switched from monetary to fiscal policy

The Corona Virus pandemic has really rather caught the European Central Bank (ECB) on the hop. You see it was not supposed to be like this on several counts. Firstly the “Euro Boom” was supposed to continue but we now know via various revisions that things had turned down in Germany in early 2018 and then the Trumpian trade war hit as well. So the claims of former ECB President Mario Draghi that a combination of negative interest-rates and QE bond buying had boosted both Gross Domestic Product ( GDP) and inflation by around 1.5% morphed into this.

First, as regards the key ECB interest rates, we decided to lower the interest rate on the deposit facility by 10 basis points to -0.50%……..Second, the Governing Council decided to restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. We expect them to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.

As you can see the situation was quite problematic. For all the rhetoric who really believed that a cut in interest-rates of 0.1% would make a difference when much larger ones had not? Next comes the issue of having to restart sovereign bond purchases and QE only 9 months or so after stopping it. As a collective then there is the issue of what all the monetary easing has achieved? That leads to my critique that it is always a case of “More! More! More” or if you prefer QE to Infinity.

Next comes the issue of personnel. For all the talk about the ECB being independent the reclaiming of it by the political class was in process via the appointment of the former French Finance Minister Christine Lagarde as President. This of course added to the fact that the Vice President Luis de Guindos had been the Spanish Finance Minister. Combined with this comes the issue of competence as I recall Mario Draghi pointing out he would give Luis de Guindos a specific job when he found one he could do, thereby clearly implying he lacked the required knowledge and skill set. It is hard to know where to start with Christine Lagarde on this subject after her failures involving Greece and Argentina ( which sadly is in the mire again) and her conviction for negligence. Of course she has added to that more recently with her statement about “bond spreads” which saw the ten-year yield in Italy impersonate a Space-X rocket until somebody persuaded her to issue a correction. Although as the last press conference highlighted you never really escape a faux pas like that.

Do you now believe that it is the ECB’s role to control the spreads on government debt?

The Present Situation

This was supposed to be one where monetary policy had been set for the next year or so and President Lagarde could get her Hermes slippers under the table before having to do anything. Life sometimes comes at you quite fast though as this morning has already highlighted. From Eurostat.

In April 2020, the COVID-19 containment measures widely introduced by Member States again had a significant
impact on retail trade, as the seasonally adjusted volume of retail trade decreased by 11.7% in the euro area and
by 11.1% in the EU, compared with March 2020, according to estimates from Eurostat, the statistical office of
the European Union. In March 2020, the retail trade volume decreased by 11.1% in the euro area and by 10.1%
in the EU.
In April 2020 compared with April 2019, the calendar adjusted retail sales index decreased by 19.6% in the euro
area and by 18.0% in the EU.

As you can see Retail Sales have fallen by a fifth as far as we can tell ( normal measuring will be impossible right now and the numbers are erratic in normal times). Also there were large structural shifts with clothing and footwear down 63.5% on a year ago and online up 20.9%. Much of this is due to shops being closed and will be reversed but there is a loss for taxes and GDP which is an issue for ECB policy. Other news points out that May has its troubles as well.

Germany May New Car Registrations Total 168,148 -49.5% Y/Y – KBA ( @LiveSquawk)

Policy Response

For all the claims and rhetoric is that the ECB has prioritised the banks and government’s. So let us start with The Precious! The Precious!

Accordingly, the Governing Council decided today to further ease the conditions on our targeted longer-term refinancing operations (TLTRO III)……. Moreover, for counterparties whose eligible net lending reaches the lending performance threshold, the interest rate over the period from June 2020 to June 2021 will now be 50 basis points below the average deposit facility rate prevailing over the same period.

For newer readers this means that the banks will be facing what is both the lowest interest-rate seen so far anywhere at -1% and also a fix for the problems they have dealing with a -0.5% interest-rate more generally. It also means that whilst the bit below is not an outright lie it is also not true.

In addition, we decided to keep the key ECB interest rates unchanged.

In fact for those who regard the interest-rate for banks as key it is an untruth. Estimates for the gains to the banking sector from this are of the order of 3 billion Euros. Yet another subsidy or if you prefer we are getting the Vapors.

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

Fiscal Policy

This is what monetary policy has now morphed into. There is an irony here because one of the reasons the ECB has pursued such expansionary policy is the nature of fiscal policy in the Euro area. That has been highlighted in three main ways. the surpluses of Germany, the Stability and Growth Pact and the depressive policy applied to Greece. But that was then and this is now.

Chancellor Angela Merkel said Wednesday that Germany was set to plow 130 billion euros ($146 billion) into rebooting an economy severely hit by the coronavirus pandemic.

The measures include temporarily cutting value-added tax form 19% to 16%, providing families with an additional €300 per child and doubling a government-supported rebate on electric car purchases.

The package also establishes a €50 billion fund for addressing climate change, innovation and digitization within the German economy. ( dw.com )

Even Italy is being allowed to spend.

Fiat To Use State-Backed Loan To Pay Italy Staff, Suppliers ( @LiveSquawk)

This is the real reason for the QE and is highlighted below.

FRANKFURT (Reuters) – The European Central Bank scooped up all of Italy’s new debt in April and May but merely managed to keep borrowing costs for the indebted, virus-stricken country from rising, data showed on Tuesday.

The ECB bought 51.1 billion euros worth of Italian government bonds in the last two months compared with a net supply, as calculated by analysts at UniCredit, of 49 billion euros.

Comment

Thus President Lagarde will be mulling the words of Boz Scaggs.

(What can I do?)
Ooh, show me that I care
(What can I say?)
Hmmm, got to have your number baby
(What can I do?)

Plainly the ECB needs the flexibility of being able to expand its QE bond buying so that Euro area governments can borrow cheaply as highlighted by Italy or be paid to borrow like Germany. We could see the PEPP plan which is the latest emergency one expanded as it will run out in late September on present trends, also the German Constitutional Court has conveniently given it a bye. But she could do that next time. So finally we have a decision appropriate for a politician!

As to interest-rates we see that the banks have as usual been taken care of. That only leaves the rest of us so it is unlikely. We will only see another cut if they decide that like a First World War general that a futile gesture is needed.