The Mark Carney Show has misfired again

Yesterday was something of an epoch-making day for the UK but it also turned into a rather odd one. Also this morning has produced another piece of evidence for my argument that we finally got a rise in official interest-rates above the emergency 0.5% level because the Bank of England finally thought the banks have recovered enough to take it. From the Financial Times.

Royal Bank of Scotland will pay its first dividend since it was bailed out during the financial crisis, marking a major milestone on the bank’s road to recovery and paving the way for a further reduction of the government’s 62.4 per cent stake. The bank will pay an interim dividend of 2p per share after it confirms a final agreement on a recent fine with the US Department of Justice.

So even RBS has made some progress although it remains attracted to disasters like iron filings to a magnet as this seems a clear hint that it managed to be long Italian bonds into the heavy falls.

 RBS blamed “turbulence in European bond markets” for a 20 per cent drop in income at Natwest Markets.

As an aside the Italian bond market is being hit again today with the ten-year yield pushing over 3%.

Returning to the UK we also saw a 9-0 vote for a Bank Rate rise as I predicted in my podcast. This was based on my long-running theme that they are a bunch of “Carney’s Cronies” as five others suddenly changed their mind at the same moment as him, making the most popular phrase “I agree with Mark”. As some are on larger salaries added to by generous pension schemes we could make savings here.

A Space Oddity

This was provided by the currency markets which initially saw the UK Pound £ rally but then it fell back and at the time of writing it has dipped just below US$1.30. The US Dollar has been strong but at 1.122 we have not gained any ground against the Euro either at 145 we lost ground against the Japanese Yen.Why?

At first Governor Carney backed up his interest-rate rise with talk of more as in the press conference he suggested that 3 rises over the next 3 years was his central aim. Of course his aim has hardly been true but this disappeared in something of a puff of smoke when he later pointed out that he could keep interest-rates the same or even cut them. This rather brain-dead moment was reinforced by pointing out that he had cut interest-rates after the EU leave vote. This left listeners and viewers thinking will he cut next March?

Then he told Sky News this.

Mark Carney tells me is prepared to cut interest rates back again depending on how Brexit negotiations go. ( Ed Conway)

This morning he has managed to end up discussing interest-rate cuts with Francine Lacqua of Bloomberg after a brief mention of further rises. Then he added to it with this.

Mark Carney threw himself back into the thick of the Brexit debate on Friday, saying the chance of the U.K. dropping out of the European Union without a deal is “uncomfortably high.”

He also spoke to the Today programme on Radio Four which of course has its own audience troubles and here is the take away of Tom Newton Dunn of The Sun,

Blimey. Carney reveals the BoE recently ran a Brexit no deal exercise that saw property prices plummet by a third, interest rates go up to 4%, unemployment up to 9%, and a full-blown recession.

You can see from that why rather than a rally the UK Pound £ has struggled rather than rallied.  Due to his strong personal views Governor Carney keeps finding himself enmeshed in the Brexit debate which given his views on the subject will always head towards talk of interest-rate cuts. He is of course entitled to his personal views but in his professional life he keeps tripping over his own feet as just after you have raised interest-rates this is not the time for it. He could simply have said that like everyone else he is waiting for developments and will respond if necessary when events change.

Oh and we have heard this sort of thing from Governor Carney before. How did it work out last time?

interest rates go up to 4%

 

Today’s News

This has added to the theme I posited yesterday about the interest-rate increase which can be put most simply as why now?

The latest survey marked two years of sustained
new business growth across the service sector
economy. However, the rate of expansion eased
since June and was softer than seen on average
over this period. ( Markit PMI )

This followed a solid manufacturing report and a strong construction one but of course the services sector is by far the largest. This added to the report from the Euro area.

If the headline index continues to track at its current
level, quarterly GDP growth over the third quarter as
a whole would be little-changed from the softer-than expected expansion of 0.3% signalled by official
Eurostat data for quarter two.

Whilst these surveys are by no mean perfect guides there does seem to be something going on here and as I pointed out yesterday it is consistent with the weaker trajectory for money supply growth.

The UK Pound £

This did get a mention in the Minutes.

The sterling effective exchange rate had depreciated slightly since the Committee’s previous meeting and was down 2.5% relative to the 15-day average incorporated in the May Report.

This is awkward on two fronts. Firstly the fall was at least partly caused by the way Governor Carney and his colleagues clearly hinted at an interest-rate rise back then but then got cold feet in the manner of an unreliable boyfriend. Next comes the realisation that all the furore over a 0.25% interest-rate rise mostly ignores the fact that monetary conditions have eased as the currency fall is equivalent to a ~0.6% cut.

R-Star

This appeared having been newly minted in the Bank of England Ivory Tower. Or at least newly minted in £ terms as the San Francisco Fed put it like this last year.

The “natural” rate of interest, or r-star (r*), is the inflation-adjusted, short-term interest rate that is consistent
with full use of economic resources and steady inflation near the Fed’s target level.

If anyone has a perfect definition of “full use of economic resources” then please send it to every Ivory Tower you can find as they need one. Actually the Bank of England has by its actions suggested it is near to here which is rather awkward when they want to claim it is somewhere above 2%. Actually I see no reason why there is only one and in fact it seems likely to be very unstable but in many ways David Goodman of Bloomberg has nailed it.

They don’t know their r* from their elbow

Comment

This is all something of a dog’s dinner and I mean that in the poetic sense because in reality dog’s in my family  always seem to be fed pretty well. We have monetary policy being delivered by someone who looks as though he does not really believe in it. Even the traditional support from ex Bank of England staff seems to be half-hearted this time around and remember that group usually behave as if The Stepford Wives is not only their favourite film but a role-model.

If this is the best that Mark Carney can do then the extension of his term of tenure by Chancellor Hammond can be summed up by Men At Work.

It’s a mistake, it’s a mistake
It’s a mistake, it’s a mistake

 

 

 

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The Bank of England is in a mess of its own making

Today looks as if it may be something of an epoch-making day for the UK as there is finally a decent chance that the 0.5% emergency Bank Rate will be consigned into history. 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 ).

This provides us scope for a little reflection as any move hardly fulfils this from back in June 2014.

This has implications for the timing, pace and degree of Bank Rate increases.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

This was taken at the time as a promise and markets responded accordingly as interest-rate futures surged and the UK Pound £ rallied. From time to time people challenge me on this and say it was not a promise. What that misses is that central bankers speak in a coded language and in that language  this was a clear “Tally Ho”. Of course the “sooner than markets currently expect” never happened and whilst you may or may not have sympathy for professional investors and traders it was also true that ordinary people and businesses switched to fixed-rate borrowing in response to this. The reality was that the Bank of England via its credit easing policies and then Bank Rate cut of August 2016 pushed mortgage and borrowing rates lower affecting them adversely. Such has been the record of Forward Guidance.

What about now?

There was something else in that speech which was revealing as a sentence or two later we were told this.

The ultimate decision will be data-driven

Okay so let us take the advice of Kylie and step back in time. If we do so we see that the UK economy was on a bit of a tear which of course was another reason for those who took Governor Carney at his word. In terms of GDP growth the UK economy had gone 0.6%,0.5%,0.9% and 0.5% in 2013 which was then followed by 0.9% in the first quarter of 2014. It did the same in the second quarter which he would not have known exactly but he should have known things were going well.

Let us do the same comparison for now and look at 2017 where GDP growth went 0.3%,0.2%,0.5% and 0.4% followed by 0.1% in the first quarter of this year. If you were “data driven” which sequence would have you pressing the interest-rate trigger? I think it would be a landslide victory. The MPC may not have known these exact numbers due to revisions but a 0.1% here or there changes little in the broad sweep of things.

Some might respond with the pint that he is supposed to achieve an inflation target of 2% per annum. That is true but that has not bothered the MPC much in the credit crunch era as we have just been through a phase of above target inflation which of course they not only cut Bank Rate into but promised a further cut before even they came to the realisation that their Forward Guidance had been very wrong. Also before Governor Carney took office the MPC turned a blind eye to inflation going above 5%. Whereas post the EU leave vote they rushed to ease policy in something of a panic in response to expectations of a weaker economy.

The Speed Limit

The Bank of England Ivory Tower has had a very poor credit crunch. It has clung to outdated theories rather than respected the evidence. Perhaps the most woeful effort has been around the output gap which if you recall led to it highlighting an unemployment rate of 7% which the economy blasted through ( which you might consider was yet another case for an interest-rate rise in 2014). It has clung to equilibrium unemployment rates of 6.5%,6% 5.5% and 4.5% which of course have all been by-passed by reality. Such outdated thinking has led it to all sorts of over optimism on wage growth. Yet is seems to have learned little as this illustrates.

We think our economy can only grow at a new, lower speed limit of around one-and-a-half per cent a year. We also currently think actual demand is growing close to this speed limit. This means demand can’t grow faster than at its current pace without causing prices to start rising too quickly.

This is the MPC rationale for a Bank Rate rise and the problem is that they simply do not know that. They keep trying to build theoretical scaffolding around the reality of the UK economy but seem to learn little from the way the scaffolding regularly collapses.After all we grew much faster in 2014.

The banks

As ever the precious will be at the forefront of the Bank of England’s mind. I cannot help thinking that having noted the apparent improvement shown below maybe the real reason for a change is that the banks can now take it. First Lloyds Banking Group.

Since taking over the reins in 2011, Horta-Osório has presided over a bank which has swung from an annual loss of £260mln to a profit of £3.5bn.  ( Hargreaves Landsdown).

Then Barclays.

Barclays reported pretax profit of 1.9 billion pounds ($2.49 billion) for the three months from April-June, up from 659 million pounds a year ago and higher than the 1.46 billion average of analysts’ estimates compiled by the bank. ( Reuters)

Comment

A Martian observing monetary policy in the UK might reasonably be rather confused by the course of events. He or she might wonder why now rather than in 2014? Furthermore they might wonder why a mere 0.25% change is being treated as such a big deal? After all it is only a small change and the impact of such a move on those with mortgages will be both lower and slower than in the past.

Nationwide: The vast majority of new mortgages have been extended on fixed interest rates. The share of outstanding mortgages on variable interest rates has fallen to its lowest level on record, at c.35% from a peak of 70% in 2001. ( h/t @moved_average )

So if they do move the impact will be lower than in the past which makes you wonder why they have vacillated so much and been so unreliable?

The MPC have got themselves on a road where all the indecision means that the timing is likely to be off. What I mean by that is that whilst I expect economic growth to pick-up from the first quarter this year will merely be an okay year and currently the threats seem to the downside in terms of trade for example. We do not yet know where the Trump trade tariffs will lead but we do know that the Euro area has seen economic growth fall such that the first half of 2018 was required to reach what so recently was the quarterly growth rate. Also the ongoing rhetoric of the Bank of England about Brexit prospects hardly makes a case for a Bank Rate rise now either as it would be impacting as we leave ( assuming we do leave next March).

The next issue is money supply growth which in 2018 so far has been weak and now (hopefully) has stabilised. That does not make much of a case for raising now and would lead to the MPC operating in the reverse way to monetary trends as it cut into strength in August 2016 and now would be raising into relative weakness.

So there you have it on what is an odd day all round. I think UK interest-rates should be higher but also think that timing matters and that a boat or two has sailed already without us on it. Accordingly my view would be to wait for the next one. For the reasons explained above whilst the MPC has managed to verbally box itself into a corner I still  think that there is a chance ( 1/3rd) of an unchanged vote today. It is always the same when logic points in a different direction to hints of direction.

There is also the issue of QE which rarely gets a mention. If we skip the embarrassment all round of the Corporate Bond purchases we could also have taken the chance to trim the QE package when money supply growth was strong. I remember making that case nearly five years ago in City-AM.

Me on Core Finance TV

 

 

 

Why is the Bank of England preparing for a 0% interest-rate?

Sometimes events have their own motion as after enjoying watching England in the cricket yesterday which is far from something I can always I had time to note it was Mansion House speech time. My mind turned back to 2014 when Bank of England Governor Mark Carney promised an interest-rate rise.

There’s already great speculation about the exact timing of the first-rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

Of course four years later we are still waiting for the unreliable boyfriend to match his words with deeds. Indeed last night he was sailing in completely the opposite direction as shown by this.

The additional capital means the MPC could, if necessary, re-launch the TFS in future on the Bank’s balance sheet, cementing 0% as the lower bound.

We have learnt in the credit crunch era to watch such things closely as preparations for an easing on monetary policy have so regularly turned into action as opposed to tightening for which in the UK we have yet to see an outright one. All we have is a reversal of the last error ridden cut to a 0.25% Bank Rate as I note that the extra £60 billion of QE, Corporate Bond QE and Term Funding Scheme are still in existence.

There was another mention of a 0% interest-rate later in the piece.

Although the principles guiding the MPC’s choice of threshold still hold, with the lower bound on Bank Rate
now permanently close to 0%,

In the words of Talking Heads “is it?”

The Lower Bound

This has been an area which if we keep our language neutral has been problematic for Governor Carney to say the least! For example last night’s speech mentioned an area I have flagged for some time.

relative to the effective lower bound on Bank
Rate of 0.5% at that time

When the statement was originally made there were obvious issues when we had countries that had negative interest-rates well below the “lower bound”. As an example the Swiss National Bank announced this yesterday morning.

Interest on sight deposits at
the SNB remains at −0.75% and the target range for the three-month Libor is unchanged at
between −1.25% and −0.25%

As they are already equipped for a -1.25% interest-rate and have a -0.75% one it is hard not to smile at the “lower bound” of Mark Carney. The truth in my opinion is that it means something quite different and as ever the main player is the “precious” or the banks.

In August 2016, the MPC launched the Term Funding Scheme (TFS) in order to reinforce the pass-through
of the cut in Bank Rate to 0.25% to the borrowing rates faced by households and companies.

As you can see it is badged as a benefit to you and me which of course is a perfect way to slip cheap liquidity to the banks. After all competing for savings from us must be a frightful bore for them and it is much easier to get wholesale amounts and rates from the Bank of England.

Bank of England balance sheet

There are changes here as well.

With the Chancellor’s announcement tonight of a ground-breaking new financial arrangement and capital
injection for the Bank of England, we now have a balance sheet fit for purpose and the future.

What arrangement? There will be a capital injection of £1.2 billion this year raising it to £3.5 billion. That can go as high as £5.5 billion should the Bank of England make profits bur after that it has to be returned to HM Treasury.

The gearing for liquidity operations is quite something to behold.

The additional capital will significantly increase the amount of liquidity the Bank can provide through
collateralised, market-wide facilities without needing an indemnity from HM Treasury to more than half a
trillion pounds. This lending capacity would expand to over three quarters of a trillion pounds when, as
designed, additional capital above the target level is accrued through retained earnings.

On the first number the gearing would be of the order of 140 times.Care is needed with that though as the Bank of England does insist on collateral in return for the liquidity. Mind you that is not perfect as a guardian as those who recall the episode where the Special Liquidity Scheme was ended early due to “phantom securities”. If you do not know about that the phrase itself is rather eloquent as an explanation.

Reducing the National Debt

Yesterday was  good day for data on the UK public finances but that may be dwarfed by what was announced in the speech.

Today’s announcement increases the amount of risk the Bank can carry on its balance sheet. As a result,
the Bank plans to bring the £127 billion of lending extended through the TFS onto our balance sheet by the
end of 2018/19 the financial year.

That had me immediately wondering if the Office for National Statistics will now drop the requirement for this to be added to the UK National Debt. this would bring us into line with rules elsewhere as for example if you will forgive the alphabetti spaghetti the TLTROs and LTROs of the European Central Bank are not added to the respective national debts. Such a change would reduce our national debt from 85.4% of GDP to below 80%. I am sure I am not the only person thinking that would be plenty to help finance the suggested boost to the NHS should you choose.

QE

There was a change here and this reflects the 0.5% change in the “lower bound”

Although the principles guiding the MPC’s choice of threshold still hold, with the lower bound on Bank Rate
now permanently close to 0%, the MPC views that the level from which Bank Rate can be cut materially is
now around 1.5%.
Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches
around 1.5%.

Let me offer you two thoughts on this. Firstly as the Bank of England has yet to raise interest-rates from the emergency 0.5% level then discussing 1.5% or 2% is a moot point. Secondly this is a way of locking in losses as you will be driving the price of the Gilts owned lower by raising Bank Rate. Even holding the Gilts to maturity has issues because you get 100 back and in the days of the panic driven Sledgehammer QE buying where market participants saw free money coming and moved prices away the Bank of England paid way over 100.

Comment

It is hard not to have a wry smile at Governor Carney planning for a 0% Bank Rate as one of his colleagues joins those voting for a rise to 0.75%. Of course Governor Carney wants a rise to 0.75% eventually, say after his term has ended for example. The irony was that the person who has put so much effort into trying to be the next Governor voted for a rise. As to how Andy Haldane’s campaign has gone let me offer you this from Duncan Weldon.

Next month: 6 votes to hold 2 votes to hike And one vote for something involving a dog and a frisbee.

There was a time when people used to disagree with my views about Andy Haldane whereas now the silence is deafening in two respects. One is that I do not get challenged on social media about it anymore and the other is that if you look for the chorus line of support that used to exist it appears to have disappeared and in some cases been redacted.

Moving to more positive news there has been rather a good piece written by the England footballer Raheem Sterling and whilst no doubt there has been some ghostwriting the final message is very welcome I think.

England is still a place where a naughty boy who comes from nothing can live his dream.

 

 

 

 

 

 

“Why, sometimes I’ve believed as many as six impossible things before breakfast.” says Mark Carney

Last night the Governor of the Bank of England Mark Carney gave a speech which was extraordinary even for him. At the Society of Professional Economists he stood up and immediately took listeners into a parallel universe that was like the episode in Star Trek where Spock was irrational and violent.

Our guidance means that those who follow us will be better able to anticipate our actions. It will make those
actions more powerful. And it will help households and businesses consume, save, hire and invest with
confidence as the UK determines its path forward.

Just for clarity he is talking about the Forward Guidance of the Bank of England where he has promised interest-rate rises and not only not delivered them but of course ended up making a cut and adding £60 billion of Quantitative Easing. So guiding you in the wrong direction up the garden path helps? Well apparently it is most helpful when he sends you the wrong way.

Guidance is most useful at such turning points.

I was challenged on social media last night by those who claimed he has never promised interest-rate rises. I responded by taking them back to Mansion House in June 2014 when Governor Carney announced this.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

This is because central bankers speak in code as Alan Greenspan of the US Federal Reserve pointed out back in the day.

 I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.

Returning to June 2014 financial markets were sure they knew what Mark Carney meant and that was that an interest-rate rise was coming soon. In response the Short Future for interest-rate expectations soared as did the UK Pound £. Here is a nuance to this which is that those who were going to be right as in nothing would happen were probably stopped out of their positions. This was added to by even David ” I can see for” Miles the easing fan writing this about interest-rate rises in the Sunday Telegraph.

But that day is coming.

Back in my days on Mindful Money I pointed this out on the 24th of June 2014.

 If we were in America then Mark Carney would be called a “flip-flopper” as we have had a lot of different types of Forward Guidance from an individual who has not yet been in office for a year. Others may be wondering at Mark Carney’s claim that he has met “thousands of businesses” in less than a year which is quite a rate!

The version according to Mark Carney

Remember this.

the MPC would not even think about tightening policy at least until the unemployment rate had fallen below 7%

Which went wrong about as fast as it could as even the Governor admits.

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

If we skip the obvious issue of Forward Guidance from an organisation making yet another large forecasting error there is a clear issue of logic. This is that a sharp fall in unemployment suggests a stronger economy and thus Bank Rate rises as it is a measure according to Governor Carney that is.

– a clear and widely understood indicator of the degree of slack

But apparently less slack meant this.

That guidance was effective. Surveys conducted in the months that followed indicated high awareness of it
among companies, with almost half reporting that they expected Bank Rate to remain at low levels for longer
than they would have done were guidance not in place

So it worked by being wrong! Of course if we switch to the real world companies were probably ignoring all the “flip-flopping” that was already evident. After all he had only been Governor for a year when this happened. From the BBC.

The Bank of England has acted like an “unreliable boyfriend” in hints over interest rate rises, according to MP Pat McFadden…………

“We’ve had a lot of different signals,” he said. “I mean it strikes me that the Bank’s behaving a bit like a sort of unreliable boyfriend.

“One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand.”

Apparently misleading is helpful

The next section was aptly described by Earth Wind and Fire.

Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies

We find that according to Governor Carney being an unreliable boyfriend brings a whole raft of benefits.

The MPC’s guidance speaks first and foremost to UK households and businesses.

Okay so he is swerving away from the financial markets he has misled to take us where?

And last year, we introduced layered communications, with simpler, more accessible language and graphics to
reach the broadest possible audience.

So we have had some dumbing down and then climbed the steps to the highest Ivory Tower he could find.

It now publishes its best collective judgments on the natural rate of unemployment, the output gap, as well as the
expected growth in productivity, labour supply and potential output.

I would like to pick out just one to illustrate how lost in the clouds this particular Ivory Tower is and that is the natural rate of unemployment. Was it the 7% he first used? Er no. In fact on the 28th of June 2014 it was already in disarray.

Governor Mark Carney pointed out that some work had suggested that the equilibrium unemployment rate (the lowest rate compatible with non-accelerating inflation) may be more like 5.5% than the 6.5% previously used.

I cannot recall if it went to 5% but it did go to 4.5% and is now 4.25%. Imagine the Bank of England had used such “science” to design the Titanic. They would be able to claim that it had not hit the iceberg but only because it would have sunk before it got out of port.

Reality got most suspended here.

The interest rate expectations of households and businesses have remained in line with the MPC’s limited
and gradual guidance………Guidance has reduced the impact of economic uncertainty on short-term interest rates

No the regular hints of an interest-rate rise have increased uncertainty especially when as has so often happened the unreliable boyfriend has flip-flopped. Ironically the next bit is true but not for the reasons given.

Guidance has dampened the volatility of interest rates, consistent with the expected and actual path of policy
rates (Chart 4). Guidance has reduced the impact of economic uncertainty on short-term interest rates.

The truth is that fewer and fewer people take any notice of his pronouncements. This was highlighted last night by the way the UK Pound £ responded with a yawn to the speech. Such a development must be most hurtful to someone whose ego is such that they changed the Bank of England website to have “Latest from the Governor” on the front page.

Comment

This is provided by two responses to last night’s speech. Here is a view which is clear on one side.

Okay so the only way is up! Or perhaps not. From Reuters.

The Bank of England could pump more stimulus into Britain’s economy if this year’s Brexit negotiations result in a bad deal, BoE governor Mark Carney said on Thursday.

In the past this would have been considered to be a masterly speech from a central bank Governor but not when he/she is claiming to provide Forward Guidance. because as you can see they can claim to be right whatever happens via some selective cherry picking but the ordinary person can not.

Why might Governor Carney hint at interest-rate rises and not do them. As ever the “precious” seems to be in the mix. From @IrkHudson.

Helps banks margins

UK Retail Sales give a hint of stagflation

We move onto the official retail sales situation having been warned that times have been hard. On the 14th of this month the British Retail Consortium told us this.

Much could be made of the adverse impact on April’s footfall of Easter shifting to March, but even looking at March and April together – so smoothing this out – still demonstrates that footfall has plummeted. A -3.3% drop in April, following on from -6% in March, resulted in an unprecedented drop of -4.8% over the two months. Not since the depths of recession in 2009, has footfall over March and April declined to such a degree, and even then the drop was less severe at -3.8%.

The news there was no good and there was a rather ominous reference to 2009 as we all know what happened next. Part of this is the switch from high street to online shopping which is a major driver in this.

 in April nearly 1 in 10 shops in town centres was vacant.

That seems to be true in my area although I note that these are described as a “flagship store opportunity” on the Kings Road in Chelsea. This morning has seen more of the same. From the BBC.

The wave of cold weather dubbed the Beast from the East took a big bite out of B&Q’s sales in the three months to 30 April, its owner Kingfisher has said.

Like-for-like sales at the DIY chain tumbled 9% in the UK and Ireland.

The woe was not contained to the UK for Kingfisher, with sales at Kingfisher’s French DIY chain Castorama also dropping 8%.

The falls led to an overall 4% decline in like-for-like sales for the quarter.

This has been added to by the woes at Marks and Spencer which was a benchmark for quality retailing in the UK but certainly in my experience lost its way. It now plans to close 100 stores and as to the reasons well the Guardian puts it like this.

Wired world: M&S faces greater competition as the internet has made it easier than ever to shop around……Too many shops:……

Poor stores:………Fashion faux pas:…..This is not just M&S food … It’s too expensive and rivals have caught up. …….M&S Inc: The business culture at M&S has long been criticised for being too bureaucratic……..Peak stuff? M&S is exposed to a shift in spending that is seeing Britons spend less on wardrobe updates.

I have two main thoughts on that. Firstly wasn’t the structure at M&S supposedly turned round by Stuart Rose? The UK establishment certainly gave that impression by making him Baron Rose of Monewden. Also the “peak stuff” issue can be taken further and wider as you see until recently UK retail sales were seeing quite a boom.

“Retailers saw a strong end to 2016 with sales in the final quarter up 5.6% on the same period last year,”

Back then we were in a phase that I thought and argued would work but of course the central bankers and their media acolytes were too busy scaremongering about DEFLATION to figure out.

Longer term, retail sales have continued to grow strongly since 2014, following a stagnant period during the economic downturn. Growth in sales coincides with a continued decline in store prices as prices began to fall in March 2014

The index set at 100 in 2013 had risen to 114.7 and my point about “peak” is did even the British consumer to some extent satiate themselves? There is a potential element of rationality too because if they expected price rises from a weaker UK Pound £ it would be logical to buy more if you could.

Today’s data

I am pleased to report that I was on the case on Tuesday.

Even VAT rose a little from £11.2 billion to £11.5 billion which may suggest that the more apocalyptic surveys on retail sales have been exaggerated.

This was because the ONS reported this.

When compared with March 2018, the quantity bought in April increased by 1.6% as all sectors, excluding department stores, recovered from the declines seen in March.

If we look for some perspective we see this.

The quantity bought and amount spent increased by 1.4% and 3.5% respectively when compared with both the same month to a year earlier and the three months to a year earlier. There was little movement to growth in the three months to April, with a slight increase of 0.1% in the quantity bought compared with the previous three months.

So we see that in fact we have some growth and as it happens it is pretty similar to the rate of growth we think we have for the wider economy right now. Not quite what we keep being told as we cross our fingers that the slow down in the monetary data is just that rather than a reversal.

For our official statisticians the numbers presented a couple of problems. If you tell people that the weather was not a material effect in March then this is to say the least awkward.

Petrol sales reported the largest recovery in April, with a growth of 4.7% compared with a decline of negative 6.9% in the previous month as road closures affected travel in March.

Or this.

The effects of the adverse weather on sales introduces further volatility to the monthly growth rate in April 2018.

Also I am sorry to say that what used to be called the “Early Wire” seems to be still around for some at least.

Who knew

Remember when we were such fools
And so convinced and just too cool
Oh no (Pink)

Comment

So we now know we are in a phase of slower retail sales growth but what happens next. Well only on Tuesday the Bank of England gave its view.

As inflation falls back, and wage growth improves somewhat due to reduced labour market slack, household real income growth is set to pick up this year. That should support consumption growth………. A key risk for this year is to what extent household will spend the additional real income, or use it to rebuild the savings that were eroded
last year.  ( Gertjan Vlieghe)

So it should get better but it might not? Thanks for that Jan. Still when you cling to a failure like the Phillips Curve the world must seem an uncertain and frightening place.

A lower unemployment rate should still be expected to push up on wages.

In reality retail sales will be supported by the end of the decline in real wages and could get a boost if they rise but as we have seen from the inflation data yesterday the situation for late summer is not what it was. We could be heading for a period of what used to be called Stagflation. To the response that inflation is lower now I would reply that you are correct but it is the relationship between it and wage growth which is material now. The numbers may be lower but the impact on people is the same.

Meanwhile in a universe far.far, away a man responsible for a £60 billion Sledgehammer for markets announces this on the Bank of England social media feed.

Mark Carney looks at what’s been done to re-build market infrastructures so real markets can thrive.

 

The UK Public Finances give the UK economy a positive message

The focus returns to the UK economy today and as the sunshine pours through my windows let us remind ourselves of one of its strengths. From the BBC.

Ed Sheeran was the big winner at this year’s Billboard Awards, held in Las Vegas.

The singer took home four awards: top artist, top radio songs artist, top song sales artist and top hot 100.

Yes it was overall a good weekend for those of the ginger persuasion as we got a reminder of a successful part of our economy. From the UK Music website.

The UK music industry grew by 6% in 2016 to contribute £4.4 billion to the economy, a major new report reveals today…….Successful British acts including Ed Sheeran, Adele, Coldplay, Skepta and the Rolling Stones helped exports of UK music soar in 2016 by 13% to £2.5 billion.

Millions of fans who poured into concerts ranging from giant festivals like Glastonbury to small bars and clubs pushed the contribution of live music to the UK’s economy up by 14% in 2016 to £1 billion.

There was a time that the success of the industry was frittered away by the use of Columbian marching powder but of course in a masterstroke that is now added to the GDP numbers. Although exactly how to measure this is a mystery to me and when I have checked appears to be something of a mystery to our statisticians too. As Fleetwood Mac would put it “Oh Well!”

Bank of England

No doubt Governor Mark Carney will be cheered by this week;s headlines assuming of course he has spotted them. From Graeme Wearden of the Guardian

FTSE 100 hits record high as US and China call a trade war truce 🇺🇸🇨🇳

Perhaps he will take the opportunity when he gives evidence to Parliament today to claim yet more wealth effects from higher asset prices as following that headline yesterday the FTSE 100 has pushed even higher to 7868 this morning. This would be in not dissimilar fashion to the way that the Bank of England has done so with house prices after it made a policy switch back in the summer of 2012 to explicitly boost them with the Funding for Lending Scheme. Of course a full exposition of the state of play in the equity market would need to allow for dividends and inflation.

Meanwhile the last week has seen the Bank of England and Mark Carney hit troubled water again on this issue of what we might call “woman overboard”. This is where the intelligent one ( Kristin Forbes) did not want a second term and the much less intelligent one ( Minouche Shafik)  had to be made a Dame to cover up her early departure. That is before we get to this. From the BBC

Charlotte Hogg has spoken of learning lessons after the “mistake” that ended her career at the Bank of England.

A former deputy governor – and tipped to take the top job – she says in her first interview that the experience made her a “different kind of leader”.

Somehow the BBC economics editor Kamal Ahmed seems to have forgotten the way she broke the rules she had set and the implied effort to in essence ride it out in a manner suggesting such rules were not for “one of us”. Also it is hard to know where to start with this.

Since her resignation in March 2017, Ms Hogg has remained out of the public eye.

It is a lesson in the way the UK establishment operates as I note the daughter of a baroness and a Viscount has the chutzpah to tell us this.

As a leader of Visa, I want it to be a more diverse organisation.

This was combined with an even more important issue that her lack of knowledge about monetary policy was no barrier to being appointed to the Monetary Policy Committee (MPC) for what Sir Humphrey Appleby would no doubt call “One of Us”.

As to Governor Carney I do hope that the Treasury Select Committee will grill him on his Forward Guidance. Here he is from August 2013 on the BBC.

So that people watching this at home, so that people running businesses here across the United Kingdom can make decisions about whether they are investing or spending with greater certainty about what’s going to happen with interest-rates.

What this has meant in practice is that the Unreliable Boyfriend has regularly promised interest-rate rises but these have not turned up.However when the opportunity came to cut interest-rates he did so immediately. Even that went wrong and had to be reversed after long enough had been left to try to avoid it looking too embarrassing.

Oh and they could also ask how he seems so often to talk for the whole MPC when the other eight members are supposed to be of independent mind especially the four external members?

Public Finances

These have been performing pretty well recently and this morning’s data continued on this happier theme.

Public sector net borrowing (excluding public sector banks) decreased by £1.6 billion to £7.8 billion in April 2018, compared with April 2017; this is the lowest April net borrowing since 2008.

The last bit is of course going to be true every time now until the next downturn but behind it has been a consistent stream of improvements  which have contradicted some of the other data which have been weaker. For example receipts from Income Tax were strong rising from £11.4 billion last year to £12.8 billion this. Even VAT rose a little from £11.2 billion to £11.5 billion which may suggest that the more apocalyptic surveys on retail sales have been exaggerated. Also debt costs fell which seems likely to reflect the fading of the rate of inflation as the main player here will be the impact of the Retail Price Index on index-linked debt costs.

The good news continued if we look back for some more perspective although you may note not very everyone as my first rule of OBR club hits another winner.

Public sector net borrowing (excluding public sector banks) in the latest full financial year (April 2017 and March 2018) was £40.5 billion; that is, £5.7 billion less than in the previous financial year (April 2016 to March 2017) and £4.7 billion less than official (OBR) expectations; this is the lowest net borrowing since the financial year ending March 2007.

So we have passed the time which regular readers will recall saw the economy apparently improve but the public finances struggle to one where the tables have been reversed. If April was any guide then the Income Tax data suggests a better economic situation than we have seen elsewhere and was quite an improvement on 2017/18 when it struggled. But of course one month;s figures are unreliable.

More problems for the Bank of England

The 2017/18 financial year saw a rise in UK debt costs of £5.9 billion which will essentially be the rise in inflation ( RPI) triggered by the fall in the UK Pound £ after the EU leave vote. This is an actual cost often ignored of the Bank of England not only “looking through” the likely inflation rise but adding to it with its Bank Rate cut and Sledgehammer QE of August 2016.

Also there is something rather embarassing in terms of number-crunching.

n compiling debt estimates for March 2018, there was an error in the treatment of data for the Asset Purchase Facility (APF), which incorrectly recorded the data relating to two events in the compilation process:the closure of the Term Funding Scheme in February 2018….the maturation of a tranche of gilts held by the APF.

Okay so what?

However, correcting this error has reduced PSND ex as at the end of March 2018 by £11.0 billion, equivalent to 0.5 percentage points as a ratio of GDP.

Comment

The news from the UK Public Finances is good and was particularly so in April. In addition we were told that the last financial year was around £2 billion better than we had previously calculated. So we now qualify for the Stability and Growth Pact in something of an irony and face the issue of what happens next? We have seen economic stimulus via the ongoing deficits but also austerity for many as funds have been switched between areas and different groups sometimes hurting the poorest. Of course we are several years already behind the planned surplus.

Maybe the numbers tell us we are doing better economically than some of the others although there is a catch and that is the way the numbers have been manipulated. Many of you will recall the Royal Mail pension fund saga where adding future liabilities supposedly improved the public finances and the housing associations who have blown into and then out of the numbers like tumbleweed in the wild west. More recently there is the issue of Bank of England involvement.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,583.2 billion at the end of April 2018, equivalent to 75.8% of GDP, a decrease of £10.5 billion (or 2.8 percentage points as a ratio of GDP) on April 2017.

Meanwhile over at the Treasury Select Committee

 

 

 

Is the Bank of England on a road to another Bank Rate cut?

Yesterday was a rather extraordinary day at the Bank of England and in some respects lived up to the Super Thursday moniker although by no means in the way intended. The media dropped that phrase at exactly the wrong moment. The irony was that for once they may have done the right thing in not raising interest-rates but what this exposed was the ineptitude and failures of their past rhetoric promises and hints. The regime of Forward Guidance can not have been much more of a failure as it found itself being adjusted yet again.

the MPC judges that an ongoing, modest tightening of monetary policy over the forecast period will be
appropriate to return inflation sustainably to its target at a conventional horizon.

Let us mark the obvious problem with the use of ongoing when the Bank Rate is still at the emergency level of 0.5% the Term Funding Scheme is at circa £127 billion and we have £435 billion of QE Gilt holdings and look at what they said in February and the emphasis is mine.

The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report,

So the timing element was wrong and so was the amount which doesn’t really leave much does it?

But things got worse at the press conference because in his attempt to explain this Governor Carney exposed Forward Guidance as an emperor with no clothes. In an exchange with Harry Daniels of LiveSquawk Governor Carney told us that his words were really only for financial markets and implied that they were big enough boys and girls to make their own views. He then contrasted with the ordinary person clearly implying they would not. Seeing as Forward Guidance was supposed to connect with the ordinary person and business Governor Carney torpedoed his own ship there. Also when he later tried to claim people and businesses do listen to him he unwittingly admitted he had misled them,

The people we speak to first and foremost are households and businesses across the country. [They] don’t trade short-sterling. They are not fixated on whether we raise rates on May 10 or at the end of June ( The Times).

They might reasonably have been fixated on his rate rise rhetoric back in June 2014 after all if they could have nearly taken out a couple of 2-year fixed-rate mortgages since then to protect themselves against the interest-rate rises which never happened.

A bizarre element was added on the issue of him talking at 6 pm to the BBC when many UK markets are closed as the Governor tried to claim it was okay because some markets such as the UK Pound £ were traded 24/7. This of course did not address at all the ones that are closed or the lack of liquidity at such times in the ones that are.

Weather or whether?

This got the blame.

The MPC’s central assessment is that it largely reflects the former, and that the underlying pace of growth remains more resilient than the headline data suggest.

The problem here is of course if they really believed that then they should have raised interest-rates! Also it directly contrasted with what our official statisticians had told us a few hours before.

Today’s figures support previous estimates showing the economy was very sluggish in the first quarter of 2018, with little impact overall from the bad weather.

Unreliable Boyfriend

This subject was raised several times and one of them got a rather bizarre response.

Shade from MC: “The only people who throw that term [unreliable boyfriend] at me are in this room” ( @birdyworld )

We do not even need to look beyond the boundaries of this website to know that such a statement is untrue and even the BBC uses the term. The Governor had opened the press conference by shiftily looking around the room before as several people rather amusingly suggested to me talking out of both sides of his mouth. Indeed the man formerly praised for his good looks and for being a rock star central banker seems to have lost the female vote too if this from Blonde Money is any guide.

Carney the ever unreliable boyfriend

There was an alternative view which I doubt the Governor will prefer.

The people outside the room say “who are you” ( @birdyworld )

Especially as it is from someone who thinks he has done a good job.

Wages

There was another odd turn here as Governor Carney went into full Ivory Tower mode and said that the Monetary Policy Committee only looked at regular wages. As it is not that frequent an event let me echo the words of Danny Blanchflower on this subject.

idiotic – workers only care about what is in their pay packet – so you take out the part of pay that varies and then tell us what is left doesn’t vary No other country in the world uses such a dumb measure.

Even worse the Governor tried to say that wages had progressed in line with the forecasts of the Bank of England but this is only if you cherry pick the data. For example the latest month for which we have figures is February and if you take the Governor’s line and look at private-sector regular pay the annual rate of increase was 3%. However if you look at pay across the economy ( and as it happens the private-sector)the annual rate of increase was 2.3%. Will people ignore what was once called “the pound in your pocket” and instead break up the notes and coins into separate piles?

The absent-minded professor

Ben Broadbent is called into play at the press conferences if the going gets tough. His role is twofold being partly to expound widely on minor details to waste time and in a related effort to make the viewers and attendees drowsy if not numb. Sadly I was not that to point out that his rhetoric on Asia ignored Japan where many fear a contraction in the first quarter GDP data due you guessed it to the weather.

He has also been on the Today programme this morning on BBC Radio Four. This seems unwise as people have just got up and do not want to be sent back to sleep but if we move on from that there is this.

BoE’s Broadbent: Message Is That Rate Hikes Will Be Gradual ( @LiveSquawk )

How long can you keep saying that when in net terms there have not been any?

It is entirely the sensible thing to do, to wait to see whether we are right that the economy will bounce back from here, and for me the decision was straightforward

So it was the weather or it wasn’t? Moving on from that is the contrast with August 2016 when Ben appeared somewhat panic-stricken and could not cut rates fast enough where was the waiting for a ” bounce back from here,” then Ben? He also wanted to cut further in November 2016 before of course even he was calmed by the actual data.

On a deeper level I would just like to point out that it was wrong to move Professor Broadbent from being an external member to an internal one. Otherwise external member of the MPC may be influenced by potential sinecures from the Governor which makes their existence pointless.

Comment

The road to a Bank Rate cut and possibly more QE Gilt purchases is simple and it merely involves the current weak patch for the economy persisting. As I have pointed out before the monetary growth numbers have been weakening which suggests the summer and early autumn may not be that good. It is also true that more than a few of our trading partners are seeing a weaker phase too as for example we saw this from France on Wednesday.

Manufacturing output fell sharply over the first
quarter of 2018 (−1.8%)

That leaves it with a similar position to the UK where a better phase seems to have ended at least for now. We know from August 2016 that it will not take much more of this for the Bank of England to look at easing policy in sharp contrast to the nearly four years of unfulfilled Forward Guidance about rises.

I don’t care if you never come home,
I don’t mind if you just keep on
Rowing away on a distant sea,
‘Cause I don’t love you and you don’t love me. ( Eric Clapton)

Meanwhile the consequences continue to build up.

Forty-somethings are now almost twice as likely to be renting from a private landlord than they were 10 years ago.

Rising UK house prices have left many middle-age workers unable to afford a first home,  ( BBC )