What next for the Bank of England?

Today is what used to be called Super Thursday for the Bank of England. It was one of the “improvements” of the current Governor Mark Carney which have turned out to be anything but. However he is not finished yet.

Starting on 7 November, the Bank of England Inflation Report is to become the Monetary Policy Report. The Report is also to undergo some changes to its structure and content.

These changes are part of the Bank’s ongoing efforts to improve its communications and ensure that those outside the institution have the information they need in order to understand our policy decisions and to hold us to account.

Really why is this?

The very latest changes represent the next step in the evolution of our communications.

I suppose when you tell people you are going to raise interest-rates and then end up cutting them you communication does need to evolve!

Communication let me down,
And I’m left here
Communication let me down,
And I’m left here, I’m left here again! ( Spandau Ballet )

The London Whale

There was so news this morning to attract the attention of a hedge fund which holds some £435 billion of UK Gilt securities as well as a clear implication for its £10 billion of Corporate Bonds. From the Financial Times.

Pimco, one of the world’s largest bond investors, is giving UK government debt a wide berth, reflecting concerns that a post-election borrowing binge promised by all the major political parties could add to pressure on prices. Andrew Balls, Pimco’s chief investment officer for global fixed income, said the measly yields on offer from gilts already makes them one of Pimco’s “least favourite” markets. The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive, he said, forecasting that the cost of UK government borrowing would rise.

Yes Andrew Balls is the brother of Ed and he went further.

“Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight,” he told the Financial Times.

Actually pretty much every bond market looks like that at the moment. Also as I pointed out only yesterday bond markets have retraced a bit recently.

The cost of financing UK government debt has been rising over the past month. The 10-year gilt yield has reached 0.76 per cent, from 0.42 per cent in early October. That remains unattractive compared with the 1.84 per cent yield available on the equivalent US government bond, according to Mr Balls,

Mind you there is a double-play here which goes as follows. If you were a large holder of Gilts you might be pleased that Pimco are bearish because before one of the biggest rallies of all time they told us this.

Bond king Bill Gross has highlighted the countries investors should be wary of in 2010, singling out the UK in particular as a ‘must avoid’, with its gilts resting ‘on a bed of nitroglycerine.’ ( CityWire in 2010 ).

Also there is the fact that the biggest driver of UK Gilt yields is the Bank of England itself with prospects of future buying eclipsing even the impact of its current large holding.

House Prices

As the Bank of England under Mark Carney is the very model of a modern central banker a chill will have run down its spine this morning.

Average house prices continued to slow in October, with a modest rise of 0.9% over the past year. While
this is the lowest growth seen in 2019, it again extends the largely flat trend which has taken hold over
recent months ( Halifax)

Indeed I suggest that whoever has to tell Governor Carney this at the morning meeting has made sure his espresso is double-strength.

On a monthly basis, house prices fell by 0.1%

This is the new reformed Halifax price index as it was ploughing rather a lonely furrow before. We of course think that this is good news as it gives us another signal that wages are gaining ground relative to house prices whereas the Bank of England has a view similar to that of Donald Trump.

Stock Markets (all three) hit another ALL TIME & HISTORIC HIGH yesterday! You are sooo lucky to have me as your President (just kidding!). Spend your money well!

The Economy

This is an awkward one for the Bank of England as we are on the road to a General Election and the economy is only growing slowly. Indeed according to the Markit PMI business survey may not be growing at all.

The October reading is historically consistent with GDP
declining at a quarterly rate of 0.1%, similar to the pace
of contraction in GDP signalled by the surveys in the third
quarter

Although even Markit have had to face up to the fact that they have been missing the target in recent times.

While official data may indicate more robust growth
in the third quarter, the PMI warns that some of this could
merely reflect a pay-back from a steeper decline than
signalled by the surveys in the second quarter, and that the
underlying business trend remains one of stagnation at
best.

The actual data we have will be updated on Monday but for now we have this.

Rolling three-month growth was 0.3% in August 2019.

So we have some growth or did until August.

The international environment is far from inspiring as this just released by the European Commission highlights.

Euro area gross domestic product (GDP) is now forecast to expand by 1.1% in 2019 and by 1.2% in 2020 and 2021. Compared to the Summer 2019 Economic Forecast (published in July), the growth forecast has been downgraded by 0.1 percentage point in 2019 (from 1.2%) and 0.2 percentage points in 2020 (from 1.4%).

The idea that they can forecast to 0.1% is of course laughable so it is the direction of travel that is the main message here.

Comment

If we move on from the shuffling of deckchairs at the Bank of England we see that its Forward Guidance remains a mess. From the September Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

Does anybody actually believe they will raise interest-rates? If we move to investors so from talk to action we see that in spite of the recent fall in the Gilt market the five-year yield is 0.53% so it continues to suggest a cut not a rise.

More specifically there was a road to a Bank of England rate cut today as this from the 28th of September from Michael Saunders highlights and the emphasis is minr.

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further.

He was an and maybe the only advocate for higher interest-rates so now is a categorised as a flip-flopper. But it suggested a turn in the view of the Bank in general such that this was suggested yesterday by @CNBCJou.

Looking forward to the BOE tomorrow where the new MONETARY POLICY REPORT will be presented (not to be confused with the now defunct INFLATION REPORT). A giant leap for central banking. * pro tip: watch out for dovish dissenters (Saunders, Vlieghe?) $GBP

The election is of course what has stymied the road to a return to the emergency Bank Rate of 0.5% as we wait to see how the Bank of England twists and turns today. Dire Straits anyone

I’m a twisting fool
Just twisting, yeah, twisting
Twisting by the pool

The Investing Channel

 

 

What are the economic consequences of Brexit?

After all the uncertainty in the UK we will have some sort of progress in that we will have an election putting the voters at least briefly in charge. Whether that will solve things is open to debate but let us take a look at what the economic situation will be should the UK start to actually Brexit from the European Union. The NIESR has looked at it and the BBC has put it in dramatic terms.

Boris Johnson’s Brexit deal will leave the UK £70bn worse off than if it had remained in the EU, a study by the National Institute of Economic and Social Research (NIESR) has found.

That is a rather grand statement which fades a little if we read the actual report which starts like this.

The economic outlook is clouded by significant economic and political uncertainty and depends critically on the United Kingdom’s trading relationships after Brexit. Domestic economic weakness is further amplified by slowing global demand.

The latter is somewhere between very little and nothing to do with Brexit. We are in a situation where the 0.3% quarterly GDP growth declared by France this morning looks good in the circumstances.

This brings us to the first problem which is that the NIESR is predicting that sort of growth for the UK.

On the assumption that chronic uncertainty persists but the terms of EU trade remain unchanged, we forecast economic growth of under 1½ per cent in 2019 and 2020, though the forecast is subject to significant uncertainty.

So where is the loss? As it happens they have predicted 1.4% economic growth which is as fast as the economy supposedly can grow these days according to the Bank of England.

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.

I am no great fan of this type of analysis but remember we are in the Ivory Tower Twilight Zone here. Now let us factor in the problems the Ivory Towers tell us about business investment.

Prior to the EU referendum, UK business investment growth was growing in line with average growth across the rest of the G7. Since then, it has risen by just 1% in the UK, compared to an average of 12% elsewhere……..DMP Survey data suggest that the level of nominal investment may be between 6%–14% lower than it would have been in the absence of Brexit uncertainties. ( Bank of England August Inflation Report)

So there is potentially quite a bit of business investment growth in the offing. How much? I do not know but it could quite easily be a sizeable swing. That view rather collides with the statement below from the NIESR.

We would not expect economic activity to be boosted by the approval of the government’s proposed Brexit deal. We estimate that, in the long run, the economy would be 3½ per cent smaller with the deal compared to continued EU membership.

So the business investment was not held back but lost forever?

They do however seem to have a rather extraordinary faith in the power of a 0.25% interest-rate cut.

In our main-case forecast scenario, economic conditions are set to continue roughly as they are, with output close to capacity but underlying growth remaining weak and well under its historic trend. Real wage growth is supporting consumer spending, but weak productivity growth means that the current pace of expansion may not be sustainable. Rising domestic cost pressures are offset to some extent by slower import price growth and CPI inflation is forecast to remain close to target. In line with our previous forecasts, fiscal policy is being loosened. This, together with an expected cut in Bank Rate next year, is supporting economic growth in the near term.

Odd that because surely we would not be here if interest-rate cuts had that sort of effect. Looser fiscal policy does seem to be on the cards whatever government we get next and the rising real wages point is interesting as it means they are not expecting a fall on the value of the UK Pound £.

Also there is very little there which is anything to do with Brexit at all. I note that they have no idea what inflation will do so they simply say it will be in line with its target. Indeed

underlying growth remaining weak and well under its historic trend.

is where we are these days and economic growth being supported by fiscal policy makes us sound the same as France which last time I checked is not Brexiting at all.

Finally we do get to a proposed loss.

Compared to our main-case forecast, uncertainty would be lifted but customs and regulatory barriers would hinder goods and services trade with the continent, leaving all regions of the United Kingdom worse off than they would be if the UK stayed in the EU.

Now we have it! There is of course an element of truth here as there are gains from being in the Single Market. But the reality is that we do not yet know what out future relationship will be and even more importantly how economic agents will respond to it.

Bank of England

There were some extraordinary reports last night emanating from ITV’s Robert Peston. I think that Robert is desperate for attention but as the son of a Labour Peer he is extremely well connected to say the least. So let us note this.

I’ve been aware for some time that the prime minister and chancellor have a preferred candidate to be next governor of the Bank of England – and it is none of the five who were interviewed a few weeks ago (Cunliffe, Bailey, Broadbent, Vadera, Shafik) and passed the the competence threshold.

If the competence threshold was one passed by Nemat Shafik then even the world’s best limbo dancer must be unable to get under it. For newer readers she was made a Dame and put in charge of the LSE to cover up her early exit from the Bank of England which happened because she was out of her depth. Indeed is she is in play then this suggestion would at least give us a laugh.

It’s….Rebekah Vardy.

Actually matters got more complex as the issue of whether it was appropriate now was raised and the issue of any likely international candidate (Raghuram Rajan )was raised. Then there were the possible political style appointments which Robert ignored presumably on the grounds that it was fine when the current incumbent espoused views with Robert himself might have made but might be something rather inconvenient looking forwards.

Comment

We find as so often that what is presented as fact has strong elements of opinion attached to it. In economics that is driven by the assumptions made in any economic modelling which are usually more powerful than actual events. An example of this was provided by the UK Office for Budget Responsibility back in 2010. It predicted we would now have Gilt yields of 5% and would have seen wage growth at the same level for some time. In reality we have a 50 year yield o just over 1.1% and wage growth has maybe made 4% for a bit after years of way under-performance. On that road 3.5% GDP growth starts to look more like a rounding error. So will there be an effect? Yes as we adjust, but after that it will be swamped by other developments.

Returning to the role of Bank of England Governor then perhaps Mark Carney just like QE and low/negative interest-rates may be to infinity and beyond! Perhaps a daily extension this time around?

 

 

 

 

 

UK wages growth, employment and unemployment all weaken in a worrying sign

Today merges several of our themes as a rather packed diary sees Bank of England Governor Mark Carney give evidence to Parliament just as the latest employment and wages data are released. There are various matters which make have him breaking out in a cold sweat. One is the rally in the UK Pound £ to US $1.266 which even he may be able to talk down. The next is the rise in annual wage growth above 4% which in the past has been regarded as something of a threshold for considering interest-rate increases. Of course that is likely to go the way that the 7% unemployment rate did! That of course raises the next issue of how the unemployment rate has fallen below 4% being chased by an equilibrium unemployment rate which is apparently now 4.25%.

It was only yesterday that I pointed out that Dave ( Sir David to his friends) Ramsden of the Bank of England was still churning out the failed Ivory Tower output gap methodology.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth,

Also tucked away in a really dull speech about longer-term trends Sir Jon Cunliffe made the case for more policy activism.

But, taken together with other changes in the economy – such as changes in the labour market which appear to have led to some flattening of the wage Phillips curve and
changes in the pass-through of labour costs to consumer prices – the probability is that demand management will need to use more tools to stimulate demand in downturns and work harder to prevent macro-economic tail events.

My apologies for their Phillips Curve obsession, but you see he is trying to tell us lower interest-rates are really nothing to do with him and his colleagues and then ask for even more freedom to interfere in the economy! He continues on that path here and “can be overdone” is classic civil service speak where is he taking out a bit of an each-way bet for himself ( but not us).

There is a lively debate over the extent to which aggressive use of monetary policy tools to stimulate demand creates financial stability risks by inflating asset prices and encouraging risk taking and the build-up of debt. My own view is that this can be overdone. There are, as I have said, deep-seated underlying structural drivers of low for long.

Perhaps he learnt all this stuff during his time at HM Treasury ( 1990-2007) which seems to have undertaken a reverse takeover of the Bank of England.

Wages

Today has brought some news that the recent past was not quite as good as we thought it was . Last month we were told that average earnings growth in July was 4.2% but this morning that has been cut to 3.9% which ch-ch-changes the picture somewhat. So now let us peruse this month’s data.

Estimated annual growth in average weekly earnings for employees in Great Britain was 3.8% for both total pay (including bonuses) and regular pay (excluding bonuses).

This means that the Bank of England can let loose a sigh of relief as the 4% wages growth threshold was not in fact in play as we only made 3.9% and have now dipped back to 3.8%. In terms of a pattern we see that since October last week each month with only one exception has seen annual wages growth above 3% so we have moved to a new higher path. Of which August at 3.6% is consistent with that and the detail backs this up.

All sectors except manufacturing saw annual pay growth of at least 3.0%; construction saw the highest estimated growth of over 5.5% for both total pay and regular pay…..manufacturing saw the lowest growth, estimated at 2.7% for total pay and 2.5% for regular pay.

So the numbers are good but not as good as we were previously told and maybe this was a factor.

Public sector pay growth has fallen back below that for the private sector, following higher growth in March to May 2019, impacted by the effect of a different pattern of pay rises for some NHS staff in 2019 compared with 2018.

Real Wages

According to the official rhetoric the position is now rather good.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.9% and annual growth in regular pay is estimated to be 2.0%.

As nominal pay growth is the same I am not sure how they get to that! Let us hope there is a difference at the second decimal place. But the fundamental issue is that it requires the use of the fantasy imputed rent driven CPIH inflation measure to get numbers that high. If we use RPI it drops back to more like 1%.

Also even using it we remain in a depression for real wage growth.

The equivalent figures for total pay in real terms are £502 per week in August 2019 and £525 in February 2008, a 4.4% difference.

Employment

The situation here has been good for seven years or so but this morning indicated the first signs of a wobble.

The UK employment rate was estimated at 75.9%; higher than a year earlier (75.6%) but 0.2 percentage points lower than last quarter……the estimated employment rate for women was 71.6%; this is 0.6 percentage points up on the year, but 0.3 percentage points down on the quarter

I added the detail on women because the change was them. Does anybody have any thoughts as to why this might be so?

We get some more detail from this.

Estimates for June to August 2019 show 32.69 million people aged 16 years and over in employment, 282,000 more than a year earlier. This annual increase was mainly driven by women (up 202,000 on the year), those aged 50 years and over (up 287,000 on the year) and full-time workers (up 263,000 on the year). There was, however, a 56,000 decrease in employment on the quarter, which was the first quarterly decrease since August to October 2017.

Furthermore we seem to be switching towards self-employment again.

However, the latest estimate shows the weakest annual increase for employees since May to July 2012 (see Figure 3), making it smaller than the annual increase for the self-employed.

Unemployment

This has been in a long downtrend but again we saw a change today.

The UK unemployment rate was estimated at 3.9%; this is lower than a year earlier (4.0%) but 0.1 percentage points higher than last quarter…….the level of unemployment increasing by 22,000 to 1.31 million, in the three months to August 2019.

Yet rather oddly considering the pattern of the employment data above it was men that were made unemployed.

the estimated UK unemployment rate for men was 4.0%, 0.1 percentage points lower than last year but 0.1 percentage points higher than the previous quarter……..the estimated UK unemployment rate for women was 3.7%, down 0.3 percentage points on a year earlier but largely unchanged on the quarter.

Comment

This is the first real hint of a possible sea change in the UK labour market which has just seen something of a troika of news. Wage growth is slower than we thought combined with weaker employment and higher unemployment. We still have much better wage growth and the employment levels are very high but if we were the Star ship Enterprise the Captain would be considering pressing the yellow alert button.

The changes in the wages data remind us of the caution that is requited with even official data. Let me remind you that the self-employed and the armed forces are ignored and that companies below 20 people are mostly imputed.

Returning to the Bank of England then they will be thinking of another interest-rate cut whilst Governor Carney emits gens like this.

“The pound is either going to move up or down,” says Mark Carney ( @BruceReuters)

Also he has been contradicting past Bank of England research.

BANK OF ENGLAND’S CARNEY SAYS UK INCOME AND WEALTH INEQUALITY FELL OVER THE PERIOD BOE QUANTITATIVE EASING WAS ACTIVE ( @RedboxGlobal )

 

 

 

 

Is it time for a new world currency?

With so many financial markets in flux our central banking overlords are lost in a world of confusion right now. Also the slowing world economy has them in a tizzy as even the most credulous must realise that their Forward Guidance is an oxymoron and the less polite will drop the oxy bit. All this is symbolised in a way by the Italian ten-year yield falling below 1% this morning in a scenario that in the past would have led to a bond vigilante all-nighter.

There is also an individual element to the next bit as the author of the new currency plan is looking to enhance his own claims for the job as head of the IMF. Here is the editor of the Financial Times Lionel Barber.

A heavyweight last minute pitch for the IMF job from the Canadian-British-Irish candidate – well worth reading.

The most revealing bit I think is the journey from being according to the FT a “rock star” central banker to someone whose name apparently cannot be mentioned. Governor Carney will no doubt be furious that his long-planned coronation as head of the IMF seems to have been usurped even in terms of UK support by his former boss George Osborne.

The Problem

Learning nothing from his debacles with an equilibrium unemployment rate ( remember when he signposted 7%) and the lower bound for interest-rates ( stating 0.5% then cutting to 0.25% and promising 0.1% at one point) we have a new toy.

In an increasingly integrated world, global r* exerts a greater influence on domestic r*. As the global
equilibrium rate falls, it becomes more difficult for domestic monetary policy makers everywhere to provide
the stimulus necessary to achieve their objectives.

For newer readers r* is the idea of a normal or equilibrium interest-rate and until around last November was what the US Federal Reserve was searching for. However as their Ivory Tower fantasy got even vaguely close to reality they ended up singing along with U2.

But I still haven’t found
What I’m looking for
But I still haven’t found
What I’m looking for

Under pressure from President Trump they gave up and decided that south was the new north and started to cut interest-rates.

Returning to the speech the ordinary person would not know the difference between an interest-rate of 1% caused by world or domestic r^. Why is he doing this? Having slashed interest-rates and it not working he and his cohorts want to shift the blame onto someone or something else. Also if you think this through logically he seems upset that he cannot reduce the value of the UK Pound £.

So if this was a game of chess he has had everything he wanted but now the results are embarrassing he wants to knock the board over like a child in a fit of pique

In the medium term, policymakers need to reshuffle the deck…….In the longer term, we need to change the game.

What to do

Those familiar with the track record of Governor Carney will not be surprised by this bit.

In these circumstances, the Committee can extend the horizon over which it returns inflation to target…… policymakers would do better to trade off inflation and output volatility,

A bit of inflation will fix it. Meanwhile back in the real world people are worse off. Whilst he is at it there is also time to make his dream job even more important. It is hard to know where to start with the moral hazard in this bit.

The deficiencies in the current IMFS mean that the IMF should play a central role in informing both domestic
and cross border policies. In particular, discussions at the Fund can identify those circumstances when
spillovers from the core are particularly acute.

Is this the same IMF that helped foster an economic depression in Greece and is currently in quite a quagmire with its programme in Argentina where there are 70% interest-rates in spite of it being the largest ever intervention or a fantasy one? Still there is some more time to make his dream job even better.

Pooling resources at the IMF, and thereby distributing the costs across all 189 member countries, is much
more efficient than individual countries self-insuring…….A better alternative would be to hold $3 trillion in pooled
resources, achieving the same level of insurance for a much lower cost. This would imply a tripling in the
IMF’s resources over the next decade, enough to maintain their current share of global external liabilities.

With responsibility and power comes accountability or at least it should. Still with that amount of pooled funding the IMF would be able to shuffle its Argentina problem into a dark corner.

The Plan

Here is the nub of it. As ever such things require an acronym and International Monetary Financial System is the new one. Perhaps International Rescue was too much even for them.

The main advantage of a multipolar IMFS is diversification. Multiple reserve currencies would increase the supply of safe assets, alleviating the downward pressures on the global equilibrium interest rate that an
asymmetric system can exert. And with many countries issuing global safe assets in competition with each
other, the safety premium they receive should fall.

Actually the main disadvantage of a multipolar IMFS is its diversification so we have nor started well. For example how would the move in recent times of the Euro from 7.5 Chinese Yuan to 7.9 then relate to “safe assets”? Also how would the flash rally of the Japanese Yen back in January? Whilst in theory a type of actual Special Drawing Right ( the present IMF currency unit) works there is no evidence it would work in practice and in fact would be a complete debacle if everyone wanted US Dollars.

Even if you issue assets in a new “SDR-IMFS” there is the problem that you would be paying for it in your own currency be it Pounds, Euros or Yen so there is a risk which can only be alleviated by fixed exchange rates. With the issues around the Euro I doubt even the most elevated Ivory Tower really believes a type of global Euro would work but of course with them you never really know.

As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would
be best provided by the public sector, perhaps through a network of central bank digital currencies.

Comment

I thought that today I would provide my comment using the words of Governor Carney to explain what he really plans. He is where he is actively misleading listeners/readers.

A more diversified IMFS would also reduce spillovers from the core and by so doing lower the synchronisation of trade and financial cycles. That would in turn reduce the fragilities in the system, and increase the sustainability of capital flows, pushing up the equilibrium interest rate.

The truth is tucked away here.

While the likelihood of a multipolar IMFS might seem distant at present, technological developments provide
the potential for such a world to emerge. Such a platform would be based on the virtual rather than the
physical.

Ah a virtual currency! Here is the IMF on that from February.

One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries. To get around this problem, in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

By up he means down.

What never happens in these sort of reports is addressing the problem of why increasing the dose again will work after so many failures?

Me on The Investing Channel

UK GDP continues to grow albeit not by much

Today brings us to what is called a theme day for the UK economy as we receive a raft of data. Too much data in fact for one day as we mull whether a latter day Sir Humphrey Appleby took the decision, especially as it is the usually poor trade data which tends to get ignored. Speaking of being ignored then one set of eyes at least seem to be elsewhere at the moment. From Euronews.

Germany and France agreed some time ago to support Bank of England Governor Mark Carney to be the new head of the International Monetary Fund, the Frankfurter Allgemeine Zeitung reported on Tuesday.

 

Without citing a source, the daily said Berlin and Paris had originally agreed to support Carney with a view to him taking over at the IMF in 2021, but this had been moved forward due to incumbent IMF chief Christine Lagarde’s forthcoming move to the European Central Bank and Carney was available from January.

 

A French official said at the weekend that, while France was aware support was growing for the Canadian-British-Irish citizen, there was concern that appointing “basically a Canadian” would set a precedent for a job that has traditionally been held by a European.

Regular readers will be aware that I have long argued that this has been Governor Carney’s plan all along. The Bank of England job was a mere stepping stone on the way to greater things, from his point of view. I also note that he is now being described as a Canadian-British-Irish which makes me think that either he could find no French ancestry or that it has gone out of fashion at the IMF. Oh and the story has been officially denied this morning which pretty much nails it as true.

Meanwhile fans of the science fiction series The Outer Limits will enjoy the new economics version that Nomura seem to be running.

Nomura pushes back next BoE rate hike forecast to May 2020 from Nov 2019… ( @BruceReuters )

The UK Pound £

This has been depreciating since the 3rd of May when the effective or trade-weighted index was 79.8 as opposed to the latest 75.9. So the UK economy has been seeing something of a boost which is equivalent according to the old Bank of England rule of thumb to just under a 0.75% cut in Bank Rate.

So if Governor Carney believed his own Forward Guidance he could raise interest-rates in response to 1% and still have an economic boost from the currency decline.

UK GDP

The news was good if we allow for the fact that we are in troubled times.

Monthly gross domestic product (GDP) growth was 0.3% in May 2019, following negative growth in April 2019……UK GDP grew by 0.3% in the three months to May 2019.

Actually the 0.3% theme continued as both UK Production and Services grew by that in the three months to May. Construction was the odd one out as it did not grow at all which does coincide to some extent with my Battersea Dogs Home to Vauxhall crane count which after peaking at 49 from a start of 25 has dipped back to 47.

There were a couple of points of detail in the numbers so let me start with the month of May.

Within manufacturing over half of the subsectors fell, so overall growth is due to transport equipment, which rose by 12.4%; this is the strongest rise since April 2005 and is a partial bounceback from the fall of 13.8% during April 2019.

Thus on a monthly basis we are boosted by the sector which is in recession as we mull the shambles of the Brexit deadline which came at the end of May in more ways than one. Also it is a sector which has seen some good news since those figures. From the BBC yesterday.

BMW has given a boost to the UK car industry by confirming that the production of its new electric Mini will start in Cowley in November.

Deliveries of the brand’s first fully electric car will start in March 2020.

This adds to the boost provided by Jaguar Land Rover last week.

Jaguar Land Rover (JLR) is investing hundreds of millions of pounds to build a range of electric vehicles at its Castle Bromwich plant in Birmingham.

Initially the plant will produce an electric version of the Jaguar XJ.

So it is an ever-changing picture which perhaps some hopes looking ahead after what has been a rough run. Oh and we sometimes discuss robots as we find out where more than a few are.

The state-of-the art automated Cowley plant has more than 1,000 robots on the assembly line

Moving to the latest three monthly data there was this in the report on the services sector.

The financial and insurance activities sector fell again in the latest three months; it decreased by 0.7% and contributed negative 0.06 percentage points. This sector has not seen positive growth since the three months to April 2017, the longest period on record without a rise.

This is something that may attract the attention of the Bank of England where the concept of “The Precious” shrinking for two years in a row will set off an alarm or two. Of course that is before this week’s news of job losses at Deutsche Bank London which will further depress the numbers which already reduced GDP by 0.05%.

Oh and it would appear that the film industry continues to be on something of a tear in the UK.

The information and communication sector also saw a large rise in the latest three months. The sector increased by 1.1% and contributed 0.09 percentage points. There was widespread growth within the sector, with the motion pictures, information services activities and computer programming industries all contributing to the rise.

If we look at the specific category which includes TV and music we see that the index which was set at 100 in 2016 is at 139.4 and it grew by 6.4% in the year to May. So please be nice to any luvvies you may meet!

Trade

There was some better news here.

The total trade deficit (goods and services) narrowed £4.6 billion to £12.6 billion in the three months to May 2019, due mainly to the trade in goods deficit narrowing £4.6 billion to £39.7 billion.

I mean better news in relative terms because switching to an absolute theme we saw another deficit in what is an extremely long-running series. Part of it was due to likely stockpiling to cover the March Brexit deadline.

Falling imports of machinery and transport equipment, and chemicals were the main drivers in the narrowing of the trade in goods deficit in the three months to May 2019.

It is time for my regular reminder that we get lots of detail on trade in good including sectoral and geographical detail but for services we get this.

The trade in services surplus remained flat at £27.1 billion in the three months to May 2019. Exports of services increased £0.4 billion to £74.0 billion, while imports also increased £0.4 billion to £46.9 billion.

Er that’s it…..

Comment

So it turns out that May was not too bad which is a bit awkward for the Markit PMI which at 50.7 suggested no growth. We wait to see of they were right about this.

The June reading rounds off a second quarter for which the
surveys point to a 0.1% contraction of GDP.

Today’s March revision from -0.1% to 0.1% reminds us that the numbers are however not as accurate as many try to have us believe.

So the picture is complex and going forwards we will be receiving a boost from two factors. The first is the lower value of the UK Pound £ and the second is the impact of lower Gilt yields. They have rebounded from the lows but even so the ten-year Gilt yield is the same as the 0.75% Bank Rate. I do expect this to filter into mortgages although the effect so far has been disappointing. From Mortgage Introducer about Barclays.

For residential purchases and remortgages a 2-year fix at 60% loan-to-value (LTV) with a £299 fee will see its rate cut from 1.59% to 1.55%

At 75% LTV two mortgages, both with a £999 fee, will have their rates reduced, a 1.52% 2-year fix will decrease to 1.48% and a 1.88% 5-year fix will be cut to 1.83%.

Along the way I spotted a what could go wrong moment?

Danny Belton, head of lender relationships, Legal & General Mortgage Club, said: “The Kensington of today has a refreshing approach when it comes to understanding customers.

“Through this new lens, and with the use of data, they are able to offer great products that really meet the needs of those customers who want to borrow larger amounts and higher LTVs.

Governor Carney sees his interest-rate promises crumble again

Yesterday was quite a day in the life of Bank of England Governor Mark Carney as he faced the problems created by his own Forward Guidance on interest-rates, but later saw one of his hopes and dreams hover tantilisingly in the distance. It will have provided some variety as he pressed the control P button to make sure plenty of copies of his CV were ready to be sent to the International Monetary Fund rather than the usual printing of money. I will look more later at the developments there which had a side-effect of putting a tsunami through even the most fanatical adherents to the cult that continues to claim central banks are politically independent.

Also he was something of a TV star as well as apparently co-writing the script for the BBC2 documentary on the Bank of England.

The Bank is responsible for ensuring our money holds its value and it works tirelessly to protect the economy from the threat of high inflation.

Back to his current job

Governor Carney gave a speech to the Local Government Association and opened with a sentence which seemed to apply to the Bank of England.

These productions will mix tragedy and
comedy in a play whose themes range from magic and creation to betrayal and revenge.

Also if we move on from the PR spinning of the BBC documentary the Governor has a problem which he summarised like this.

In recent months, the expected paths of policy interest rates in advanced economies have shifted sharply
lower, most notably in the US where an expectation of two further rate hikes over the next three years has
flipped to four rate cuts by the end of next year. In the euro area, markets have begun to price in further rate
reductions and asset purchases

He could have mentioned that the Reserve Bank of Australia had cut interest-rates at two meetings in a row that day, which repeated what the Reserve Bank of India had already done earlier in 2019.

This is a problem because he has been giving Forward Guidance about interest-rate increases as the rest of the world has been planning for cuts. Here is how he explained this.

If Brexit progresses smoothly, we expect that the current heightened uncertainties facing companies and
households will fade gradually, business investment will rebound, the housing market to rally, and
consumption to grow broadly in line with households’ real incomes. This would accelerate economic growth,
strengthen domestic inflationary pressures, and require limited and gradual increases in interest rates in
order to return inflation sustainably to the 2% target.

So the UK economy would be able to stand aside from the trends affecting the rest of the world? For a country where trade is a very important part of the economy this is just a fantasy. What is an unreliable boyfriend to do in such circumstances? Step one is of course to put the blame elsewhere.

It is unsurprising that the path of interest rates consistent with achieving the inflation target in this scenario
differs from current market pricing of a lower expected path for Bank Rate given that the market places
significant weights on both the probability of No Deal and on cuts in Bank Rate in that event.

Yes the Brexit Klaxon has been deployed yet again by Governor Carney. This is an attempt to put a smokescreen over the fact that the world economy has been slowing for nearly a year now. After all the economy of Germany contracted in the third quarter of 2018. This morning’s weakening of the Caixin PMI in China notes that today’s weaker number for June is the lowest since October last year. Or to point it another way the attempt by Governor Carney to claim trade tariff problems started in May is an innovative version of history.

Actually in the course of a mere three sentences the Governor contradicts himself.

It just highlights the extent to which the levels of interest rates, sterling and other asset prices might increase if a deal were reached.

Becomes this.

We will also make a detailed assessment of the potential implications of the global sea change currently
underway.

In a smooth Brexit sterling and asset prices are likely to rise although of course many equities do not like higher sterling. But interest-rates higher in a “global sea change”?

Markets

The antennae of financial markets quickly picked up the hint that the unreliable boyfriend was limbering up to go on tour again. This saw the UK Gilt market continue its recent bull run and led to a couple of developments that will have embarrassed Governor Carney. Firstly the UK ten-year Gilt yield fell below the 0.75% Bank Rate and is 0.7% as I type this. Even more so both the two and five-year yields have fallen to 0.5% this morning so they are implying a 0.25% cut which is precisely the opposite of the rises in the Forward Guidance of Governor Carney.

Just as a reminder here is the BBC from the second of May.

Interest rate increases could be “more frequent” than expected if the economy performs as the Bank of England is expecting, governor Mark Carney says.

UK economy

There are doubts as to how accurate the Markit PMI business surveys are as we have seen them get things wrong such as late summer 2016 in the UK. But we also know that the Bank of England looks at it closely as it used it as a signal on its way to cutting Bank Rate to 0.25% in August of that year. So many eyes in Threadneedle Street will have been on this.

At 49.2 in June, the seasonally adjusted All Sector Output
Index fell from 50.7 in May and signalled a reduction in
overall private sector business activity for the first time in 35 months.

This was because the services sector at 50.2 was unable to offset the weaker manufacturing and construction estimates.

Comment

Governor Carney is preparing for yet another U-Turn as his Forward Guidance crumbles yet again in the face of reality. As a consistently unreliable boyfriend I guess he has a list of excuses ready for this. Yet as the day developed there was a further double-swing. The announcement that Christine Lagarde would leave the IMF and become President of the ECB had one clear positive for Governor Carney as the job he has long coveted suddenly became available hence my CV reference earlier. Perhaps he will discover some French ancestry too.

But this had a much more problematic swing as I note the words of the UK Chancellor Philip Hammond.

UK’s Hammond says Bank of England must not be politicized.

That initially provoked thoughts of the current Governor who attracted criticism for playing politics in his time as Governor of the Bank of Canada and has repeated that in the UK. However the appointment of a former French Finance Minister to head the ECB destroyed any fantasies of central banks being politically independent. After all she will be working with a Vice President ( De Guindos) who was formerly the Spanish Finance Minister. Can anybody spot a trend here?

This brought out a barrage of Fake News. For example Madame Lagarde was described as having a good reputation as others were pointing out this.

Useful reminder: Lagarde was judged guilty of gross negligence (ahem) by a French court over the insane payment to Bernard Tapie in the Credit Lyonnais case but escaped the one year jail sentence because (quoting) Of her « personnality» and “international reputation” and the fact that at the time she was fighting an « international financial crisis » ( @jeuasommenulle )

There was a time when being convicted in a fraud case would debar you from any sort of financial role let alone major ones. In the ordinary person’s world the CV would simply have been rejected. Still some places are managing to report that the ECB is safe from political interference now which really is an insult to readers.

Even the supporters of Madame Lagarde seem to be a bit thin on evidence that she has any real grasp of monetary policy. We do know that she helped put the Greek economy into an economic depression with the “shock and awe” policies of 2010 and 11 which she so vociferously supported. So in conclusion it was a good idea to pick a woman but a really bad idea to choose her.

The Bank of England reveals it is an inflation creator rather than targeter

Yesterday Bank of England Governor Mark Carney spoke at the ECB summer conference in sunny Sintra Portugal. Tucked away in a speech mostly about the Euro was a reference to the problems the Bank of England has had with inflation as you can see below.

While the euro area has continued to experience ‘divine
coincidence’ the UK has not (Chart 1). In the euro area, inflation has averaged half a point below target,
reflecting in part the drag from persistent slack in the labour market. In contrast, UK inflation has been above
target, averaging 2.3%, during a period where the economy was operating well below potential.

Over such a period that is quite a difference and for the moment I will simply point out that he has no idea about the “potential” of the UK economy as his speech later inadvertently reveals. But let us move on to his explanation.

That reflects the inflationary impacts of two large exchange rate depreciations and weak productivity that have
offset a major positive shock to labour supply. This has created tensions between short-term output and
inflation stabilisation in the UK that have not been evident in other major economic regions.

Missing from his explanation is the way that expectations of easier policy from the Bank of England helped drive both “large exchange rate depreciations”. The 2007/08 one pre dates his tenure at the Bank of England but the post EU Leave vote one was on his watch. I still come across people who think he pumped £500 billion into the UK economy on the following morning rather than getting the ammunition locker ready. But he did cut interest-rates ( after promising to raise them) and pour money into the UK Gilt Market with £60 billion of Sledgehammer QE purchases.

So rather than something which just happened he and the Bank of England gave it a good shove and that is before we add in that he planned even more including a cut to a Bank Rate of 0.1% that November. That did not happen because it rapidly became apparent that the Bank of England had completely misread the UK economic situation. But by then the damage had been done to the UK Pound which was pushed lower than it would otherwise have done.

We get an implicit confirmation of that from this.

Since 2013, the MPC’s remit has explicitly recognised that there are circumstances in which bringing inflation
back to target too quickly could cause undesirable volatility in output and employment.

In other words in a world where inflation is lower than before  it is no longer an inflation targeter and instead mostly targets GDP. Actually we get a confession of this and a confirmation of a point I have made many times on here as we note this bit.

Indeed, on the basis of this past behaviour in the great moderation, the MPC would have raised interest rates by 2 to 3 percentage points between August 2013 and the end of 2014.

Due to the international environment with the Euro area heading for negative interest-rates that would have been to much, But we could have say moved from 0.5% to 1.5% as I have regularly argued and would have put ourselves on a better path. Oh and I did say that Governor Carney has no idea of the potential of the UK economy, so here that is in his own words.

What we – and others – learnt as the recovery progressed was that the UK economy had substantially more
spare capacity than previously thought.

UK Inflation

It is hard not to have a wry smile at UK inflation being bang on target after noting the above.

The Consumer Prices Index (CPI) 12-month rate was 2.0% in May 2019, down from 2.1% in April 2019.

Tucked away in the detail was something which should be no surprise if we note the state of play in the car industry.

there were also smaller downward contributions from the purchase of vehicles (second-hand and new cars).

The other factor was lower transport costs as air fares fell mostly due to the Easter timing effect and the cost of diesel in particular rose more slowly than last year. On the other side of the coin was something which has become very volatile and thus a problem for our statisticians.

Price movements for computer games can often be relatively large depending on the composition of bestseller charts.

Looking for future trend we see what looks like a relatively benign situation.

The headline rate of output inflation for goods leaving the factory gate was 1.8% on the year to May 2019, down from 2.1% in April 2019.

There had been worries about the input inflation rate which picked up last time around but the oil price seems to have come to the rescue for now at least.

Petroleum provided the largest downward contribution to the change in the annual rate of output inflation. The annual rate of input inflation fell 3.2 percentage points in May 2019, driven by a large downward contribution to the change in the rate from crude oil.

Welcome news from house prices

If we switch to this area we see that the slow down in the annual rate of growth continues.

Average house prices in the UK increased by 1.4% in the year to April 2019, down from 1.6% in March 2019 . Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 1.2% over the year to April 2019, up from a fall of 2.5% in March 2019.

I am pleased to see that as the best form of help for prospective buyers is for wage growth ( currently around 3%) to exceed house price growth. There is a lot of ground to be gained but at least we are making a start.

There is an irony here as I note that for once this will be similar to the number for rents that are being imputed as the inflation measure for owner-occupiers. Yes for newer readers you do have that right as the official CPIH inflation measure assumes that those who by definition do not pay rent rush out and act as if they do.

Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to May 2019, up from 1.2% in April 2019.

The problem for CPIH is that we have had an extraordinary house price boom without it picking anything up, so this is an anomaly and is unlikely to last.

Comment

There is a sort of irony in UK inflation being on target in spite of the fact that the Bank of England has mostly lost interest in it. The credit crunch era has seen other examples of this sort of thing which echoes when the Belgian economy did rather well when it had no government. We might well be better off if we sent the Monetary Policy Committee on a long holiday.

At the moment there have been quite a few welcome developments in this area. Because wage growth is positive compared to both CPI inflation and house prices after sustained periods of falls. Some caution is required as the RPI is still running at an annual rate of growth of 3% but we are in sunnier climes.There are troubles in other areas as the lower car prices highlight so we need to grab what we can.

Let me finish with a thank you to the Guardian for quoting me in their business live blog and for providing some humour.

Today’s drop in inflation means there’s no chance of the Bank of England raising interest rates on Thursday, say City economists.

Where have those people been in the credit crunch era?