Welcome news from UK Money Supply growth

Today brings UK credit growth especially unsecured credit growth and the Bank of England into focus so let me open with the market view on interest-rate prospects.

Interest rate swap markets have cut expectations of a quarter-point rate hike from the Bank of England by the end of 2019 to 52 percent on Wednesday, compared to a previous 64 percent expectation.

The latest leg down in market expectations of a rate hike comes after overnight political developments that has sown fresh uncertainty for the British economy in the near term. ( Reuters)

Personally I find that rather odd as I think a cut is about as likely as a rise. Indeed with slowing world economic growth in ordinary circumstances people would be looking for a cut. I can understand those who think that in a disorderly Brexit the Bank of England might be forced to raise interest-rates to defend the value of the UK Pound £. But the catch is that when the Pound fell after the EU Leave vote Governor Carney and his colleagues decided to cut rather than raise Bank Rate. So it would require a collapse in the Pound for the Bank of England to raise rates.

Gold

There is a curious situation about the gold that is stored by the Bank of England but belongs to Venezuela. Reuters explains.

It is a decision for the Bank of England whether to give Venezuelan President Nicolas Maduro access to gold reserves it holds, British junior foreign office minister Alan Duncan said on Monday.

Venezuelan opposition leader and self-declared president Juan Guaido has asked British authorities to stop Maduro gaining access to gold reserves held in the Bank of England, according to letters released by his party on Sunday.

As that is an official denial from Alan Duncan we immediately suspect the government has applied pressure on the Bank of England. But it is left in an awkward position and so far it has refused to return the gold to Venezuela which begs more than a few questions as it holds quite a lot of gold for foreign countries.

If we look into the situation the Bank of England holds some 165,377,000 troy ounces.

 A troy ounce is a traditional unit of weight used for precious metals. It is different in weight to an ounce, with one troy ounce being equal to 1.0971428 ounces avoirdupois.

It has been falling recently but rose quite a bit in the latter part of 2016 and 2017. In terms of gold bars it is a bit over 413,000. Contrary to what some claim the UK still has some gold ( worth £9.41 billion in the 2017/18 accounts) as pert of its foreign exchange reserves.

Returning to the issue of Venezuela I see George Galloway has got rather excited on RT.

The bank’s decision to seize – a polite word for steal – more than a billion dollars’ worth of Venezuelan gold was reportedto have been ordered by the governor after a call from US National Security Advisor John Bolton and Secretary of State Mike Pompeo – not even the president himself.

Apart from that being hearsay they have not seized it as they already had it but they are currently refusing to return it. I have some sympathy at the moment as who should they return it too in a country which is in turmoil? A lot of other markets concerning Venezuela have seen changes as for example the market in bonds of the state oil company PDVSA has dried up.

So to my mind the current position of the Bank of England has a weakness ( fears you might not be able to get your gold back) but also a strength ( it will question who is reclaiming it). Also as to how much of the gold at the Bank of England is actually gold here is John Stewart with a different perspective.

People out there turnin’ music into gold
People out there turnin’ music into gold
People out there turnin’ music into gold

Money Supply and Credit

These are hot topics on two counts. Firstly slowing money supply growth proved to be a reliable indicator of weak economic growth in 2018 and secondly soaring unsecured credit growth showed vulnerabilities in the UK economic structure.

So we first observe a welcome move.

The total amount of money held by the UK private sector (broad money or M4ex) increased by £11.5 billion in December. Within this, money held by households increased £5.5 billion, significantly above the £3.2 billion average over the past six months. This increase was driven by deposits in interest-bearing instant access savings accounts. Money held by UK private non-financial corporations (PNFCs) increased £1.5 billion, in line with the recent average.

This means that the annual rate of growth has risen from 2.2% to 2.5%. This is still weak but a more hopeful sign emerges if we look at the latest three months because they show an annualised rate of growth of 4.3%.

If we switch to a lending side style analysis we see this.

Households borrowed £4.1 billion secured against property in December, slightly above the average of the previous six-months……The amount businesses’ borrowed from UK banks………. Borrowing from banks remained robust in December at £2.3 billion.

If we add in unsecured credit and the other components we see that lending growth rose to 3.7% from the recent nadir of 3.1% in September.

Unsecured Credit

Here are the numbers.

The extra amount borrowed by consumers to buy goods and services fell to £0.7 billion in December . Within this, credit card borrowing was particularly weak at only £0.1 billion, compared to an average of £0.3 billion since July. The overall consumer credit monthly flow was slightly below the £0.9 billion monthly average since July, and significantly below the average between January 2016 and June 2018 of £1.5 billion.

We need to take care with phrases like “particularly weak” as credit card borrowing has been on something of a tear in the UK meaning that at £72.2 billion it is 7.1% higher than a year ago. Perhaps Deputy Governor Dave Ramsden wrote that but as he of course described 8.3% growth as “weak” not so long ago.

The annual growth rate of consumer credit has been slowing gradually since its peak of 10.9% in November 2016, falling further to 6.6% in December.

So we have a nuanced view here which is threefold. Firstly it is welcome to see a decline in the rate of growth. A catch though is that this rate of growth is on inflated levels and is still far higher than other numbers in the UK economy at around quadruple the rate of economic growth and double wage growth. Lastly the peak of November 2016 suggests it was puffed up by the “Sledgehammer QE” and Bank Rate cut of August 2016 a subject the Bank of England would rather not discuss.

Comment

There is a fair bit to consider here but let us start with a welcome improvement in the UK money supply trajectory.  I realise this is against the rhetoric we hear from elsewhere but the numbers are what they are. At a time when the world outlook is weak we need to grab every silver lining. The situation is more complex with unsecured credit because whilst the annual rate of growth is slowing some of that is due to it being on a larger amount ( £215.6 billion). Also some of it is due to a slowing of car loans as we see that sector slow due to technical reasons such as the diesel debacle. According to the UK Finance & Leasing Association car finance had 0% growth in November as falls in new car finance were offset by higher used car finance. This is at a time where we continue to pivot towards a rental/lease model as opposed to an outright purchase one.

The percentage of private new car sales financed by FLA members through the POS was 91.2% in the twelve months to November.

Let me end with some good news and a compliment for Governor Mark Carney. It comes from a disappointingly downbeat comment from Katie Martin of the Financial Times.

There’s more trade in the renminbi in London than there is in the euro vs sterling, which is weird/interesting.

Actually that is good news and confirms a conversation I had a while back with one of the managers of the Chinese state body in the City. It is an area of strength for the UK economy and I believe the Bank of England has supported this. Not all areas of banking are bad just some.

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The outlook for the economy of Germany has plenty of dark clouds

Sometimes it is hard not to have a wry smile at the way events are reported. Especially as in this instance it has been a success for my style of analysis. If we take a look at the fastFT service we were told this yesterday.

German industrial production unexpectedly drops in November.

My immediate thought was as the German economy contracted by 0.2% in the third quarter we should not be surprised by declines. Fascinatingly the Financial Times went to the people who have not been expecting this for an analysis of the issue.

German data released over the past two days have painted a glum picture for how Europe’s biggest economy performed during the latter part of 2018. fastFT rounds up what economists and analysts have said about what is happening. Anxieties over global trade wars and political uncertainty in the eurozone have taken their toll, and Europe’s powerhouse is showing signs of fatigue. Questions of whether a recession is looming have also been raised, while many economists remain cautiously optimistic in their prognosis.

If we now switch to what we have been looking at I wrote this on December 7th about the situation.

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area.

So not only had there been an expected weakening of the economy but there had been at that point no clear sign of the promised bounce back. What we know in addition now is this which was released on January 3rd.

  • Annual growth rate of broad monetary aggregate M3 decreased to 3.7% in November 2018 from 3.9% in October
  • Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.7% in November, compared with 6.8% in October

So another decline and if we look for a trend we would expect Euro area growth to continue to be weak and this time around that is being led by Germany. The link between monetary data and the economy is not precise enough for us to say Germany is in a recession but we can expect weak growth at best heading into the early months of 2019. The FT does to be fair give us a brief mention of the monetary data from Oxford Economics.

lending growth remaining robust

The problem with that which as it happens repeats the argument of Mario Draghi of the ECB is that it is a lagging indicator in my opinion as banks respond to the better economic news from 2017.

As these matters can be heated let me make it quite clear that I wish Germany no ill in fact quite the reverse but the money supply data has been clear and has worked so far. Frankly the way it is still being widely ignored suggests it is likely to continue to work.

This week’s data

Trade

This morning’s release started in conventional fashion as we got the opportunity to observe yet another trade surplus for Germany.

 Germany exported goods to the value of 116.3 billion euros and imported goods to the value of 95.7 billion euros in November 2018………The foreign trade balance showed a surplus of 20.5 billion euros in November 2018. In November 2017, the surplus amounted to 23.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.0 billion euros in November 2018.

In world terms an annual decline in Germany’s surplus is a good thing as it was one of the imbalances which set the ground for the credit crunch. But if we switch to looking at this on a monthly basis this leapt off the page at me about imports.

-1.6% on the previous month (calendar and seasonally adjusted)

A fall in imports is a sign of a weak economy as for example we saw substantial falls in Greece back in the day. There are caveats to this of which the biggest is that monthly trade data is inaccurate and erratic but such as the numbers are they post another warning. The other side of the balance sheet was more conventional in that with current trade issues one might expect this.

also reports that German exports in November 2018 remained nearly unchanged on November 2017.

Let us move on by noting that due to the way that Gross Domestic Product or GDP is calculated lower imports in isolation provide a boost before a “surprise” fall later as it filters through other parts.

Production

If we step back to Monday there was some troubling news on this front.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2018 a seasonally and calendar adjusted 1.0% on the previous month.

So not much sign of an improvement and it was hardly reassuring that geographically the issue was concentrated in the Euro area.

Domestic orders increased by 2.4% and foreign orders decreased by 3.2% in November 2018 on the previous month. New orders from the euro area were down 11.6%, new orders from other countries increased 2.3% compared to October 2018.

Then on Tuesday we got disappointing actual production numbers.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). The revised figure shows a decrease of 0.8% (primary -0.5%) from October 2018.

So November has quite a fall and this was compared to an October number which had been revised lower. This meant that the annual picture looked really poor.

-4.7% on the same month a year earlier (price and calendar adjusted)

Business surveys

At then end of last week we were told this by the Markit PMI ( Purchasing Manager’s Index) at the end of last week.

December saw the Composite Output Index fall for the fourth month running to 51.6, down from 52.3 in
November and its lowest reading since June 2013.
The latest slowdown was led by the service sector, as the rate of manufacturing output growth strengthened for the first time in five months, albeit picking up only slightly and staying below that of services business activity.

The problem for Markit is that rather than leading events they are lagging them as they are recording declines after the economic contraction in the third quarter. If we took them literally then the economy would shrink by even more this quarter! Anyway they no seem to be on the case of the motor industry. From yesterday.

Latest data indicated a worsening downturn in the European autos sector at the end of 2018. Production of automobiles & parts fell for the third month running, and at the fastest rate since March 2013. New orders fell sharply, with new export business (including intra-European trade) declining at the fastest rate in six years.

Comment

The German economy found itself surrounded by dark clouds as 2018 developed and as I am typing this we have seen more worrying signs. From @YuanTalks.

It’s the FIRST YEARLY DROP in at least 20 years. Passenger car sales slumped 19% y/y in Dec 2018 to 2.26 mln vehicles.

Over 2018 as a whole car sales fell by 6% so we can see the issue is accelerating and there are obvious implications for German manufacturers. It has been accompanied by another generic sign of possible world economic weakness from @LiveSquawk.

Exclusive: Apple Cuts iPhone Production Plan By 10% – Nikkei

Suddenly there is a lot of concern over a German recession or as it is being described a technical recession. In case you were wondering that means a recession that is within the error range of the data which actually covers most of them! Because of these errors it is hard to say whether the German economy grew or contracted at the end of last year, as for example wage growth should support consumption. But what we can say is that the broad sweep from it to the like;y trend for the early part of 2019 is weak. Perhaps some growth but not much after all even 0.2% growth in the final quarter would mean flat growth for the second half of the year.

For those who think ECB policy is set for Germany this poses quite a problem as it has ended its monthly QE purchases just as things have deteriorated in a shocking sense of timing. But to my mind just as bad is the issue that my “junkie culture” theme that growth was dependent on the stimulus also gets a tick including something of a slap on the back from Mario Draghi who seems to have come round to at least part of my point of view.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

According to Handelsblatt every little helps.

Germany has saved €368 billion in interest costs on its debt thanks to record low interest rates since the financial crisis in 2008, according to Bundesbank calculations. That’s more than 10% of annual GDP.

 

 

 

The Tokyo Whale will need to get its buying boots on again

Let us begin the week with some good news for the central bank from the land of the rising sun or Nihon. That is that the Nikkei 225 equity index rallied strongly this morning and its 2.44% surge saw it regain the 20,000 level and close at 20,038. The Bank of Japan will be pleased on two counts, of which the first is the wealth effects it will expect from a higher equity market. The second is that it will improve its own position as what we have labelled the Tokyo Whale.

The Bank of Japan’s purchases of exchange-traded funds since the start of 2018 exceeded 6 trillion yen ($53 billion) on Tuesday, reaching a record high on a yearly basis and signaling the central bank has been increasingly exposed to riskier assets. ( The Mainichi).

For newer readers the Bank of Japan has been buying Japanese equities for around 5 years and has been doing so on an increasing scale.

Under Governor Haruhiko Kuroda, the BOJ announced aggressive monetary stimulus in 2013 aimed at breaking Japan’s economy out of its deflationary malaise.

The measures included increasing the central bank’s holdings of ETFs by an annual 1 trillion yen, which it expanded to 3 trillion yen in 2014 and again to 6 trillion yen in 2016.

The name “Tokyo Whale” came about because as you can see it found the need to keep increasing the size of the purchases as the expect results did not materialise. This meant that it cannot keep this going for much longer as it will run out of equity ETFs to buy. Why does it buy them? Well the bit below hints at it.

ETFs allow investors to buy and sell exposure to a basket of equities or an index without owning the underlying shares.

So the Bank of Japan can avoid claims it is explicitly investing in the companies concerned or if you like is a passive fund manager. Those of you who recall the media claims last autumn that the Bank of Japan was in the process of conducting a “tapering” of its purchases will find the bit below familiar.

The purchases have been criticized by some as artificially buoying stock prices, leading the BOJ in July this year to give itself more flexibility by saying it “may increase or decrease the amount of purchases depending on market conditions.”

The Tokyo Whale bought more and not less as the 24,000 or so of late summer was replaced by the current level.

Purchases of the investment funds swelled as the BOJ stepped in to underpin the stock market, which in October suffered huge losses amid concerns over heightened trade tensions between the United States and China.

If we step back and wonder what influence this has been then this from the Tokyo Whale itself hardly provides much support.

a challenge lies in the household sector in that the mechanism of the virtuous cycle from
income to consumption expenditure has been operating weakly.

Money Supply

We have been observing for some months now that many countries have had lower money supply growth which has then led to lower economic growth. So as you can imagine I was waiting for the monetary base data released today. What we see is that the monetary base in Japan grew by 17% in 2017 but by a much lower 7.3% in 2018 and the annual rate in the month of December was only 4.8%. Quite remarkably there were spells in December when the monetary base actually fell. That begs a question about this.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

As ever in Japan picking one’s way through this is complex as we arrive at what I think is the largest number we have noted on here. You see the Japanese monetary base which is some 504.2 trillion Ten has been pumped up so much by the Bank of Japan the annual rate of growth could not be kept up. For a start there was the issue of how many bonds and the like have already been bought.

The BOJ’s balance sheet, after all, reached a dubious milestone in 2018, when it topped Japan’s $4.87 trillion of annual gross domestic product. ( Nikkei Asian Review)

Rather oddly the NAR then tells us this.

The BOJ could easily buy more government debt and ETFs.

Actually there are not many ETFs left to buy and the Bank of Japan itself is seeing dissent against the current level of purchases. That is not to say that the Bank of Japan could not use other methods as it has shown itself willing to buy pretty much anything.

If we move to the wider liquidity measure of the Bank of Japan we see that the rate of growth was 3.5% in November 2017 but only 1.8% this November. Thus both the bass line and the drumbeat from the monetary system are not only the same but they are a 2018 theme. Because of the different nature of the Japanese system it is hard to be precise about any likely effect because all the expansion seemed to have only a minor upwards effect but one would expect that to now disappear.

Oh and my largest number did not last long as Japanese liquidity is 1788.5 trillion Yen.

The Yen

It was only last week that we were mulling the “flash rally” in the Yen as yet another weak period for equity markets saw a yen for Yen. A combination of thin markets and a Japanese bank holiday saw the Yen strengthen into the high 104s versus the US Dollar. I am told that exited some of the hedges placed by Japanese exporters but there was no sign of the “bold action” often promised by the Bank of Japan. Things are now calmer and the Yen is at 108 but even that is higher over time and that has been against a relatively strong US Dollar.

As the NAR points out this will not be welcomed by the Japanese authorities.

The central problem is that Japan’s economic growth relies largely a weak yen and its capacity to boost exports. Though Prime Minister Shinzo Abe talked grandly about structural reform, the yen’s 30% drop beginning in late 2012 was the fuel behind the 12-quarter run of growth Japan experienced until its July-September stumble.

Comment

The Tokyo Whale faces quite a few problems right now. For example the third quarter of 2018 showed something it has claimed was temporary.

Quarter-on-quarter, GDP shrank a real 0.6 percent, downgraded from the earlier reading of a 0.3 percent contraction. ( The Japan Times)

According to the Markit business survey there was a bounce back. From earlier today.

“Positive survey data from the manufacturing sector
were not mirrored by Japan’s dominant service providing industry in December, where business
activity increased at the weakest pace since May if
the natural-disaster-hit September is discounted.
The survey also pointed to abating demand
pressures, as private sector sales increased only
mildly on the month.”

But then we will expect to see the impact of slowing money supply growth. So 2019 may see the Tokyo Whale do this as we wait to see how those who have presented Abenomics as a triumph deal with Elvis Costello being number one again.

She’s been a bad girl, she’s like a chemical
Though you try to stop it, she’s like a narcotic
You want to torture her, you want to talk to her
All the things you bought for her, putting up your temperature
Pump it up, until you can feel it
Pump it up, when you don’t really need it

Meanwhile here is my podcast from last week with covers my thoughts on how Japan has survived the “lost decade(s)”.

 

 

 

 

 

The US economy is slowing but how quickly?

A feature of recent times has been the way that economic growth forecasts have been trimmed somewhat. This morning has already seen two examples of that as the Swiss National Bank has suggested it will fall from 2.5% this year to 1.5% next, must be awkward that when your official interest-rate is already -0.75%. Next came the IFO Institute in Germany which did a little pruning to 1.5% this year and more of a short-back and sides to 1.1% in 2019. That provides some food for thought for the European Central Bank today as its largest economy slows.

The situation in the United States has been somewhat different, however, at least according to the official data. From the Bureau for Economic Analysis.

Real gross domestic product (GDP) increased at an annual rate of 3.5 percent in the third quarter of 2018 , according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.2 percent.

Yes it has slowed but to a rate most first world countries would currently give their right arm for. We can use the Atlanta Fed now cast to see where we stand this quarter.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2018 is 2.4 percent on December 7, down from 2.7 percent on December 6.

They updated it on the basis of this new information.

The nowcast of fourth-quarter real final sales of domestic product growth decreased from 2.9 percent to 2.7 percent after this morning’s employment report from the U.S. Bureau of Labor Statistics. The nowcast of the contribution of inventory investment to fourth-quarter real GDP growth decreased from -0.23 percentage points to -0.33 percentage points after the employment report and this morning’s wholesale trade release from the U.S. Census Bureau.

So we see that whilst the level of economic growth remains relatively good the US has not escaped the cooling winds blowing.

Money Supply

This has proved to be a good guide to economic trends in 2018 and even better it remains widely ignored. Shorter-term trends are usually best encapsulated by narrow money so let us investigate last week’s monetary base data from the Federal Reserve which incorporates this.

The release also provides data on the monetary base, which includes currency in circulation and total balances maintained.

On the 5th of this month it was US $3.444 trillion but we immediately know that as Alicia Keys would say it has been Fallin’ as it was US $3.508 trillion on the 7th of November. We need to switch to the monthly numbers for an annual comparison and when we do so we see that in November it was 11% lower than a year before. If the phrase was not in use elsewhere this would be a credit crunch or to be more specific a type of cash crunch. Not a pure cash crunch as the currency in circulation has risen to US $1.705 trillion but reserve balances at the banks.

The fall has been driven by this.

For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month…….For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

As you can see it is the central bank which is sucking reserve balances out of the system as indeed it was it who pumped them up. In a broad sweep we see that the QE era took the monetary base from a bit under US $0.9 trillion to US $4.1 trillion and now is pulling it back down.

Personally I think the main effect is coming from the reductions in holdings of mortgage-backed securities so if we pro rata that we get a monetary base reduction of say 5% but that is still a crunch.

Interest-Rates

These have been rising in the US another 0.25% still seems likely next week. An intriguing way of putting the international perspective on this has been provided by the Bond Vigilantes website.

 the de facto global discount rate, the 2-year US Treasury bond yield, has risen by almost 100 basis points (bps) over the year, and thus repriced global assets.

Higher US interest-rates effect the world economy and thus have a second order effect on the US economy via trade. Then there are the domestic effects.

the US 30-year mortgage rate hit 4.8% recently, up from 3.3% in 2016. Whilst most existing homeowners, like corporates, will have locked in those cheap rates, new borrowers face costlier loans, and this is already having an impact: US housing and real estate data is surprising to the downside at a rate that exceeds that seen even in 2008 and 2009:

So there has been something of a squeeze on the real economy from this source as well, although it will have weakened recently as US Treasury Bond yields have fallen back from their peaks.

Fiscal Policy

As we mull the developments above it seems that the fiscal stimulus provided by President Trump was not as ill-conceived as some have claimed. Of course views vary about fiscal stimuli as for example they are apparently good for France but bad for Italy. But the Donald has provided one into a slow down which has at least some of the textbook rationale. Where matters get more complex is the fact that the US has so far only really seen its boom slow and other countries such as Germany make a stronger case. But if we skip the absolute level argument the Donald does appear to have spotted the direction of travel.

Comment

We see that the US has not in fact escaped the economic changes in 2018 but it has had an advantage from starting at a higher level of economic growth. But the monetary data is applying a squeeze as are higher interest-rates and as ever we find it impacting in familiar places.

Whenever you saw the supply of unsold homes reach 7 months, a recession followed. It certainly did in 2008, despite the consensus of economic forecasters believing that economic growth would be 2.4% – it was actually negative. Why should we worry now? Well, the supply of unsold new homes is… 7.4 months (blue line).  (BondVigilantes )

That will trouble the US Federal Reserve as will this development.

BKX not far from yesterday’s low. There’s a real problem with the banks. And I don’t think I’m being an alarmist by simply saying something might be going on here that we don’t know about. ( @selling_theta )

Worries about the housing market and the banks? We know how central banks usually respond to those so no wonder the US Fed has cooled on future interest-rate rises. QE4 anyone?

 

 

 

 

The challenge for the ECB remains Italy and its banks

This week has seen something of an expected shifting of the sands from the European Central Bank ( ECB) about the economic prospects for the Euro area. On Monday its President Mario Draghi told the European Parliament this.

The data that have become available since my last visit in September have been somewhat weaker than expected. Euro area GDP grew by 0.2% in the third quarter. This follows growth of 0.4% in both the first and second quarter of 2018. The loss in growth momentum mainly reflects weaker trade growth, but also some country and sector-specific factors.

What he did not say was that back in 2017 quarterly growth had risen to 0.7% for a time. Back then the situation was a happy one for Mario and his colleagues as their extraordinary monetary policies looked like they were bearing some fruit. However the challenge was always what happens when they begin to close the tap? Let me illustrate things by looking again at his speech.

The unemployment rate declined to 8.1% in September 2018, which is the lowest level observed since late 2008, and employment continued to increase in the third quarter…….. Wages are rising as labour markets continue to improve and labour supply shortages become increasingly binding in some countries.

There is a ying and yang here because whilst we should all welcome the improvement in the unemployment rate, we would expect the falls to slow and maybe stop in line with the reduced economic growth rate. So is around 8% it for the unemployment rate even after negative interest-rates ( still -0.4%) and a balance sheet now over 4.6 trillion Euros? That seems implied to some extent in talk of “labour supply shortages” when the unemployment rate is around double that of the US and UK and treble that of Japan. This returns us to the fear that the long-term unemployment in some of the Euro area is effectively permanent something we looked at during the crisis. In another form another ECB policymaker has suggested that.

I will focus my remarks today on the economies of central, eastern and south-eastern Europe (CESEE), covering both those that are already part of the European Union (EU) and those that are EU candidate countries or potential candidates………..Clearly, for most countries, convergence towards the EU-28 average has practically stalled since the outbreak of the financial crisis in 2008

Care is needed as only some of these countries are in the Euro but of course some of the others should be converging due to the application process. Even Benoit Coeure admits this.

And if there is no credible prospect of lower-income countries catching up soon, there is a risk that people living in those countries begin questioning the very benefits of membership of the EU or the currency union.

I have a couple of thoughts for you. Firstly Lithuania has done relatively well but the fact I have friends from there highlights how many are in London leading to the thought that how much has that development aided its economy? You may need to probe a little as due to the fact it was part of Russia back in the day some prefer to say they are Russian. Also the data reminds us of how poor that area that was once called Yugoslavia remains. It is hardly going to be helped by the development described below by Balkan Insight.

At the fifth joint meeting of the governments of Albania and Kosovo in Peja, in Kosovo, the Albanian Prime Minister Edi Rama backed the decision of the Kosovo government to raise the tax on imports from Serbia and Bosnia from 10 to 100 per cent.

Banks

Here the ECB is conflicted. Like all central banks its priority is “the precious” otherwise known as the banks. Yet it is part of the operation to apply pressure on Italy and take a look at this development.

As this is very significant let us break it down and yes in the world of negative interest-rates and expanded central bank balance sheets Unicredit has just paid an eye-watering 7.83% on some bonds. Just the 6.83% higher than at the opening of 2018 and imagine if you held similar bonds with it. Ouch! Of that there is an element driven by changes in Italy’s situation but the additional part added by Unicredit seems to be around 3.5%.

If we look back I recall describing Unicredit as a zombie bank on Sky News around 7 years ago. The official view in more recent times is that it has been a success story in the way it has dealt with non performing loans and the like. Although of course success is a relative term with a share price of 11.5 Euros as opposed to the previous peak of more like 370 Euros. Now it is paying nearly 8% for its debt we need not only to question even that heavily depreciated share price and it gives a pretty dreadful implied view for the weaker Italian banks such as Monte Paschi which Johannes mentions. Also those non-performing loans which were packaged up and sold at what we were told “great deals” whereas now they look dreadful, well on the long side anyway.

Perhaps this was what the Bank of Italy meant by this.

The fall in prices for Italian government securities has caused a reduction in capital reserves and
liquidity and an increase in the cost of wholesale funding. The sharp decline in bank share prices has resulted
in a marked increase in the cost of equity. Should the tensions on the sovereign debt market be protracted, the
repercussions for banks could be significant, especially for some small and medium-sized banks.

Comment

We can bring things right up to date with this morning’s money supply data.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.8% in October, unchanged from previous month.

So we are holding station to some extent although in real terms we are slightly lower as inflation has picked up to 2.2%. Thus the near-term outlook remains weak and we can expect a similar fourth quarter to the third. Actually I would not be surprised if it was slightly better but still weak..

Looking around a couple of years ahead the position is slightly better although we do not know yet how much of this well be inflation as opposed to growth.

Annual growth rate of broad monetary aggregate M3 increased to 3.9% in October 2018 from 3.6% in September (revised from 3.5%).

On the other side of the coin credit flows to businesses seem to have tightened.

Annual growth rate of adjusted loans to non-financial corporations decreased to 3.9% in October from 4.3% in September

Personally I think that the latter number is a lagging indicator but the ECB has trumpeted it as more of a leading one so let’s see.

The external factor which is currently in play is the lower oil price which will soon begin to give a boost and will reduce inflation if it remains near US $60 for the Brent Crude benchmark. But none the less the midnight oil will be burning at the ECB as it mulls the possibility that all that balance sheet expansion and negative interest-rates gave economic activity such a welcome but relatively small boost. Also it will be on action stations about the Italian banking sector. For myself I fear what this new squeeze on Italian banks will do to the lending to the wider economy which of course had ground to a halt as it is.

 

The UK Budget outlook is good unlike that for car finance

Today sees two important pieces of economic news for the UK and we can look at the state of play for both by taking a look at the UK Gilt or government bond market. Only last Monday I pointed out this.

 there is a small or medium-sized island depending on your perspective which has seen its bonds doing well over the last week or so. It is the UK where the ten-year Gilt yield has fallen from above 1.71% to 1.53%.

Since then the good news has carried on coming to coin a phrase because the ten-year Gilt yield has fallen to 1.37%. If we look back to see what has happened we see that there was a change since around the tenth of this month as up to then bond yields around the world had been rising and took the UK Gilt with them. Actually it is not far off an example of groundhog day as we are pretty much where we were this time last year.

The UK Budget

What the development above means is that the media needs a large slice of humble pie after majoring on this issue.

British Prime Minister Theresa May declared on Wednesday that her government’s austerity push was over after nearly a decade of spending cuts in many areas of public services. ( Reuters on October 3rd).

They then cherry picked this part of the IFS Report from the middle of the month to give a cost for this.

Keeping to the spring statement plans, combined with the commitments to spending on the NHS, defence and aid, would mean that a total of £19 billion would be cut from the day-to-day budgets of unprotected public services by 2022–23.

This had two problems.  The first was that this government declared the same thing back in October 2016 but then seemed to suffer from an outbreak of amnesia. The next and to be fair to the IFS they did mention this the public finances are performing well so the mentions of tax rises were not well thought out.

Thus we advance on today’s Budget noting that the recent fall in equity markets has had a much larger impact on Gilt yields than expectations about the Budget and also all the rhetoric about the implications of Brexit. Also it gives us another perspective on the 0.25% Bank Rate rise to 0.75% as Gilt yields are back to where they were then. It took Mark Carney four years to summon up the courage to do something which looks an ever smaller pea shooter.

There may be another impact of this which is on the housing market via fixed-rate mortgages. This is because they tend to track the five-year Gilt yield which has fallen below 1% to 0.96% from the recent peak of 1.26%, meaning there may be some cheaper deals in the offing.

Today

As ever we see that various details of the Budget have been leaked. The plan for higher spending on the National Health Service was announced a while back and the last week has seen hints of help for business rates for smaller businesses and more money for road potholes. As the troubled Universal Credit program rumbles on it would not be surprising if money was found to oil its wheels either. As the underlying public finances are good there is scope for the Chancellor to pull a rabbit from the hat should he wish.

Every Budget has the following feature.

Mechanically extrapolating the percentage change in net borrowing that we have seen so far this year over the full fiscal year would imply a deficit for 2018-19 about £11 billion lower than we forecast in March. But that would not take account of the fact that the recent strength of cash corporation tax receipts has yet to be reflected in the accrued borrowing measure.

This is the Office for Budget Responsibility ( OBR ) which has confirmed my first rule of OBR Club once more. This is around a £13 billion error if we allow for the corporation tax changes they mention which they have managed in spite of the economy doing nothing spectacular. Please remember that when their figures are being quoted later along the lines of this from the Colonel in Full Metal Jacket.

Son, all I’ve ever asked of my marines is that they obey my orders as they would the word of God.

The reality is that in this instance “the word of God” as expressed by the media over the next few days will be wrong again.

Monetary Data

This has been heading in the opposite direction recently as in a similar pattern to  the Euro area we have seen money supply growth weaken. Today;s update for September was mixed on this front. The annual rate of M4 growth fell to 2.5% but the amount of M4 lending rose by £16.5 billion raising its annual rate of growth to 3.1%. So we know that the trend is weak but due to the erratic nature of these numbers we are still not sure how weak.

Next comes something we have been looking for through most of 2018.

The fall on the month was due to weaker net borrowing for other loans and advances, which fell from £0.7 billion to £0.3 billion. Within this, new borrowing for car finance fell sharply, consistent with very weak car registration numbers in September,

That was from the Bank of England earlier and I hope readers will forgive me for putting the cart in front of the horse here. But we have been waiting for it to admit to this for some time! After all car registration numbers have been weak all through 2018. So let is now look at the overall data in this area.

The net amount of new consumer borrowing, excluding mortgages, fell to £0.8 billion in September, down from £1.2 billion in August……….The annual growth rate of consumer credit slowed further in September, to 7.7%, reflecting these weaker monthly lending flows. The annual growth rate was the lowest since June 2015, and well below the peak of 10.9% in November 2016.

There are various ways of looking at this. After all a 7.7% growth rate is not far off treble the rate of growth of wages and around quadruple economic growth. Although of course a few months back Sir Dave Ramsden did call an annual rate of growth of 8.3% weak. But apart from car finance other sectors of unsecured credit are still maintaining quite a rate of expansion as for example credit card debt is still rising at an annual rate of 8.7%.

Business Lending

Unlike consumers who seem to thirst for bank lending especially if it is unsecured businesses seem to be turning away from it.

The fall in bank lending to businesses was driven by lending to large businesses, which fell £2.0 billion in September following three months of positive flows. Bank lending to small and medium sized businesses (SMEs) increased by £0.4 billion in September. These flows left the annual growth rate of lending to large businesses unchanged at 2.2%, while the growth rate for SMEs remained close to zero for the ninth consecutive month.

I do not see this being reported elsewhere but it does beg a question of the bank bailout culture and also measures such as the Funding for Lending Scheme which gave banks yet another subsidy but crucially to help them boost business lending.

Comment

The UK public finances have more room for manoeuvre in them than we are being led to believe another sign of that has been given by the OBR.

Public sector net debt (PSND) fell by 2.4 per cent of GDP between September 2017 and September 2018.

Care is needed as such waters are always muddy rather than crystal clear. For example the August 2016 Sledgehammer actions of the Bank of England continue to inflate the national debt whereas the latest stage of the “hokey-cokey” dance of the housing association sector went the other way. Current Gilt yields will help the numbers and it is in HM Treasuries favour to have them as up to date as possible. So the Chancellor has room and will be happy that the media has suggested the reverse.

On the other side of the political fence from what is called the Progressive side is this from Ann Pettifor.

£50 billion added to the 2019/20 Budget would add £13 billion to the NHS; £12 billion to the social security budget and £12 billion to local government services. £13 billion would be added to other government departmental services.

Via the multiplier effect this would ripple through the economy.

So an injection of £50 billion could generate another £25billion of income – thereby expanding the economic ‘cake’.

So a multiplier of 1.5. Let me address that by going back to Friday where in the case of Italy the multiplier was suggested to be less than one partly through higher bond yields. As the series SOAP regularly informed us.

Confused you will be!

Let me offer some guidance. Is the UK in a situation where the fiscal multiplier is more than one? Yes I think so for two reasons. We have an economic growth record much better than Italy’s and Gilt yields start much lower. At some point the Gilt market would respond unfavourably but the tipping point depends on what we call “confidence”. Also the reference to “cake” tells us it has shrunk which it only has if you compare to pre crisis trends. So that bit is misleading.

Nearly Forgot!

It would not be a UK Budget without some form of a stealth tax. This time in comes in the form of a cut in likely interest for savers. From National Savings & Investments.

From 1 May 2019, existing holders of Index-linked Savings Certificates who renew into a new term will receive index-linking based on the Consumer Prices Index (CPI) measure of inflation, rather than the Retail Prices Index (RPI)

 

 

 

 

UK annual unsecured credit growth “slows” to 8.1%

Today brings us to the latest UK data on both the money supply and the manufacturing sector. Both of these are seeing developments. If we start with something which has boosted the UK money supply by some £445 billion there is of course the QE bond purchases of the Bank of England. Having given my thoughts on Friday here is David Smith of the Sunday Times who seems to have bought the Bank of England rhetoric hook,line and sinker. Firstly let me correct an early misconception.

At first, as in America, the process of running off QE assets is being achieved by not reinvesting the proceeds of maturing bonds.

That implies that the UK is no longer reinvesting its maturing Gilt holdings and if it were true would be a policy I support having originally suggested it some five years ago. This would, however be news to the Monetary Policy Committee.

The Committee also voted unanimously to maintain the stock of UK government bond purchases,

Moving back to how things might play out the musical theme is “Don’t Worry Be Happy” by Bobby McFerrin.

We are still, of course, some way away from the unwinding of the Bank’s £435bn of QE. It will not happen until interest rates reach 1.5%, and they are currently only half that level. It remains possible that, in the event of a rocky, no-deal Brexit, the Bank will think it is obliged to launch a further tranche of QE. But it will eventually be reversed. And there is no reason why we should be unduly worried about that.

So suddenly we are no longer reversing it, and we will not do so until Bank Rate reaches 1.5%. In case you are wondering if there is something especially significant about 1.5% there is not apart from the fact that the associated higher Gilt yields will mean a lower value for the holdings. Oh and we might get more! But don’t worry “it will eventually be reversed”  although using the strategy suggested, which of course has not started, it would not be until 2065.

As to what good it has done? We seem to just have to accept the line it has saved us.

any marginal increase in wealth inequality looks like a small price to pay for avoiding more serious economic damage and deflation.

Money Supply

This month’s data was a little bit of a curate’s egg but let us start with something that has become very familiar. From the Bank of England.

The annual growth rate of consumer credit slowed further in August, to 8.1%, reflecting weaker monthly lending flows. The annual growth rate was the lowest since August 2015, and well below the peak of 10.9% in November 2016. Within this, and consistent with lower monthly net flows over the past few months, other loans and advances growth fell to 7.7%, the lowest since December 2014. Credit card growth has been broadly stable for the past 18 months at close to 9%.

The official view can be seen quite clearly here, and if we take the £838 million of July and the £1118 million of August that is lower than the circa £1500 million previously. The catch is the annual growth rate of 8.1% as can anybody thing of anything else in the UK economy growing at that sort of rate? After all it compares with real wage growth which is somewhere around zero and an annual rate of economic growth of between 1% and 2%. Although I am reminded that Sir Dave Ramsden of the Bank of England called an annual growth rate of 8.3% “weak” earlier this year.

Also if you look at the date of the peak you see that the “Sledgehammer QE” and Bank Rate cut of August 2016 did seem to achieve something, which was a peak in unsecured borrowing. Oddly we do not see the Bank of England trying to bathe itself in this particular piece of glory…..

Mortgage Lending

This has been fairly stable for a while now. The Funding for Lending Scheme got net monthly lending positive in 2013 and since then both the banks and our central bank have been happy. At the moment we mostly see net lending of around £3 billion per month.

Lending to business

There are two clear trends here.Let me open by pointing out the impact of the Funding for Lending Scheme on the metric it was loudly proclaimed to influence.

Annual growth in lending to small and medium-sized businesses remained close to zero for the eighth consecutive month.

This has been the pattern since it began which is why the central banking version of the  nuclear deterrent or the word “counterfactual” has been deployed. It tells us that however bad things are they would have been worse otherwise, so things are in fact a success. If we look at the breakdown we see that of the £166 billion or so, some £50 billion is for real-estate as opposed to the £10 billion for manufacturing, which tells us something about the way the UK economic wind blows.

Another is that businesses are shifting away from banks which is a trend which would make my late father very happy if he was still with us.

Businesses can raise money by borrowing from banks or from financial markets (in the form of bonds, equity and commercial paper). The total amount outstanding of businesses’ borrowing from these sources increased by £3.2 billion in August. Within this, net finance raised from banks remained positive, but weak, at £1.0 billion.

Over the past six months the average raised from banks has been £1 billion but £1.5 billion has been raised from other sources of credit.

Money Supply

These are the curate’s egg part this month. This is because the actual monthly data was better.

The total amount of money held by UK households, businesses and non-intermediary other financial corporations (NIOFCs) (Broad money or M4ex) rose by £6.9 billion in August. This was above the £0.7 billion in July and the £2.6 billion average of the previous six months.

However the annual rate of M4ex fell to 2.8% which is poor and a further slowing. But if we look for perspective the problem months were July as you can see above and even more so June where it shrank by £2.6 billion. So we know the overall trend has been weak but we are a bit unsure about what is about to take place.

Manufacturing

There was some rather welcome news from this sector today as Markit published its PMI business survey.

Domestic market demand strengthened, while increased orders from North America and Europe helped new export
business stage a modest recovery from August’s
contraction. Business confidence also rose to a three-month
high.

The reading of 53.8 following an upwardly revised 53 for August shows some welcome growth and is rather different to the media perspective and coverage. Let us hope it bodes well.

Comment

The UK money supply data have been weak for a while now and on Friday we noted again that so has the economy.

Compared with the same quarter a year ago, the UK economy has grown by 1.2% – revised down slightly from the previously published 1.3%.

That makes the Bank Rate rise in August look even odder to me. Of course there is an exception which is unsecured credit which is charging along albeit not quite a fast as before. The total has now reached £214.2 billion.

We are left hoping that the better manufacturing surveys will add to the GDP data for July and give us if not the economic equivalent of the long hot summer at least some solid growth. After all clouds are gathering around at least some of Europe (Italy) if not its golfers.

Meanwhile our official statistician rather than working on known problems seem determined to produce numbers which are meaningless in my opinion.

In 2017, the UK’s real full human capital stock was £20.4 trillion, equivalent to just over 10 times the size of UK gross domestic product (GDP).

Perhaps there is a clue telling us where the author lives.

the average real human capital stock of those living in West Midlands fell the most, by 5% in 2017 to £568,168, the biggest drop in six years, reflecting negative real earnings growth. By contrast, the average real human capital stock of those living in East Midlands with a degree or higher qualification rose by 9% in 2017 to £564,790.