What are lower bond yields telling us?

A major story in 2021 so far has been the moves in bond yields. This matters because they have become more significant in economic terms during the credit crunch. A factor in this is the way that the ZIRP era of effectively 0% official interest-rates has pretty much stopped the game there for now. For example the US Federal Reserve is presently trying to stop more US rates going below zero. Even the European Central Bank which has applied negative interest-rates for some years now thinks it is at its limit as we learn from the denial below.

SCHNABEL: #ECB ISN’T AT EFFECTIVE LOWER BOUND BUT IS CLOSER ( @LiveSquawk)

Putting it another way their last move was a paltry 0.1% cut to -0.5% although of course they sneaked in a -1% for the banks.

If we step back and ask why?The answer comes from the early days of the credit crunch when official interest-rates were slashed but economies did not respond as the central bankers hoped they would. In effect they thought they had more economic power than they did as longer-term interest-rates cocked something of a snook at them. So we got QE bond purchases in an attempt to control them as well, but whilst this has been associated with lower bond yields the link has been far from what you might think.

Last Night

Whilst many of us in the UK had our eyes on Wembley last night the Federal Reserve released the minutes of its most recent meeting.

On net, U.S. financial conditions eased further, led by a decline in Treasury yields.

Remember this was from mid-June and in terms of central banker psychobabble you can explain it like this.

Lower term premiums appeared
to be a significant component of the declines, as reflected by lower implied volatility on longer-term interest rates.

There had also been bad news for those using real yields as a measure.

The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk’s Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside.

The Federal Reserve is of course desperate to emphasis anything agreeing with its claim that inflation will be transitory. But the problem for those seeing things in real yield terms is that the higher inflation forecasts should lead to higher bond yields and we got lower ones. Oh Well! As Fleetwood Mac would say.

Oh and I did point out earlier that the Federal Reserve is trying to stop short-term rates going below zero.

Amid heightened demand and reduced supply for short term investments, the ON RRP continued to maintain a
floor on overnight rates.

Taper 

Here things get a little awkward again. Because any reduction in the current rate of purchases ( $80 billion of US Treasury Bonds and $40 billion of Mortgage-Backed Securities a month) should lead to higher bond yields. Except for all the talk it still seems some way away.

In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.

This backs up this from the statement at the time.

The Committee expects
to maintain an accommodative stance of monetary policy until these outcomes are achieved

Timber!

An exaggeration but there is a point behind it. Highlighted in a way by this from Reuters.

“If we do see a further drop in interest rates, if we do get below that 1.3% level in any kind of meaningful way, that is going to confirm that growth over value has returned and it is not just a head fake,” said Matt Maley, chief market strategist at Miller Tabak.

Actually the US ten-year yield is 1.26% as I type this as we wonder if that is meaningful enough for Mr. Maley? This compares to 1.78% earlier this year as the yield party peaked and 1.6% just after the Federal Reserve meeting and its hints of a couple of interest-rate rises in 2023. So if you have been long bonds well played.

Back to the economic implications and we start with the US government being able to borrow very cheaply again. Related to that is that long bond (30 year ) yield and its impact on mortgage rates.

Mortgage rates have fallen fairly consistently over the past 2.5 weeks with the past 2 days seeing some of the better improvements…….

They have the 30-year at 3.07% with Freddie Mac going below 3% to 2.98%. I doubt today’s fall to 1.88% for the long bond is factored in but of course the day is not over and things might change.

The International Effect

We can see one via Yuan Talks.

#China‘s most-traded 10-year #treasury futures extend gains to more than 0.5% to hit the highest since Aug, 2020. The yield on China’s 10-year govt bonds drops by 6.25 bp and break through 3% mark to hit 2.9925%.

If we switch to Europe one of my subjects this week – France- has seen its ten-year yield move to a whisker away from 0% this morning. Germany has a thirty-year of a mere 0.15%.

If we travel to a land down under he get a new sort of insight into QE. This is because the Reserve Bank announced a reduction in the rate of it by around 20% from September. The knee-jerk response saw the ten-year yield rise to 1.48% but only a couple of days later it is 1.3%.

The Global Dunces Cap goes to the Bank of Japan. You may recall that a few months ago Yield Curve Control was all the rage. Maybe even fashionable if an economic concept can be. But by pinning the ten-year yield the Bank of Japan stops it from falling and effectively undertake a sort of reverse Abenomics. So it has only moved within the permitted range from 0.06% to 0.02%. I guess that counts as a big move for JGBs these days.

I suspect that has contributed to today’s rally in the Japanese Yen as it moved through 110 although currencies rarely move for one thing alone.

Comment

The pendulum keeps swinging in 2021. Markets tend to overshoot but even that theory is awkward now as we note how large the narrative is versus how small the bond yield moves have been. I have worked through plenty of occasions where a 0.5% move would not be considered much and one comes to mind ( White Wednesday 1992) when it was happening if not in seconds in minutes.

Is this a cunning triumph by the US Federal Reserve as some argue? I do not think so as that is way over emphasising their ability. Putting it another way if so they have just poured petrol on the house price rise fire via the impact on mortgage rates.

Switching to the UK we see the same themes in play. The fifty-year yield is back below 1% so the government can borrow incredibly cheaply just as theory tells us it should be getting a lot more expensive. Also we may see more of this.

Record low rate on a 60% LTV 2yr fix of 1.15% in June. No wonder that mortgage mover numbers and house prices are up. Average quoted rates are falling on higher LTVs but still higher than pre-pandemic. ( @resi_analyst )

 

UK house prices surge again

One economic story of the Covid-19 pandemic has been the surge in house prices.Only yesterday we took a look at the way the US Federal Reserve is trying to manage public expectations.  Today we see a further challenge for the vigilant Bank of England.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide)

As you can see they have had a go at doing the Bank of England’s job for it with the mention of what we prefer to call exit effects. But the final sentence rather torpedoes that effort as it points out prices are up nearly 5% since March.

The Nationwide has another go here.

Despite the increase in house prices to new all-time highs,
the typical mortgage payment is not high by historic
standards compared to take home pay, largely because
mortgage rates remain close to all-time lows.

The problem is that for the more thoughtful that is a reminder that mortgage rates and hence interest-rates cannot rise by much without causing what Taylor Swift would describe as “trouble,trouble,trouble”. Also it is kind of them to point out that mortgage payments are a third of take-home pay reinforcing the insanity of the targeted inflation measure ( CPI) ignoring this area. Also in spite of their efforts to tell us everything is fine they cannot avoid a consequence in terms of capital required.

However, house prices are close to a record high relative to
average incomes. This is important because it makes it even
harder for prospective first time buyers to raise a deposit. For example, a 10% deposit is over 50% of typical first time
buyer’s income.

Stamp Duty

We got a hint of what will happen when the holiday here is over from Scotland.

But conditions were more muted in Scotland, which saw a
modest increase in annual growth to 7.1% (from 6.9% last
quarter) and was also the weakest performing part of the UK.
This may reflect that the stamp duty (LBTT) holiday in
Scotland ended on 31 March.

So still growth but much slower reminding us that such holidays simply seem to add any tax gain to prices. So the real winners are in fact existing owners.

By contrast Northern Ireland at 14% and Wales at 13.4% led the rises and would presumably be higher now if we had June numbers rather than quarterly ones.

Mortgages

The Nationwide points out that there has been anther official effort to juice the mortgage market.

The improving availability of mortgages for those with a
small deposit (and the continued availability of the
government’s Help to Buy equity loan scheme) is helping
some people over the deposit hurdle, but it is still very
challenging for most.

Maybe that was in play at least in part in the latest mortgage data from the Bank of England.

Net mortgage borrowing bounced back to £6.6 billion in May. This followed variability in the previous couple of months in anticipation of the reduction in stamp duty ending, which has been extended to the end of June. Net borrowing was £3.0 billion in April, following a record £11.4 billion of net borrowing in March

So a bounce back from these numbers compared to April.

Net borrowing in May was slightly higher than the monthly average for the six months to April 2021 and above the average of £4.2 billion in the year to February 2020.

So a combination of the stamp duty extension and an attempt to make more low deposit mortgages available has pumped up the volume.

If we look further down the chain we see this.

Approvals for house purchases increased slightly in May to 87,500, from 86,900 in April. They have fallen from a recent peak of 103,200 in November, but remain above pre-February 2020 levels. Approvals for remortgage (which only capture remortgaging with a different lender) rose slightly to 34,800 in May, from 33,400 in April. This remains low compared to the months running up to February 2020.

So a small rise and Neal Hudson has looked back for some perspective on them.

Mortgage approvals for house purchase were still 32% higher than recent average (2014-19) in May.

Savings

These are another factor in the game because we have seen them soar in the pandemic era as some received furlough payments whilst having lower bills ( no commuting) and less ability to spend due to lockdown. In spite of the increased freedoms it still seems to be happening.

Households deposited an additional £7.0 billion with banks and building societies in May. The net flow has fallen in recent months, and compares to an average net flow of £16.5 billion in the six months to April 2021  and a series peak of £27.6 billion in May 2020. The flow is nevertheless relatively strong – in the year to February 2020, the average inflow was £4.7 billion. ( Bank of England)

So there is money potentially available for house purchase deposits from this source as prospective buyers boost savings or perhaps the bank of mum and dad is more flush with funds.

Whilst we are on the subject of saving we saw more from another source as people who could increased their rate of mortgage repayment.

Gross lending was a little higher at £24.2 billion, while gross repayments dropped to £18.9 billion.

That was of course another example of central bank policy misfiring as a type of precautionary saving acted in the opposite direction to the hoped for one. We see this a lot well except in central banking research.

Consumer Credit

If we look back to the heady pre credit crunch days we can recall that even this area was deployed to boost housing credit as people were able to sign their own income chits. More recently that has been unlikely as we have seen falls but of you hear feet hammering on the floor earlier it was probably at the Bank of England as staff rushed to be first to inform Governor Andrew Bailey about this.

However, for the first time since August 2020, consumers borrowed more than they paid off in May, with net borrowing of £0.3 billion.

We even got some detail from the numbers which is rare. Regular readers will know I have been keen to track car finance movements but we only get an occasional glimpse behind the curtains.

The increase in net consumer credit reflected an additional £0.4 billion of ‘other’ forms of consumer credit, such as car dealership finance and personal loans. Credit card lending remained weak compared to pre-February 2020 levels, with a net repayment of £0.1 billion.

Comment

The monetary push from the Bank of England goes on as we note the reason for the Nationwide being able to claim that mortgage repayments are affordable.

The rate on the outstanding stock of mortgages remained unchanged at a series low of 2.07%……..The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 2 basis points to 1.90% in May.

It was no surprise we saw a nudge higher in May but since then not much has happened in terms of bond yields and hence fixed-rate mortgages. As to supply of mortgages we saw the Bank of England funnel cash to the banks only for the furlough schemes to mean they had plenty of new deposits too.

As ever Bank of England research is focused on this area and if you read between the lines you see that banks rip customers off if they can. Their way of explaining that is highlighted below.

What drives these patterns of customer choices and price dispersion? We show that customers facing large price dispersion are typically those borrowing large amounts relative to both their income and the value of their house. These tend to be younger customers, and are more likely to be buying a house for the first time. Lenders thus price discriminate, offering menus with greater price dispersion to customers who may be less able to identify and avoid expensive options, or have fewer options to go elsewhere.

 

UK Mortgage Lending surges to a record high

Today brings us up to date with what is now a year of the Bank of England going what can be called all in on monetary policy. We have seen its Bank Rate cut to 0.1% and its QE bond purchases if we includes the corporate bonds, raised from £445 billion to £833 billion on its way to £895 billion later this year. There have been various loan support schemes as well with the CCFF where the Bank buys commercial paper at £7.2 billion. That includes 2 erstwhile members of the European Super League with Tottenham Hotspur at £175 million and Arsenal at £120 million, or if you prefer a North London thing.My alma mater the LSE is in there at £80 million too

There are three contexts we can look at to give us a perspective on this. Firstly the economy seems to be showing ever more signs of moving forwards. In this instance someone at BBC Business seems to have had a sweet tooth over the weekend.

‘People are literally running in to shop… We bagged up the pick n mix and it was sold out in under an hour’ Gordon Gibb, owner of Flamingoland in Yorkshire, told @seanfarrington his business got a boost over the early May bank holiday.

This backs up this from Ernst and Young.

A substantially stronger April CBI distributive trades survey shows consumers significantly stepping up their spending, both in the run-up to non-essential retailers re-opening on 12 April and in the immediate aftermath. The survey only captures three days of the re-opening of non-essential retailers (the survey covers 25 March – 15 April).

Also this morning’s Markit IHS release could hardly be more positive.

The manufacturing sector was flooded with optimism
in April as the PMI rose to its highest level since July 1994,
bolstered by strong levels of new orders and the end of
lockdown restrictions opened the gates to business. It was
primarily the home market that fuelled this upsurge in
activity though more work from the US, Europe and China
demonstrated there were also improvements in the global
economy

If we now shift to the international position there have been a couple of developments today. Here is David Sheppard of the Financial Times.

EU carbon price hits a record high above €50 a tonne, pushing the cost of polluting for industries covered by the EU Emissions Trading System to roughly double their pre-pandemic level Huge ramifications for power generation and manufacturing #EUETS

That looks another signal of inflation on its way which gives another context to easy monetary policy. Also plants may have another view on carbon dioxide being pollution. The inflation theme continued if we look again at the Markit survey of UK manufacturing.

The resulting input
shortages kept producer price inflation among the highest
over the past four years. Manufacturers have generally
passed on these costs to customers, as highlighted by a
survey-record rise in selling prices,

Then if we look at Denmark we see that contrary to the supposed trend we see that negative interest-rates are spreading. From the quarterly release from Jyske Bank.

Effective 11 June 2021, Jyske Bank changes the variable interest rate on corporate clients’ demand deposits to -0.95% p.a. from -0.75% p.a.

Mortgages

It was only on Friday we looked at this from the Nationwide.

New record high average price of £238,831,
up £15,916 over the past 12 months.

Today we see one of the main drivers of it from the mortgage data and the emphasis is mine.

Mortgage borrowing was very strong in March with individuals borrowing an additional £11.8 billion secured on their homes (Chart 1). This was the strongest net borrowing on record since the series began in April 1993, with the previous peak in October 2006 (£10.4 billion). The strength in net lending reflected gross lending also reaching a new series high in March (£35.6 billion). The strong borrowing was driven by the expected ending of the temporary stamp duty tax relief at the end of March, which has now been extended to the end of June.

When you consider the booms we have seen that number is quite something. I note that it is backed up by a surge in gross lending as well. In terms of totals we passed the £1.5 trillion level in January and is now £1.516 trillion. Moving further up the mortgage chain seems to back that up.

The strength in mortgage borrowing follows a large number of approvals for house purchase. These approvals have fallen from a recent peak of 103,100 in November to 82,700 in March, but they remained relatively strong. In February 2020, there were 73,000 approvals for house purchase.

As to mortgage rates they will not make the Governor of the Bank of England Andrew Bailey quite so happy as he has gone to enormous effort to get them below pre pandemic levels.

The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 4 basis points to 1.95% in March. That is above the rate in January 2020 (1.85%), and compares to a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained broadly unchanged at a series low of 2.08%.

That is a reflection of the rising bond yields we have been seeing in recent months. I think there is more to come as my indicator for this which is the UK five-year bond yield is at 0.39% and has risen by quite a bit more than the 0.1% rise in mortgage rates since January. So we could easily see new mortgage rates not only go above 2% but reach the existing stock level at 2.08%.

Of course Governor Andrew Bailey has experience of things he has tried to cut rising for his days at the Financial Conduct Authority. There he tried to cut overdraft rates from around 19%. As they are now 33.5% you can see what a botched effort that was.

Consumer Credit

This used to be called unsecured credit but that was replaced with the much more friendly sounding consumer credit. However the trend over the past year or so has been anything but friendly.

Individuals have made significant net repayments of consumer credit since March 2020 (Chart 2). A further net repayment of £0.5 billion in March this year was, however, a little smaller than seen on average each month over the past year (£1.9 billion). It was also a smaller net repayment than in March 2020 (£4.1 billion), so the annual growth rate – while remaining weak at -8.6% in March – rose from its series low of -10% in February.

In terms of detail we get very little as for example it has been quite some time since we got a steer as to what is happening with car finance. All we are told is that it is mostly a credit card game.

Within consumer credit, the weakness on the month reflected net repayments on credit cards (£0.4 billion) and other forms of consumer credit (£0.2 billion). The annual growth rates of both components have risen from series lows, but remained weak at -18.5% and -4.1%, respectively.

Comment

We see record house prices accompanied by record mortgage lending. If we jump back just over a year to when the Bank of England was making its decisions at the peak of the crisis in mid-March last year it would have been very pleased if it knew the future. But there are issues with this and let me give you something heading the other way. We do nit get told this in the release but of you look at the numbers repayments at £23.8 billion must have been a record too. So some are heading in the opposite direction to official policy.

That leads us to the issue of saving which we see has boomed as well during the pandemic. I wait to see how economics research covers this as we see exactly the opposite of what economics 101 has told us with lower interest-rates being associated with more not less saving. Some of it has been forced but far from all of it. That leads to another line of though as if the past of the UK is any guide we will see at least some of the saving head for the housing market as time passes.

The money supply numbers are now being influenced by the fact that policy was eased a year ago so annual growth fell by 3% to 12.3%. But the heat is still on as we note that monthly growth was 0.5%. Pre pandemic that would have been considered to be rather hot.

 

 

 

 

 

Canada has quite a house price problem

Let us take a trip over the Atlantic to Canada where we see that a familiar issue is bubbling up again.

Bank of Canada Governor Tiff Macklem said he’s seeing “worrying” signs in Canada’s hot housing market, in which households are taking on increasing levels of debt to chase rising prices. ( Financial Post)

Perhaps the housing market is soaring because someone has done this?

The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week. ( March 10)

You could quite easily read the next bit as Governor Macklem saying to house buyers that he has their back. He has set policy to make borrowing as cheap and he can and also he has done his best to keep the quantity of credit flowing.

In the Bank’s January projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway.  As the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required.

We can look into this further because the Bank of Canada calculates a variable mortgage interest-rate. This came into the pandemic at 2.9% and now is at a record low of 1.42%. I raise this because the interview seems to have somehow missed it.

House Prices

These seem to have shot up for no reason at all.

The central bank had largely stayed quiet on the housing market until February, when Macklem said it was showing signs of “excessive exuberance” as national real estate prices jumped 25 per cent from the year before.

That is still continuing.

“Since then, the housing market has continued to run strong across a variety of dimensions; price increases have continued at a pretty high rate,” Macklem said in an interview with the Financial Post on Wednesday.

Indeed he is allowed to get away with a blame game

While the state of the market can be explained to some extent by a fundamental shift in demands, there are other factors, like speculation, at play, the governor said.

Considering his own behaviour and actions the bit below is breath-taking.

“What gets us worried is when you start to see extrapolative expectations, or people starting to speculate on this, and houses become assets as opposed to something we live in. There certainly are some signs of extrapolative expectations,” Macklem said.

“If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”

So people just turned up and started speculating all of their own accord in a pandemic?

Debt Issues

Apparently according to Governor Macklem the fact that people are borrowing seems to be like the economic equivalent of an out of body experience.

“If you look at the household indebtedness, you are seeing, on average, the loan-to-value ratios are getting higher, particularly in the uninsured space. That suggests that Canadians are stretching and that is worrying.”

If we take a look we can see a driving force here and the good Governor only needs to look at his own website. It calculates an effective household interest-rate which includes mortgages but also other borrowing. It has dropped from 3.7% to 2.57%. I suggest the Governor needs to launch an immediate investigation into who has done this?

If we look for the debt data we see a sign that they have been listening to Lyndsey Buckingham.

I think I’m in trouble,
I think I’m in trouble.

They have switched from the Bank of Canada to Canada Statistics so we can see that as of last September residential mortgage borrowing was growing at an annual rate of 5.7%. From September to January it grew from Canadian $ 1.61 trillion to $1.66 trillion or about 2.7%.

Here is the view of Canada Statistics.

By the end of January, households had added $7.0 billion in overall mortgage debt compared with the end of 2020—a year-over-year rise of 7.1%. Sales of existing homes remained strong into January, with overall sales volumes up 35.2% from the previous year. Non-mortgage debt declined 1.6% by the end of January, compared with the same month of the previous year, and has yet to reach the levels of 2019, after a year of moderation, including a notable decline in the first half of 2020.

Overall, the total credit liabilities of households reached $2,453.2 billion by the end of January. Real estate secured debt, composed of both mortgage debt and home equity lines of credit, stood at $1,925.7 billion.

House Prices

Early last month the New York Times took a look.

Instead, of course, Canada is talking again about whether most of the country is in a soon-to-burst real estate bubble. In Vancouver last month, the benchmark price for detached homes rose by 13.7 percent compared with a year earlier, reaching 1.6 million Canadian dollars. In the Toronto area, the average selling price for detached homes rose by 23.1 percent over the same time period, and a composite price that includes all kinds of housing topped 1 million dollars.

This was put another way by CBC yesterday.

In December, the Canadian Real Estate Association warned that the average house price in Canada is expected to hit $620,000 throughout 2021. By this month, the CREA reported that home sales in February were up 39.2 per cent compared with a year ago, and the average price had hit $678,091, up 25 per cent from a year earlier.

Comment

This is part of what has become familiar for central bankers but Governor Macklem has taken it to something of an extreme. In some ways I am a little surprised that he did not try to claim “Wealth Effects” from the house price rises. If we step back for a moment he was responding to this from a Bank of Canada survey.

In particular, focus group participants voiced concerns about the costs of urban housing:

  • rising far beyond the 2 percent inflation target
  • growing faster than wages

These growing costs, they said, make it much harder for people to become homeowners. As a result, they felt this widens the divide between the rich and the poor, which negatively affects social cohesion.

This was right at the top of the survey. He is in something of a trap because he has promised to continue easy monetary policy until 2023. The Bank of Canada has recently stopped some of its emergency programmes but if we return to the Financial Post raising interest-rates is considered like this.

Tal reiterated Macklem’s view.

“The housing market is one part of the economy,” he said. “As a society, we have never been so sensitive to the risk of higher interest rates…. Every small increase in the interest rate can have a significant impact on the housing market and therefore, (Macklem) would like to see the market slow down before we have to raise interest rates.”

It did not seem to bother him when he cut interest-rates!

Also let me add in an additional factor here which comes to some extent from fiscal policy and the furlough schemes.

Canadians recorded a similar amount of savings in 2020 as in the previous seven years combined. Some of this savings made its way into currency and deposits of Canadian households, with growth in this asset nearing $160.0 billion over the first three quarters of the year. The savings rate for the fourth quarter stood at 12.7%, while the savings rate for 2020 was 15.1%. ( Canada Statistics)

Perhaps some of these savings are finding their way into the housing market as well.

Let me finish by wishing you all a Happy Easter.

UK mortgage supply surges as consumer credit collapses

Today the economic focus switches to the UK as we consider its share in the pumping up of the world money supply. Although as I type this the central bankers may be rather jealous of the Reddit and Wall Street Bets crew.

Spot silver leapt as much as 7.4% in Asia to $28.99 an ounce, taking gains to about 15% since last Wednesday and the price to its highest since mid August.

Silver mining stocks soared in Australia and China and Money Metals, an online exchange for precious coins and bullion, posted an “EXTREME DEMAND ALERT” banner across its homepage, and announced it restricted orders to between $1,000 and $10,000. ( Reuters)

A more prosaic view on a direct impact of the loose monetary policy in the UK is provided by house prices. Last week Hometrack offered their perspective on this.

The annual rate of UK house price growth is 4.3%, the highest since April 2017. The impetus for growth is coming from Wales, northern England and Scotland where strong demand and attractive affordability allow headroom for above average growth rates.

The rate of annual price inflation is highest in Wales and the North West at +5.4%.

At a city level, Liverpool has jumped to the top of the growth rankings with house prices rising by 6.3% over the last 12 months – this is the highest annual growth rate for 15 years.

Manchester is close behind with a growth rate of +6.0%, back to levels of inflation last seen 2 years ago.

So Liverpool is leading the way as the house price market follows the performance its football team, or at least the red version. Next comes Manchester which may be seeing the benefit of all the plugging of its house prices by the Salford based BBC. Care is needed though because at £127,200 prices in Liverpool are a long way short of the average for this index which is £233,700 and less than half of the twenty city index at £260.500.

This time around things are being led by the North it would seem.

House price growth is at a decade high across three regions – North East, North West, Yorkshire and the Humber – in fact growth is running at the highest since before the global financial crisis.

Although looking ahead they expect all areas to continue this trend.

Despite the new lockdown, demand for homes has posted the usual seasonal rebound which has been stronger than last year. Demand for homes is up 13% on this time last year, with new sales agreed also up 8%.

This rebound is broadly uniform across all regions and countries. It is a continuation of above average demand and market activity from 2020 H2.

You may not be surprised to read that they seem to be keen on an extension to the Stamp Duty holiday. They say it will be short but we know what that invariably means!

Meanwhile something slightly different is happening in London.

The one area where supply is growing is London with flats accounting for much of this increase.

We believe this is a combination of 1) more owners looking to trade up from flats to houses motivated by a desire for space and more flexible working patterns; 2) investors looking to sell homes in the face of falling rents and expectations of an increase in capital gains tax rates in 2021.

Those of you who follow the debate might think that for once the official obsession with using Imputed Rents might show something useful here.They might if they did not use last year’s.So next year they will be useful for telling us what is happening now!

Mortgage Supply

It was on a bit of a tear in December.

Net mortgage borrowing remained strong at £5.6 billion in December.

2020 was a year of not far off the football image of two halves with a strong ending.

Net borrowing continued to be significantly higher than the average of £3.9 billion seen in the six months to February 2020. Strength since September in net mortgage borrowing has, however, only partially offset weakness earlier in the year: total borrowing in 2020 (£43.3 billion) was below 2019 (£48.1 billion).

If we look further up the chain we can expect more of the same.

The strength in mortgage borrowing follows a large number of approvals for house purchase over the second half of 2020. In December, the number of these approvals – an indicator for future lending – was 103,400 (Chart 1). This was slightly lower than in November (105,300) but well above the February level (73,400). Recent strength in approvals has more than offset the significant weakness earlier in the year

The next statement is not for the nervous as what happened after 2007?

House purchase approvals – having troughed at a record low of 9,400 in May – totaled 818,500 in 2020, the largest number in one year since 2007.

These are extraordinary numbers in a pandemic which has ravaged more than a few bits of the UK economy. For example there was more woe being reported for the retail sector earlier via Arcadia. This is a clear function of the way the Bank of England stepped in.

However there is an area where it is now beginning to struggle.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages rose 7 basis points to 1.90% in December. That is slightly above the rate at the start of the year (1.85% in January) and the highest since October 2019. The rate on the outstanding stock of mortgages was little changed at 2.12% in December.

The fact that mortgage rates are not higher than pre pandemic confirms my theme that Bank Rate is essentially now irrelevant for them. After all it was cut from 0.75% to 0.1% and now mortgage rates are in general higher. Indeed it has had little lasting effect even on the shrinking number of variable rate mortgages as their interest is 0.11% lower than a tear ago or around one sixth of the Bank Rate cut.

Consumer Credit

This had a simply wretched 2020 and I do envy the individual who had to announce these numbers at the Bank of England morning meeting.

Households’ consumer credit remained weak in December with net repayments of £1.0 billion. This follows a net repayment of £1.5 billion in November (Chart 2). Total net repayments were £16.6 billion in 2020, the weakest in one year on record. As a result, the annual growth rate fell further to -7.5% in December, a new series low since it began in 1994.

It has essentially been driven by credit cards.

Within consumer credit, the weakness in December reflected net repayments on both credit cards (£0.8 billion) and other forms of consumer credit (£0.1 billion). As a result, the annual growth rates of both components fell further, to -16.2% and -3.4%, respectively. For credit cards, this represents a new series low.

I would say this was due to the cost of borrowing on a credit card but in fact that has pretty much ignored all the Bank Rate cuts of the credit crunch era.

The cost of credit card borrowing bounced back to 17.76% in December, following the series low at 17.49% in November.

Comment

There are some extraordinary numbers here as we see the impact of the £128 billion or so of the various Term Funding Schemes on mortgage supply. Next comes the impact of the extra QE bond buying in driving mortgage interest-rates lower although even a current weekly purchasing rate of just over £4.4 billion has not stopped a bounce back.

Switching to the wider money supply we see changes as mortgage finance fires up again but consumer credit shrinks. On the other side of the coin we have seen an extraordinary rise in savings.

Households’ flows in to deposit-like accounts rose in December. The net flow of deposits was £20.9 billion in December, up from £18.4 billion in November (Chart 3).

There is an irony here as the TFS was to avoid the banks having to compete for deposits which have poured in anyone. I am also sure some bright spark PhD is writing a piece saying that lower savings rates create a higher demand for savings.

The effective interest rate paid on individuals’ new time deposits with banks fell by 8 basis points in December, to 0.42%, a new series low since it began in 2016. The effective rates on the outstanding stock of both sight and time deposits were broadly flat, at 0.12% and 0.51%, respectively. The rate on the stock of sight deposits remains the lowest since the series began, and 34 basis points lower than in January.

With mortgage rates rising and savings rates falling The Precious! The Precious! Will be making some money and is no doubt a factor in why bank share prices have been doing better.

Adding it all up gives us money supply growth of 14.1%.

Podcast

 

 

 

Money Supply growth has both ramped Bitcoin and made it even more unstable

Let me welcome you to 2021 as the main financial trading year catches up with the calendar one. It is a time of year to mull whether the Who will be right or not?

Meet the new boss
Same as the old boss

The good news comes from the vaccine rollout with the Oxford vaccine programme beginning today and the bad from the case numbers in the UK which seem set to add to the restrictions on our lives.What can central banks  do about it well they can visit the outer limits of monetary policy as below.

The Central Bank of Egypt (CBE) has launched a new EGP 15bn initiative to finance the dual-fuel vehicle conversion plan, with a lump-sum return of 3%.
In a Sunday letter to banks, the CBE said that the initiative aims to support the government’s ambitious, recently announced multi-year plan to replace car engines powered by traditional fossil fuels with dual-fuel engines that run on both petrol and natural gas.

Accordingly, the central bank will provide the needed financing through this initiative at low-interest rates.

Its Board of Directors approved the decision, with the financing to be made available through banks at a flat return rate of 3% used in granting loans. ( alnaasher.com)

That sort of mission creep will no doubt be copied by others and is one of the factors behind this development which has really gathered pace in the new year.

Bitcoin climbed above $34,000 for the first time on Sunday, extending a record-breaking rally in the volatile cryptocurrency that delivered a more than 300 per cent gain last year. With trading in key financial markets yet to commence in 2021, bitcoin has resumed its dizzying ascent, rising more than 10 per cent in the first few days of January. By late afternoon in London on Sunday, it had given up some of its early gains to dip just below $33,000. ( Financial Times)

As so often they are rather tardy whereas back on November 17th when the price was half of what it is now I pointed out this.

Another way of looking at the change in perception of Bitcoin is the way that central banks are now looking at Digital Coins in a type of spoiler move as it poses a potential challenge to their monopoly over money.

The price is volatile and there are dangers in using a marginal price for an average concept but a “value” of over US $600 billion will be giving central bankers itchy shirt collars. Also frankly it is another sign of inflation.

UK Money Supply

Let me pivot now to a factor behind this announced by the Bank of England this morning.

Overall, private sector companies and households significantly increased their holdings of money in November. Sterling money (known as M4ex) increased by £31.9 billion in November; broadly in line with October which saw holdings increase by £33.5 billion. This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £41.1 billion on average each month.

That takes the annual rate of growth of the Bank of England’s preferred money supply measure to 13.9%. This is significant not only for the rate itself which in theory feed straight into nominal economic growth but because it comes on the back of an inflated money supply which now totals some £2.53 trillion. Or as MARRS observed.

Pump up the volume
Pump up the volume
Pump up the volume
Pump up the volume

If we switch back to Bitcoin we see another factor in its rise. UK money supply is only a bit part player but we see similar ramping of the money supply pretty much everywhere we look. I get regularly asked where it goes? Also where the inflation is? Well…..

House Prices

Whilst we were off on holiday ( a stay at home one) the Nationwide released this.

“Annual house price growth accelerated further in
December, reaching a six year high of 7.3%, up from 6.5% in the previous month. Prices rose by 0.8% month-on-month, after taking account of seasonal effects, following a 0.9% rise in November. House prices ended the year 5.3% above the level prevailing in March, when the pandemic struck the UK.”

The Bank of England was cheerleading for this sort of thing in its release earlier.

The mortgage market strengthened in November. Households borrowed an additional £5.7 billion secured on their homes, following net borrowing of £4.5 billion in October. November borrowing was the highest since March 2016, and significantly higher than the average of £3.9 billion seen in the six months to February 2020.

But for it the party really got started here.

The continued strength in mortgage borrowing follows a large number of approvals for house purchase over recent months. In November, the number of these approvals – an indicator for future lending – continued increasing, to 105,000 from 98,300 in October (Chart 1). This was the highest number of approvals since August 2007 and recent strength in approvals has almost fully offset the significant weakness earlier in the year. There were 715,300 house purchase approvals up to November 2020, close to the number during the same period in 2019 (722,000).

So we now know something we had long expected which is that even an economic depression is not allowed to get in the way of house price pumping and rises. Or as the Nationwide put it.

“But, since then, housing demand has been buoyed by a raft
of policy measures and changing preferences in the wake of
the pandemic.”

Consumer Credit

By contrast there will have been wailing and gnashing of teeth at the Bank of England earlier over this.

Household’s consumer credit weakened further in November with net repayments of £1.5 billion; that followed a net repayment of £0.7 billion in October. The weakening on the month reflected a fall in new borrowing. Since the beginning of March, households have repaid £17.3 billion of consumer credit. That has caused the annual growth rate to fall to -6.7% in November, a new series low since it began in 1994.

The word repayment is like kryptonite to them. These are broad brush numbers with the only breakdown we receive below.

Within consumer credit, the weakness was broad based with net repayments on both credit cards (£0.9 billion) and other forms of consumer credit (£0.7 billion). As a result, the annual growth rates of both components fell further, to -14.5% and -3.0%, respectively. For credit cards, this represents a new series low.

I make the point because there was a brief spell we were updated on car loans but that soon ended. So I wonder what is happening now in that area? According to the UK Finance and Leasing Association or FLA then personal credit for new cars was down 17% in the year to October and down 10% for second-hand cars.

But the overall picture is of a collapse in credit card borrowing which maybe has led to this.

The cost of credit card borrowing fell by 47 basis points to 17.49% in November; a new series low.

I have followed it since the credit crunch began and all the various interest-rate cuts have until now bypassed it.

Mortgage Rates are rising

Apart from it we see that other interest-rates are rising.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages rose 5 basis points to 1.83% in November. That is close to the rate at the start of the year (1.85% in January)

Where did the Bank Rate cuts and bank subsidies ( Term Funding Scheme) go? It looks as though banks have simply boosted their margins. Especially as they pay ever less.

The effective interest rate paid on individuals’ new time deposits with banks fell by 3 basis points in November, to 0.50%, and remains much lower than in February (1.04%)………The rate on the stock of sight deposits remains the lowest since the series began, and 34 basis points lower than in February.

 

Comment

We see that in spite of the increasingly desperate effort to claim there is no inflation we do not have to look far to see it. Indeed this morning someone I consider to be something of a High Priest in the systemic denial has changed tack.

Ultra low interest rates raise asset prices hurting the young and those without wealth. ( Paul Johnson of the Institute for Fiscal Studies)

Why do I say denial? Well his 2015 Inflation Review told us this.

CPIH is conceptually the best overall measure of inflation in the UK.

Because it excluded the asset prices (house prices) he is now worried about. Indeed he thought making the numbers up was much better.

A home provides a flow of accommodation services that are
consumed by households. The rental equivalence approach estimates the price of consuming these services as being equivalent to what the owner would have to pay if renting the property.

Suddenly the house price rises are recorded as growth. The poor first-time buyer gets shafted twice. Firstly by higher prices and then by being told they are better off using the inflation measure recommended by Paul.

Next comes the instability created by a system built in sand and misrepresentations. Bitcoin is showing that by its drop to around US $30k as I have been typing this.

Lastly let me give you another example of reality being adjusted to suit a narrative. Remember the way that the present Bank of England Governor Andrew Bailey so botched an enquiry into overdraft interest-rates that they then doubled?

 Following discussions with reporters on how to account for the ending of fees and COVID support measures, these overdraft rates are now estimated to have been lower between April and September than previously thought, and similar since October.

So far though they seem to be failing.

The effective rate on interest-charging overdrafts was 20.62% in November, above the rate of 10.32% in March 2020 before new rules ending overdraft fees came into effect.

 

 

 

 

 

UK interest-rates are rising in spite of another money supply surge

Today brings the opportunity to note how the Bank of England is progressing in its plan to pump up the volume in the UK monetary system. One way of looking at it is to see where at least some of the money is going.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%).

London’s average house prices hit a record high of £496,000 in September 2020.

These moves are really extraordinary as really house prices should be falling by those sort of amounts. After all we have seen a virus pandemic and restrictions on the economy such that economic output is somewhere around 10% lower than at the turn of the year right now. Of course monetary juicing if the housing market has not been the only game in town as we have seen Stamp Duty cuts as well as both the government and Bank of England have acted to stop house price declines. It is notable that prices are rising everywhere and even in London which is a place where people are fleeing if the media are any guide.

As you can see house prices are rising much faster than the official rate of inflation which is why this was announced last week by the National Statistician Sir Ian Diamond.

“The RPI is not fit for purpose and we strongly discourage its use. The Authority’s proposal is designed to address its shortcomings by bringing the methods and data of CPIH into RPI.”

You see the Retail Price Index or RPI has as a component house prices via a depreciation measure and they are around 8% of the index. Can any of you figure out why they want to replace something rising at 4.7% a year with something like this?

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020. ( UK ONS).

Just as a reminder those rents are not actually paid by owner occupiers so it is a complete theoretical swerve as a way of making inflation look lower than it really is. The National Statistician should be ashamed of himself.

If we now switch to another asset market we see another surge as for example the five-year yield has gone negative again this morning. So if we flip that over UK bond or Gilt prices have gone through the roof. The clearest example of that is our 2068 Gilt which was only issued 7 years ago but with a coupon of 3.5% which means it has more than doubled to 211. Bonds should not be doing that as it really rather contracts their role as a safe haven but it is where we are.

Pump It Up!

This is the change seen in October.

Overall, private sector companies and households significantly increased their holdings of money in October. Sterling money (known as M4ex) increased by £29.9 billion in October; a significant rise from September which saw holdings increase by £11.5 billion . This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £40.8 billion on average each month.

The first consequence of this is that the broad measure of the money supply called M4 rose at an annual rate of 13.1%. This is a record for this series which goes back to 1993. It is best to take these numbers as a broad brush as they are erratic on a monthly basis.

There is also a cross over between monetary and fiscal policy here as the rise in savings deposits is probably from the furlough payments and the like.

Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.

As an aside there seems to be a shift out of National Savings since it announced interest-rate cuts.

This strength could in part reflect less investment in National Savings and Investment (NS&I) accounts, which are not captured within household deposits, but can be substitutes for one another as they have similar characteristics. There was a small withdrawal (£0.5 billion) from these accounts in October compared with strong investments seen since March, including £5.0 billion in September.

Mortgages

Let me now switch to the part that will be emphasised at the Bank of England morning meeting.

The mortgage market remained strong in October. On net, households borrowed an additional £4.3 billion secured on their homes, following borrowing of £4.9 billion in September….. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered and is slightly higher than the average of £3.9 billion in the six months to February 2020.

Governor Andrew Bailey’s smile will only broaden when it is followed-up by this.

The number of mortgage approvals for house purchase continued increasing in October, to 97,500 from 92,100 in September. This was the highest number of approvals since September 2007, 33% higher than approvals in February 2020 and around 10 times higher than the trough of 9,400 approvals in May.

However the road to the fast track promotion scheme will mean relegating this part to the small print.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages ticked up by 4 basis points to 1.78% in October. New mortgage rates have risen back to their level in June,

Perhaps our junior could emphasise this part.

 but remain below the rate at the start of the year (1.85% in January).

Consumer Credit

This is a more thorny issue and will require some deep thought for the Bank of England morning meeting. Perhaps they could start with the gross borrowing figure although the fact it has been dropped from the press release is not an auspicious sign. Or they could quickly flick up this chart if the Governor takes a toilet break.

Household’s consumer credit remained weak in October with net repayments of £0.6 billion, unchanged from September. Since the beginning of March, households have repaid £15.6 billion of consumer credit. As a result, the annual growth rate fell further in October to -5.6%, a new series low since it began in 1994.

A sub-plot in the Bank of England plan has been to light the blue touch paper on what used to be called unsecured credit but that has come a cropper.

Small Business Lending

For once these numbers look good.

Within overall corporate borrowing, small and medium sized non-financial businesses continued borrowing from banks. In October, they drew down an extra £1.7 billion in loans, on net. SMEs have borrowed a significant amount since May, and as a result the annual growth rate has risen sharply, reaching 23.9% in October, the strongest on record .

Although this is government mandated and no doubt includes the various £50.000 loans which were free (0%). So whilst the numbers look good the reality behind them is grim.

Comment

The beat goes on today as the Bank of England will buy another £1.473 billion of UK bonds as it continues its campaign to reduce the UK government’s borrowing costs. A consequence of that aim will be more electronically produced money and a higher money supply. But there is trouble ahead for economics 101 which would assume lower interest-rates as a consequence. We have already noted mortgage rates heading higher and it is variable-rate mortgages which have driven this by rising a quarter point from their low. But there are also others doing the same.

Rates on new personal loans to individuals increased in October by 37 basis points, to 5.15%, but remain low compared to an interest rate of around 7% in early 2020. The cost of credit card borrowing was broadly unchanged at 17.96% in October.

Also there is this.

 Interest rates on new loans to SMEs increased by 11 basis points to 1.83% in October, but remain well below the rate of 3.44% in February. Rates have risen gradually over recent months from a trough of 0.98% in May.

So in spite of the ongoing effort interest-rates are beginning to edge higher again and that is before something from Governor Andrew Bailey’s past catches up with him.When he was head of the Financial Conduct Authority he acted to reduce overdraft interest-rates and yes I did type reduce, because it was botched and look what happened next.

The effective rate on interest-charging overdrafts was 19.70% in October, above the rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.

Podcast

What are the consequences of bond yields rising further?

This week has brought an unusual development for the credit crunch era. Let me illustrate with an example of the reverse and indeed what we have come to regard as the new normal from last week.

AMSTERDAM, Nov 5 (Reuters) – Italy’s five-year bond yield turned negative for the first time on Thursday as uncertainty from the U.S. election supported government bonds in Europe.

Prima facie that seems insane but of course as I will explain later it is more complicated than that. That is for best when we add in this from Marketwatch on Monday.

Investors now pay Greece for the privilege of owning its debt, an incredible turnaround from its securities being the source of global financial instability a decade ago.

Greece’s three-year debt turned negative on Friday, and then the country received more good news after the surprise decision by Moody’s Investors Service on Friday night to upgrade the nation’s debt. The upgrade, from Ba3 from B1 previously, still leaves Greek debt in junk market territory, and three notches away from becoming investment grade.

The yield on Greek 10-year debt TMBMKGR-10Y, 0.834% fell 4 basis points to 0.77%. In 2012, the yield on Greek 10-year debt surpassed 35%.

Amazing in its own way and well done to investors who got their timing right in these markets. Although a large Grazie is due to Mario Draghi who set things in motion.

US Treasury Bonds

However there has been something of a contrary signal from the US bond market. There was a hint of something going on in what is called the Long Bond which is the thirty-year maturity. Some of you may recall at the height of the pandemic panic in financial markets in March the yield here dipped below 1%. This was driven by two factors.The first was a move to a perceived safe haven in times of trouble and US Treasury Bonds are AAA rated as well as being in the world’s reserve currency. Also there would have been some front-running of the expected bond buying or QE from the US Federal Reserve. It did indeed charge in like the US Cavalry with purchases at the peak of US $75 billion per day.

But around 2 weeks ago the mood music was rather different as the debate was then about whether the yield would break above the 1.6% level that market traders felt was significant. As the election results began to come in it did so and now we find it at 1.75%.

If we switch to the benchmark ten-year ( called the Treasury Note) we see a slightly delayed pattern but also a move higher. In fact it gave us a head fake as the initial response to the election was a rally leading to lower yields and we noted it at 0.72%. But there were ch-ch-changes on the way and now we see it is 0.96%. So perhaps on the cusp of what is called a big figure change should it make 1%.

Why does this matter?

The first reason is for the US economy itself and there is a direct line in from mortgage rates.

Over the course of the past few days, 10yr yields are up roughly 0.2%.  This time around, the mortgage market hasn’t been able to avoid taking its lumps with the average lender now quoting 30yr fixed rates that are 0.125% higher compared to last Thursday.    ( Mortgage Daily News)

The housing market has been juiced by ever lower and indeed record low mortgage rates up until now. The change will feed into other personal and corporate borrowing as well.

Next comes its role as the world’s biggest bond market with some US $21.1 billion and of course rising at play here. I will come back to the domestic issues but there is a worldwide role here.For example back in my days in the UK Gilt ( bond) market the beginning of the day was checking what the US market had done overnight before pricing in any UK changes. That theme will be in play around the world and in fact on spite of the Italian and Greek moves above we have seen it.

For the US there is the domestic issue of debt costs. These have been a pack of dogs that have not barked but with the increases in the size of the bond market and hence higher levels of borrowing and refinancing smaller moves now matter. We know that President Elect Biden wants to spend more and looked at this on the 5th of this month although there remains doubt over how much of it he will be able to get through what looks likely to be a Republican controlled Senate. Even before this here are the projections of the Congressional Budget Office.

Debt. As a result of those deficits, federal debt held by the public is projected to rise sharply, to 98 percent of GDP in 2020, compared with 79 percent at the end of 2019 and 35 percent in 2007, before the start of the previous recession. It would exceed 100 percent in 2021 and increase to 107 percent in 2023, the highest in the nation’s history.

Best I think to take that as a broad sweep as there are a lot of moving parts in the equations used.

Yield Curve Control

This is, as you can see, not going so well! We have looked at the Japanese experience as recently as Monday and in the US it would be a case of recycling a wartime policy.

In early 1942, shortly after the United States declared war, the Fed effectively abdicated its responsibility for monetary policy despite its concern about inflation and focused instead on helping the Treasury finance the conflict. After a series of negotiations with the Treasury, the Fed agreed to peg the Treasury-bill yield at 0.375 percent, to cap the critical long-term government bond yield at 2.5 percent, and to limit all other government securities’ yields in a consistent manner.  ( Cleveland Fed)

The Long Bond yield is still quite some distance from the 2.5% of back then but as I have already explained the situation is I think more exposed now.

Oh and there was a concerning consequence to this.

The Treasury, however, did not wish to relinquish its control over Fed monetary policy and only acquiesced to small increases in short-term interest rates starting in July 1947, after inflation had been hovering around 18 percent for a year. The Treasury believed that it could not possibly finance its unprecedented levels of public debt at reasonable interest rates without the Fed’s continued participation in the government-securities market; in its view, only unrealistically high interest rates could coax enough private-sector savings to finance the debt.

Comment

Let me now switch to what we might expect if we had free markets. The extra borrowing we have looked at would be pushing yields higher. Another influence would be the fact the real ( after inflation) bond yields are heavily negative unless you think US inflation will be less than 1% per year for the next ten years. Even then it is not much of a return, especially compared to the 5% in one day some equity markets have just provided. The reality is that bond markets provide the prospect of capital gains rather than interest right now.

Also the modern era provides something very different from free markets as the US Federal Reserve will be thinking at what point will it intervene? Or to be more precise at what point will it do so on a larger scale as it is already buying some US $80 billion per month of US treasury bonds. It was not so long ago that such amounts were considered to be a lot. The path to Yield Curve Control may be via bond yield rises now followed by its response. So the real question is what level will they think is too much? This quickly becomes an estimate of what they think the US government can afford? As they have become an agent of fiscal policy again.

 

The Bank of England has pumped up the housing market again

Overnight there has been quite a shift in economic sentiment. To some extent I am referring to the falls in equity markets although the real issue is the new lockdown in France and increased restrictions in Germany. As we have been noting they were obviously on their way and the Euro area now looks set to see its economy contract again this quarter. It will be interesting to see how and if the ECB responds to this in today’s meeting and these feeds also into the Bank of England. The UK has tightened restrictions especially in Northern Ireland and Wales as we now wonder what more the central banks can do in response to this?

Still even in this economic storm there is something to make a central banker smile.

LONDON (Reuters) – Lloyds Banking Group LLOY.L posted forecast-beating third quarter profit on Thursday, lowering its provisions for expected bad loans due to the pandemic and cashing in on a boom in demand for mortgages.

Britain’s biggest domestic lender reported pre-tax profits of 1 billion pounds for the July-September period, compared to the 588 million pounds average of analysts’ forecasts.

Few things cheer a central banker more than an improvement in prospects for The Precious! But we can see that there is also for them a cherry on top of the icing.

The bank booked new mortgage lending of 3.5 billion pounds over the quarter, after receiving the biggest surge in quarterly applications since 2008.

That links into the theme of monetary easing which of course is claimed to help businesses but if you believe the official protestations somehow inexplicably ends up in the housing market every time. So let us look at the latest monetary data which has just been released. Oh and one point before I move on, what use are analysts who keep getting things so wrong?

Mortgages

Whoever was responsible for the Bank of England morning meeting today must have run there with a smile on their face and gone through the whole release word by word.

The mortgage market strengthened a little further in September. On net, households borrowed an additional £4.8 billion secured on their homes, following borrowing of £3.0 billion in August. This pickup in borrowing follows high levels of mortgage approvals for house purchase seen over recent months. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered reaching levels slightly higher than the average of £4.0 billion in the six months to February 2020. The increase on the month reflected higher gross borrowing of £20.5 billion, although this remains below the February level of £23.4 billion.

From their perspective they will see this as a direct response to the interest-rate cuts and QE they have undertaken as net mortgage borrowing has gone from £0.2 billion in April to £4.8 billion. Something they can achieve.

The outlook,from their perspective, looks bright as well.

The number of mortgage approvals for house purchase continued increasing sharply in September, to 91,500 from 85,500 in August (Chart 1). This was the highest number of approvals since September 2007, and is 24% higher than approvals in February 2020. Approvals in September were around 10 times higher than the trough of 9,300 approvals in May.

At this point we have what in central banking terms is quite an apparent triumph as they have lit the blue touch paper for the housing market. It has not only been them as there have also been Stamp Duty reductions but we see that there is an area of the economy that monetary policy can affect.

As to what people are paying? Here are the numbers.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn, and the outstanding stock of, mortgages were little changed in September. New mortgage rates were 1.74%, an increase of 2 basis points on the month, while the interest rate on the stock of mortgage loans fell 1 basis point to 2.13% in September.

Money Supply

Curiously the Money and Credit release does not tell us the money supply numbers these days although we do get this.

Overall, private sector companies and households increased their holdings of money in September. Sterling money (known as M4ex) increased by £10.8 billion in September; a significant rise from August which saw withdrawals of £1.0 billion (Chart 5). This is a continuation of the trend of strong deposit flows seen between March and July, albeit at a much weaker pace in comparison to the £40.5 billion monthly average seen during that period.

In essence this is part of the higher savings we have observed where people have furlough payments to keep incomes going but opportunities to spend them have been cut.

I have looked them up and annual M4 (broad money) growth was 11.6% in September. So we are seeing a push of the order of 12% which is more than in the Euro area.

Consumer Credit

Here the going has got a lot tougher and the monetary push seems to be fading already.

Household’s consumer credit weakened in September with net repayments of £0.6 billion, following some additional net borrowing in July (£1.1 billion) and August (£0.3 billion).

Actually the numbers have established something of an even declining trend since July. This means that the detail looks really rather grim.

Although the repayment in September was small in comparison to the £3.9 billion monthly average seen between March and June, this contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows pushed the annual growth rate down further in September to -4.6%, a new series low since it began in 1994.

In fact it is essentially repayment of credit card debt.

The net repayment of consumer credit was driven by a net repayment on credit cards of £0.6 billion

So it has an annual growth rate of -11.3% now. That is probably due to the price of it which is something of a binary situation.For those unaware there have been quite a few 0% offers in the UK for some time now but this is also true for others.

The cost of credit card borrowing was also broadly unchanged at 17.92% in September.

Although blaming the interest-rate for credit card borrowing does have the problem that overdraft interest-rates have been on quite a tear.

The effective rates – the actual interest rate paid – on interest-charging overdrafts continued to rise in September, by 3.52 percentage points to 22.52%. This is the highest since the series began in 2016, and compares to a rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.

Perhaps those that can have switched to the much cheaper personal loans.

Rates on new personal loans to individuals were little changed in September, at 4.78%, compared to an interest rate of around 7% in early 2020.

As you can see Bank of England policy has been effective in reducing the price of those.

Comment

The present situation gives us an insight into the limits of monetary policy and as to whether we are “maxxed out”. We see that the Bank of England interest-rate cuts, QE bond purchases (another £4.4 billion this week) and credit easing can influence the housing market and personal loans. However we have also noted the way that more risky borrowers are now wondering where all the interest-rate cuts went? For example a 2 year fixed rate with a 5% deposit was 2.74% in July as the Bank of England pushed rates lower but was 3.95% in September, or a fair bit higher than before the easing ( it was typically around 3%).

So we see that monetary policy is colliding with these times even before we get out into the real economy and a reason for this can be see on this morning’s release from Lloyds Bank. Some £62.7 billion of mortgages went into payment holidays of which £9.1 billion have been further extended and £2.2 billion have missed payments. No doubt the banks fear more of this and this is why they are tightening credit for riskier borrowers which operates in the opposite direction to Bank of England policy.

So the easing gets muted and we are left mostly with the easing of credit for the government as the instrument of policy right  now.

 

 

 

 

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

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

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

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

The Detail

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

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

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

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

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

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

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

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

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

Net exports contributed 1.0 percentage point to GDP

There was another curiosity in the shop.

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

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

Savings and Wages

There are two separate trends here as some did well.

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

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

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

Reserve Bank of Australia

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

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

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

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

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

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

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

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

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

Comment

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

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

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

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

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

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

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

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

Number Crunching

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

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