Australia is pivoting on interest-rates because of fears about house prices

This week is one that will be dominated by rises in interest-rates as domestically we await the Bank of England but also the whole world waits for the US Federal Reserve tomorrow. This morning we awoke to news from a land down under where according to Midnight Oil beds are burning.

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 2.85 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.75 per cent.

That was from Phillip Lowe who is the Governor of the Reserve Bank of Australia. There are 3 immediate issues here. Firstly that the increase was only 0.25% when we have got used to a “new normal” of 0.75%. Secondly that there is a complete mismatch between the interest-rate and inflation as he kindly confirms below.

As is the case in most countries, inflation in Australia is too high. Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades.

So they have slowed the rate of increase in spite of the fact that the rate of inflation is over 2 and half times higher than the interest-rate. As we also need to look forwards as interest-rates operate with a lag we in fact see that things are even worse.

A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year.

There is an attempt to explain things with this.

Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to be around 4¾ per cent over 2023 and a little above 3 per cent over 2024.

So they are suggesting that inflation will be lower next year and thus they do not need to increase interest-rates by much more.  Let us look back to last year to see how good they are at looking ahead as here is the statement from the 2nd of November 2021.

The central forecast is for underlying inflation of around 2¼ per cent over 2021 and 2022 and 2½ per cent over 2023.

As you can see they were completely wrong about this year by a factor approaching four and as we stand now think inflation next year would be double what they thought then. In fact they were so sure of this they kept interest-rates at record lows.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range….. The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth.

It was a clear policy error and one of the biggest of our times but for our purposes today we can see that their claimed rationale for reducing the pace of interest-rate rises is based on wishful thinking. More specifically based on economic models which could not have been much more wrong.

The third issue is how do you end up with an interest-rate of 2.85%?

Contradiction Time

The economy is awkward for them as we note an indicator that we have been guided to in the past.

The labour market remains very tight, with many firms having difficulty hiring workers. The unemployment rate was steady at 3.5 per cent in September, around the lowest rate in almost 50 years. Job vacancies and job ads are both at very high levels….

So we are around the lowest unemployment rate for 50 years and the growth pattern is much better than elsewhere.

The Bank’s central forecast for GDP growth has been revised down a little, with growth of around 3 per cent expected this year and 1½ per cent in 2023 and 2024.

Commodity prices have fallen in some areas but Australia must be benefiting from the LNG and coal boom.

Over the past year, the index has increased by 22.4 per cent in SDR terms, led by higher LNG, coking coal and thermal coal prices. The index has increased by 28.9 per cent in Australian dollar terms. ( RBA)

After he enjoyed his dinner in Hobart Governor Lowe confirmed this.

Our economy has bounced back better than most from the COVID-19 disruptions and we are benefiting from a surge in the prices of our key exports.

There is an obvious problem here as apparently Australia needs to increase interest-rates by less because it is doing better!

House Prices

If we now switch to what usually determines RBA policy we see that they were on their minds. From the official statement.

Another is how household spending in Australia responds to the tighter financial conditions. The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Higher interest rates and higher inflation are putting pressure on the budgets of many households. Consumer confidence has also fallen and housing prices have been declining following the earlier large increases.

So they are worried about the rise in mortgage interest-rates and hence mortgage costs and the implication for house prices. Perhaps suitably refreshed Governor Lowe went further at the dinner.

I understand that the higher interest rates that are needed to bring inflation under control are unwelcome by many people, especially those who have borrowed large amounts over recent times.

Who was that person who encouraged Australians to borrow so much? Here is Governor Lowe from a year ago.

Financial conditions in Australia remain highly accommodative, with most lending rates at record lows.

Comment

The basic point is that one of the stronger world economies is in the midst of what has become called the “pivot” on interest-rates. Indeed if we note these bits from the dinner speech there may be more to come.

This morning, we also discussed the consequences of not raising interest rates,

And….

Similarly, if the situation requires us to hold steady for a while, we will do that.

Our intrepid inflation fighters seem to be getting cold feet. If you follow my work you will know that my theme is that so much of central banking policy is driven by house prices. Looking at the figures below confirms that as we see how enormous rises were ignored but what are still small falls are getting an instant policy change.

House prices across the nation have continued to fall despite the spring selling season getting underway.

Prices have fallen by 0.06 per cent nationally, with a 0.11 per cent drop in Australia‘s capital cities according to PropTrack’s Home Price Index, the smallest fall since the March peak.

Hobart and Canberra led the declines with 0.46 per cent and 0.37 per cent dips respectively, followed by Sydney at 0.21 per cent.

But the dip isn’t a reason to panic according to property experts, with prices still up 30.2 per cent when compared with pre-pandemic levels. ( news.com.au )

 

 

 

 

UK Money Supply trends suggest lower inflation next year

Today we switch focus to an area resolutely ignored by the Bank of England which is the money supply and its consequences. Speaking of ignoring things the Labour Party is either ignoring it put the Bank of England in charge of UK inflation control or cannot remember back to the move by the then Chancellor Gordon Brown in 1997.

Labour has called for an independent assessment of whether Rishi Sunak’s £21bn cost of living emergency package could cause inflation to rise even higher and a verdict on the fiscal impact of substantial borrowing.

Pat McFadden, shadow chief secretary to the Treasury, wrote to the Office for Budget Responsibility (OBR) to ask it to analyse the impact of the measures. ( The Guardian)

Perhaps they also think that the Bank of England is no longer independent.

Anyway whist we are looking at the subject we can also cover off a hardy perennial which is that the UK Pound £ is behaving like an emerging market or EM currency.

Kamal Sharma, a foreign exchange strategist at Bank of America, warned that the pound was facing a prolonged period of weakness that risked resembling an emerging market currency hit by unique volatility caused by government interference in monetary policy. ( The Times)

The last part is not a little bizarre as under Abenomics the Japanese government pretty much directed the Bank of Japan and the ECB still has a a -0.5% deposit rate and both are continuing QE bond purchases. From the US there was this only yesterday.

WASHINGTON (AP) — President Joe Biden will meet Tuesday with Federal Reserve chairman Jerome Powell as soaring inflation takes a bite out of Americans’ pocketbooks.

So the definition of unique here rather echoes that used by the famous Formula One commentator Murray Walker.

The lead car is unique, except for the one behind it which is identical.

This bit was also interesting.

“We believe that the [Bank of England] is hiking for a different set of reasons than the Federal Reserve,” Sharma said. “Whereas the Fed is hiking against the backdrop of a strong domestic economy, the Bank is facing a number of unique supply challenges, most notably Brexit.

In fact the US economy shrank in the first quarter and the Chair of the US Federal Reserve is hardly being called to see the President because things are going well. For a start President Biden would take the credit for that himself. Whilst France is not individually mentioned we learnt this morning that first quarter GDP growth was revised to -0.2% and last year was revised lower too. So again I question the use of the word unique especially as the UK grew by 0.8%.

He seems to have been flogging this horse since 2016.

Although there have been no signs of international investors dumping UK assets since the Brexit vote in 2016

If he was on the case on Brexit night then he had a good few months but since then no.

Bank of England

We can start with the monetary data via the lens of the Bank of England which of course starts with the housing market.

Net borrowing of mortgage debt by individuals decreased to £4.1 billion in April from £6.4 billion in March. This is slightly below the pre-pandemic average of £4.3 billion in the 12 months up to February 2020.

So lending fell but is still solidly positive and I make the latter point because policy since the summer of 2012 has been to get net lending positive and to keep it there. Next up is our forward indicator.

Approvals for house purchases, an indicator of future borrowing, decreased to 66,000 in April, from 69,500 in March. This is slightly below the 12-month pre-pandemic average up to February 2020 of 66,700.

So there has been a small reduction in both present and likely numbers but so far not much of a response to the change in mortgage rates.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 9 basis points to 1.82% in April. The rate on the outstanding stock of mortgages ticked up 1 basis point to 2.05% in April.

There is an issue here I think of the continuing impact of the Term Funding Scheme where mortgage rates have not followed bond yields higher as one might expect. My proxy for mortgages is the UK 5 year yield because the vast majority of new mortgages are fixed-rate.  and it was between 1.4% and 1,8% in April meaning there was little or no margin at all, and this is especially significant, as of course domestic borrowing should be more expensive than sovereign borrowing.

Consumer Credit

I think that these numbers are showing a response to the cost of living crisis.

Individuals borrowed an additional £1.4 billion in consumer credit in April, on net, following £1.3 billion of borrowing in March. This is the third consecutive month where borrowing has been higher than the 12-month pre-pandemic average up to February 2020 of £1.0 billion.

It looks as though we are seeing increased borrowing as a way of making ends meet and it was evenly split between the sectors.

The additional borrowing in April of consumer credit was split between £0.7 billion on credit cards, and £0.7 billion through other forms of consumer credit (such as car dealership finance and personal loans).

The car dealership reference is interesting as it is two months in a row and it does not often get a mention. As we know new car sales are weak it seems second-hand cars are still in demand and are being bought on credit.

Whilst the rise was split evenly between categories it has very different impacts on growth rates.

The annual growth rate for all consumer credit increased to 5.7% in April from 5.2% in March; the highest rate since February 2020. The annual growth rates of credit card borrowing and other forms of consumer credit were 11.6% (the highest since November 2005) and 3.4% (the highest since March 2020), respectively.

This is because at £60.9 billion the credit card category is much smaller than the other loans category at £141 billion. If you add them up you see that we are back over £200 billion for consumer credit.

Oh and the credit card rise is in spite of the interest-rates being charged.

Rates on new personal loans to individuals rose by 60 basis points to 6.52% in April, though this was still 38 basis points below the February 2020 (pre-pandemic) level. The effective rate on interest bearing credit cards was 18.08% in April, 47 basis points below the February 2020 level.

Comment

On today’s journey through the economic swamp we have seen various things. A rather odd case of amnesia from the Labour Party followed by someone talking his book on the UK Pound £. I do hope he was not one of those feeding the anti-Pound line to the Telegraph a couple of weeks ago because if so he is already 4 cents offside.

If we switch to the economy we see a Bank of England that will be relieved that so far it seems to have been able to insulate the housing market from its interest-rate increases. But I think the growth of consumer credit shows that sadly workers and consumers are being affected by the cost of living crisis. Also I think this month showed us the impact of the Bank of England’s first foray into Quantitative Tightening.

The flow of sterling money (known as M4ex) decreased to £1.5 billion in April, compared with £24.4 billion in March.

That is not the same amount as the £27.9 billion of QT we saw in March but as the numbers have other moving parts is I think out first sighting of it,

It means that broad money growth has fallen to 4.7% so we should see lower inflation next year. Fingers crossed!

The Bank of England is in a pickle

On Friday we looked at the troubles of the ECB which have been exacerbated in another area this morning as inflation in Spain has risen to 5.6%. If we switch our perspective to the UK we see a Bank of England that also has inflation troubles albeit not yet at that level and is also still easing policy as there will be another £1.15 billion of QE bond buying later today. However it’s buying is in its last phase as it has already bought some £865 billion of the £875 billion planned. So its large push to the narrow money supply will soon be over.

Switching to interest-rates its position looks rather confused with the second incarnation of the Unreliable Boyfriend at the helm. Last week we saw this added to by Silvana Tenreyro.

LONDON, Nov 24 (Reuters) – Bank of England policymaker Silvana Tenreyro said on Wednesday that she was thinking “more in the medium term” about the question of when the British central bank should start to raise interest rates from their pandemic emergency low.

I am not sure she could be more clear about her plan to ignore the inflation rise which then leaves us with the question if she would ever raise interest-rates? Even then she would not move them by much.

Tenreyro said she saw the BoE’s Bank Rate eventually rising back to its pre-pandemic level of 0.75% from 0.1% now.

On a technical level that would mean that the stock of QE would be as I have often suggested forever as we would not reach the present 1% threshold. But for her it feels like that the answer will continue to be no.

As to Jonathan Haskel you might wonder what he thinks his job is after this crucial part of his speech last week? He starts by apparently not realising how badly things then went for the ECB after it boasted like this.

The Bank of England was made independent in 1997. Since then, average inflation has been… 2%, the
current target

Then his breakdown suggests his job is mostly pointless.

There has been variation around that 2% since then. On average, of every deviation of inflation from
target,
a. 24% has been due to food and energy,
b. 13% due to taxes like VAT and
c. 25% due to sharp exchange rate movements and imported prices.
Thus around 62% of inflation deviations from target is due to outside forces that are difficult for a central bank to
control in the short run.

Firstly it is not the Bank of England’s job to control short-term inflation. Next I would argue that the Bank made factor c worse back in 2016 when Governor Carney choose to turn up on TV and promise further easing thus pushing the UK Pound £ lower. That is before you get to any thoughts about changing interest-rates or using the foreign exchange reserves. That is before you get to the obvious swerve below.

So the puzzle is: why did inflation run away then, but not now? Are we somehow better insulated from these
and other shocks to the economy or are we destined for a repeat of the 1970s?

Many would argue that he is comparing a decade’s experience with a few month’s and frankly that inflation is running away quite fast enough!

Or you could apply a rule of thumb that I use which is that the speech has a lot of algebra which is invariably used to central bankers to justify inaction.

Today’s Data

Mortgages

I feel sorry for which research student had to explain this development to the Governor at today’s morning meeting.

Net borrowing of mortgage debt by individuals amounted to £1.6 billion in October, down from £9.3 billion in September. This is the lowest since July 2021 when individuals repaid £2.2 billion of mortgage debt, on net.

Whilst there is an explanation we know that the Bank has a different reaction function to this from the inflation issue we looked at above.

October’s decrease was driven by borrowing brought forward to September to take advantage of stamp duty land tax relief, before it was completely tapered off. The net borrowing in October was £4.6 billion below the 12-month average to June 2021, when the full stamp duty holiday was in effect.

As an aside there is a curiosity below. We can all figure out why lending might fall but they then always assume repayments do as well but why?

Gross lending fell sharply to £19.3 billion in October, from £30.7 billion in September. Gross repayments fell to £18.2 billion from £20.6 billion in September.

There was more bad news further down the mortgage chain.

Approvals for house purchases, an indicator of future borrowing, fell to 67,200 in October, from 71,900 in September. This is the lowest since June 2020, and is close to the 12-month average up to February 2020 of 66,700.

Mortgage Rates

There was quite a move here which may have cheered the Governor up a bit.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages fell 19 basis point to 1.59% in October, which is a new series low. The rate on the outstanding stock of mortgages ticked down 1 basis point to a new series low of 2.03%.

I have regularly argued that moves in the Term Funding Scheme invariably turn up in the mortgage market and if we look back to the 19th there was this.

The loan liability under the TFS umbrella increased by £57.3 billion between September and October 2021 and now stands at £171.5 billion, adding an equivalent amount to the level of debt.

As most mortgages are fixed-rate then it is not as simple a link as it might be as this is Bank Rate focused lending. It could be hedged or perhaps some do not believe the Bank of England will act.

Consumer Credit.

There will have been a little more cheer at the morning meeting for this.

Individuals borrowed £0.7 billion in consumer credit in October, on net. The majority of this was £0.6 billion of additional borrowing on credit cards, which is the strongest net borrowing since July 2020. Individual borrowing in other forms of consumer credit (such as car dealership finance and personal loans) accounted for the other £0.1 billion of net lending.

It is interesting that there is a mention of car dealership finance and perhaps there is a flicker here caused by the rise in used car prices we have seen? We have to surmise because we are told so little.

Deposits

People are continuing to increase their bank deposits.

Households deposited an additional £5.5 billion with banks and building societies in October. In addition, households deposited £0.9 billion into National Savings and Investment (NS&I) accounts in October, which are not captured within household deposits but can act as a substitute for them.

I raise the issue not only because we may be seeing more savings but also because the bank’s if we allow for the extra TFS funding must be awash with cash/liquidity right now.

Comment

I find it fascinating that Bank of England policy was reducing mortgage interest-rates just as its Governor and Chief Economist were giving strong hints about increases. They then compounded the problem by in the case of the Chief Economist Huw Pill contradicting the Forward Guidance message which has been in play since 2013. It all looks quite a mess as the response to the new Omicron variant of Covid puts another brake on economies.

Meanwhile the rise in the money supply continues as the annual rate of growth is 7.7% with another £15.1 billion in October. So we can expect inflation to be singing along with Glenn Frey for a while yet.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Podcast

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast154?si=79759dc42ddb4657aad3f4ff50471c7b

 

 

Interest-Rates are on the rise again

In the middle of the various crises in which we presently find ourselves there has been something else going on. As the leader of the pack in this area is the United States we can start there.

U.S. Treasury yields bounced higher on Monday, continuing their upward momentum from last week as the Federal Reserve moves closer to easing off its pandemic-era policies.

The yield on the benchmark 10-year Treasury note climbed above the key 1.5% level in early trading, at one point rising above 1.51% ( CNBC)

There is quite a value judgement about the US Federal Reserve there but let us stay for the moment with the concept of a higher benchmark bond yield. There is a bit of a yo-yo here because it was only a week ago that it was 1.3% as there was a rush to bonds from those panicking about Evergrande. Also and in some ways more significant due to its role in the mortgage market there is this.

And another down leg for bonds overnight as 30s now comfortably above key 2% level ( @fullcarry)

The Impact

The first port of call is likely to be the mortgage market as the move in the long bond pushes borrowing rates higher. That will also impact on all longer-term businesses and of course the US government just as it plans this.

Senate Majority Leader Chuck Schumer and House of Representatives Speaker Nancy Pelosi provided no details on how they would pay for Biden’s proposed $3.5 trillion social spending plan. ( Reuters)

The whole issue here is dragging on but the plan will end up with more borrowing which means the US government will not appreciate higher financing costs.

The other impact is that these higher yields are followed around the world in a type of ripple effect.

The Causes

I am not as convinced as the media are that the so far mythical Taper is the driving force here. After all what has really changed over the past week on that front? Yes we have more vague promises from the US Federal Reserve but we have had those before and with more signs of a world economic slow down appearing it does not seem to be getting more likely.

Local governments in Zhejiang, Jiangsu, Yunnan and Guangdong provinces have asked factories to limit power usage or curb output.

Some power providers have sent notices to heavy users to either halt production during peak power periods that can run from 7 a.m. and 11 p.m., or shut operations entirely for two to three days a week. ( Reuters)

Power cuts in China just add to the economic output problems there. The New York Fed suspended its GDP Nowcast at the beginning of this month which is not especially auspicious and on Friday slashed its future growth expectations.

The mean forecast for real GDP growth (Q4/Q4) is 5.3, 1.7, 0.8, and 0.7 percent in 2021, 2022, 2023, and 2024, respectively, compared to 5.4, 2.6, 1.7, and 1.0 percent in June.

The debt ceiling is not entirely convincing either. There are obvious risks if the US is unable to raise the present US $28.4 trillion dollar ceiling. But we have been down this road more than a few times now and opposition is in general about the opponents getting approval for some of their favourite plans, rather than any willingness to shut down US government and eventual default. So we might get a partial shut down for a few days but then once the pork barrel deals are struck, on we go.

Convexity and Foreign Buyers

By contrast I think these are in play and convexity is a curious one in a way. Let us go back to February when Reuters looked at this.

The rise in Treasury yields has created the need for investors who hold mortgage-backed securities (MBS) to reduce the risks on the loans they manage to counter the negative effects of slower loan prepayments when interest rates climb, a move known as “convexity hedging”.

This is similar in a way to being short gamma in an options position because you end up doing what you do not want to do which is responding to a fall in prices by selling.

MBS investors such as insurance companies and real estate investment trusts who need to maintain a certain duration target would have to reduce that duration by either selling Treasury futures or by buying interest rate swaps where they would exchange a fixed coupon with another investor for a floating rate, a move that effectively reduces the duration of an asset.

In a piece of timing so bad it is almost admirable the Financial Times told us this a weel ago.

Foreign investors cannot get enough US government debt, which analysts say could help soften the blow when the Federal Reserve starts to cut back its own bond-buying programme this year. Overseas buyers snapped up more than a quarter of the $41bn of 10-year notes on offer in August, the highest percentage in three years. At the equivalent auction in July, foreign investors took 16 per cent. At the two-year auction in August, investors bought 22 per cent, the highest since December 2019.

Poor old Tom is probably lying low right now.

“It is still very attractive for global investors to buy Treasuries,” said Tom Graff, head of fixed income at asset manager Brown Advisory. “We expect foreign demand will remain quite strong for the foreseeable future.”

In my career Japanese overseas buying is a consistent reverse indicator.

Demand has been particularly strong in recent months from China and Japan, the two biggest foreign holders of Treasuries, said Tiffany Wilding, North American economist at Pimco.

Still they are even more attractive now.

Comment

The situation here looks to be something of a perfect storm where various factors have been in play in a minor way and have been enough via convexity selling to push the market. Regular readers may have noted to have not mentioned inflation and that is simply because bond markets seem to have decoupled from that.

Moving outside of the US there are many who are directly affected by their use of US dollar borrowing. Places such as Argentina, Turkey and Ukraine come to mind but there are plenty of others. Then there are those indirectly affected by the reality that their bond markets follow the US one. So that is the UK where the ten-year yield has nudged 1% today as opposed to the 0.5% of early August. Also Germany although a ten-year yield of -0.2% shows it is being paid less to borrow  rather than paying more.

These moves will ripple through mortgage markets and business lending thus tending to add to the economic slow down. Also we will see more expensive government borrowing and this is where I get off this particular wagon as I do not see them letting this happen on any scale. The central banks will be told to stop this at some point and they will “independently” decide to do so meaning their talk of interest-rate hikes is just that, talk.

Quite how we get off this particular train I am not sure but for now with government’s becoming even more control freaks they will soon step in I think. Just to be clear I do not think it is a good idea merely that they will do it.

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

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast113

 

 

 

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.