Central banks face an ongoing exit strategy problem

Today features one of the earliest themes of this blog. It can be summarised around the line never get yourself into something without a plan to get out of it. Back in my early days on this website I suggested that when the time came to roll back the interest-rate cuts and Quantitative Easing ( QE) that central banks would dither and delay and thereby act too late. We now know that in generic terms what was happening then wasn’t the half of it as more and more QE was to follow around the world as well as more interest-rate cuts taking some negative. So the problem became ever larger as central banks had more skin in the game and would be even more afraid of any setbacks should they withdraw policy stimulus.

Also there was another feature likely to lead to a delay. You see by the 18th of January 2011 I was pointing out this.

Even worse than this if we go back to the Bank of England’s forecasts for 2010 we can see that they underestimated inflation in 2010 by a considerable amount. This continues the Bank of England’s forecasting record which is now so poor in this area it is abject.

The nuance that has developed over time is that central banks seem to be most woeful at forecasting the most important factor at the time. For example the Bank of England has more recently kept getting wage growth wrong and the ECB raised the issue of 5 year inflation swaps and then led itself down the garden path. Whilst there will be official denials this fact of course is likely to add to the existing penchant to dilly and dally on any policy tightening.

Sweden

This morning has seen this announcement from the Riksbank.

Given this, the Executive Board of the Riksbank has decided to hold the repo rate unchanged at -0.50 per cent and does not expect to raise it until the middle of 2018. Purchases of government bonds will continue during the second half of 2017, as decided in April. At the end of the year, the purchases of government bonds will thus amount to a total of SEK 290 billion, excluding reinvestments.

So it remains very expansionary and here is the apparent justification.

Economic activity is strong and inflation is close to the target of 2 per cent.

Even odder is the enthusiasm for making Swedes better off by making them poorer.

Monetary policy needs to remain expansionary for inflation to continue to be close to 2 per cent……..However, it has taken time and a great deal of support from monetary policy to bring up inflation and inflation expectations

As you can see the view here is that without the policy of the Riksbank the economy of Sweden would somehow disappear off a cliff. But its problem is highlighted in its report.

The Swedish economy is strong. The upturn in inflation has continued and been faster than expected. In   July, inflation was 2.4 per cent in CPIF terms, and 2.1 per cent in terms of the CPIF excluding energy  prices. GDP growth was unexpectedly high in the second quarter. Monthly indicators point to the strong  developments continuing through the second half of the year. Although the inflation outcome for July is  primarily explained mainly by temporarily higher prices for foreign travel, the underlying development  appears stronger than expected. Inflation is therefore expected to be somewhat higher during the  remainder of the year than was forecast in July.

There is something familiar in their inability to forecast either GDP or inflation as we note inflation is above target! Now perhaps they did forecast Del Potro stunning Roger Federer this morning in the US Open tennis but in terms of the day job this continues the poor record of the Riksbank. This matters when you are undertaking what is an extreme monetary policy experiment as for example first-time buyers are unlikely to see this as a triumph.

The rate of increase of housing prices has gradually risen  throughout 2017. In July, housing prices rose by an annual rate of  9 .6 per cent. Surveys show that the general public and estate  agents continue to expect rising housing prices in the period  ahead.

Apologies for the formatting issue but there is a clear problem for Sweden via this issue. There are other issues as we look into the detail of corporate borrowing.

 has increased  in significance in recent years for real estate companies in  particular ( they are talking about securities issuance here)

and personal borrowing.

. Lending to households in the form of pure consumer  loans without collateral has increased at an ever‐higher pace and,  in July, the annual rate of growth amounted to 8 per cent.

Oh and the suggestion that interest-rates could rise next year is an example of Swedish recycling of the Forward Guidance of Mark Carney as this from September last year proves.

Not until the second half of 2017 does the Executive Board consider it appropriate to begin slowly increasing the repo rate.

ECB

By the time you read this you may already know the policy announcement from Mario Draghi but the Riksbank has undertaken a form of trolling.

This could happen if, for example, the Riksbank’s monetary policy deviates too far from that of other countries.

They mean the Euro of course and this morning’s announcement implies they expect little from the ECB today.

Oh Canada

Yesterday’s announcement from the Bank of Canada may have provoked a stream of letters signed Mark of Threadneedle Street mentioning destruction of legacy and questioning whether they understand the true purpose of Forward Guidance.

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The rationale really rather reminds us of the situation in Sweden.

Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted.

Of course if we look at house price developments in parts of Canada ( Toronto and Vancouver) there is another similarity and you could argue that the response is far too late as well as being too small.

Comment

There is a fair bit to consider here. As I pointed out earlier the monetary expansionism moved on in both scale and concept ( including corporate bonds in several places and even equities in Japan). It also moved on in time as depending on how you count it we are approaching a decade of this. Thus makes me have a wry smile when central bankers use the buzzword “normalisation” when what must seem normal to millennials for example is where we are now!

But if we stay with the normalisation theme then 1% or so in Canada and the US does not take us far does it? The real issue is shown by economic growth in Sweden and indeed today from the Euro area which has been shown to have been stronger than first thought.

 

But in both places we still have negative interest-rates and ongoing QE bond buying programmes leaving us mulling the words of Coldplay.

Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,

Me on CoreTV Finance

http://www.corelondon.tv/bond-bubble-fiction-reality-not-yes-man-economics/

 

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The land of the rising sun sees rising GDP too

Today starts with good news from the land of the rising sun or Nihon. I do not mean the sporting sphere although there was success as a bronze medal in the men’s 4 by 100m relay was followed by silver and bronze in the men’s 50 km walk at the world athletics championships. There was also a near miss as Hideki Matsuyama faded at the US PGA  and did not become the first Japanese man to win a golf major. But the major good news came from the Cabinet Office as this from The Mainichi tells us.

Japan’s economy grew an annualized real 4.0 percent in the April-June period for a sixth straight quarter of expansion, marking the longest growth run since 2006, as private consumption and corporate spending showed signs of vigor, government data showed Monday.

If we convert to the terms we use there was 1% economic growth from the previous quarter which was quite a surge. Actually that is way beyond what the Bank of Japan thinks is the potential growth rate for Japan but let us park that for now and move on to the detail.  Reuters points out that consumption was strong.

Private consumption, which accounts for about two-thirds of GDP, rose 0.9 percent from the previous quarter, more than the median estimate of 0.5 percent growth.

That marked the fastest expansion in more than three years as shoppers splashed out on durable goods, an encouraging sign that consumer spending is no longer the weak spot in Japan’s economic outlook.

In fact so was investment.

Capital expenditure jumped by 2.4 percent in April-June from the previous quarter, versus the median estimate for a 1.2 percent increase. That was the fastest growth in business investment since January-March 2014.

The combination is interesting as this is something that Japan has wanted for a long time as its “lost decade(s)” of economic malaise have seen domestic demand and consumption in particular struggle. Some countries would be especially troubled by the trade figures below but of course Japan has seen many years of surpluses as this from the Nikkei Asian Review indicates.

 Japan’s current account surplus expanded in the January-June period to the highest level since 2007 as earnings from foreign investments moved further into the black, despite rising energy prices pushing up the overall value of the country’s imports, government data showed Tuesday.

 

Thus it is likely to see this as another welcome sign of strong domestic demand.

External demand subtracted 0.3 percentage point from GDP growth in April-June in part due to an increase in imports.

Those who look at the world economy will be pleased to see a “surplus” economy importing more.

Where does this leave Abenomics?

There are various ways of looking at this and the Japanese owned Financial Times leads the cheers.

‘Not a fluke’: Japan on course to record best GDP growth streak since 2000

“Not a fluke” is an odd thing to write because if you look at the GDP chart they provide we see several spikes like this one which imply it may well be er not only a fluke but another one. They are less keen to credit another form of Abenomics which is the way that the latest stimulus programme impacted with a 5.1% (21.9% annualised) rise in public investment causing a 0.2% rise in GDP on its own. Perhaps this is because of the dichotomy in this part of Abenomics where on the one hand fiscal expansionism is proclaimed and on the other so is a lower deficit! Also there are memories of past stimulus projects where pork barrel politics led to both bridges and roads to nowhere.

Actually the FT does then give us a bit of perspective.

 

Japan’s economy, as measured by real GDP, is now 7 per cent larger than when prime minister Shinzo Abe took office in late 2012, notes Emily Nicol at Daiwa Capital Markets.

That is a long way short of the original promises which is one of the reasons why the Japanese government page on the subject introduces Abenomics 2.0.  If we look at the longer-term chart below is there a clear change.

On such a basis one might think it was the US or UK that had seen Abenomics as opposed to Japan. Of course the figures are muddied by the recession created by the consumption tax rise in 2014 but the performance otherwise even with this quarter’s boost is far from relatively stellar.

Bank of Japan

It will of course be pleased to see the economic news although it also provides plenty of food for thought as details like this provide backing for my analysis that ~0% inflation is far from the demon it is presented as and can provide economic benefits. From Bloomberg.

The GDP deflator, a broad measure of price changes, fell 0.4 percent from a year earlier.

Board Member Funo confirmed this in a speech earlier this month.

The rate of increase for all items less fresh food and energy had remained on a decelerating trend, following the peak of 1.2 percent in winter 2015; recently, the rate of change has been at around 0 percent.

He of course followed this with the usual rhetoric.

The rate will likely reach around 2 percent in around fiscal 2019.

It is always just around the corner in not entirely dissimilar fashion to a fiscal surplus in the UK. As to the official view it is going rather well apparently.

Taking this into consideration, the Bank decided to adopt a commitment that allows inflation to overshoot the price stability target so as to strengthen the forward-looking mechanism in the formation of inflation expectations, enhance the credibility of achieving the price stability target among the public, and raise inflation expectations in a more forceful manner.

Make of that what you will. The reality is that the QQE programme did weaken the Yen but that effect wore off and inflation is now ~0% as is wage growth.

Comment

This growth figures are good news and let me add something that appears to have been missed in the reports I have read. Back to Board Member Funo.

In an economy with a declining population.

Thus the per capita or per person GDP numbers are likely to be even better than the headline. I would say that this would benefit the ordinary Japanese worker and consumer but we know that real wage growth has dipped into negative territory again. This provides a problem for Prime Minister Abe as when he came to power the criticisms were based around his past history of being part of the Japanese establishment. What we see nearly 5 years down the road is a lack of real wage growth combined with good times for Japanese corporate profitability. As to the reform programme there is not a lot to be seen and maybe this is why Board Member Funo was so downbeat.

In an economy with a declining population, as is the case in Japan, demand is expected to decrease for many goods and services; therefore, it will be important to adequately adjust supply capacity; that is, employees and production capacity to meet such a decreasing trend.

I do not know about you but trying to raise prices when you expect both demand and supply to fall seems extremely reckless to me.

As to the GDP numbers themselves we need a cautionary note as Japan has had particular problems with them and they are revised more and by larger amounts than elsewhere.

 

The ECB faces the problem of what to do next?

Later this month ECB President Mario Draghi will talk at the Jackson Hole monetary conference with speculation suggesting he will hint at the next moves of the ECB ( European Central Bank). For the moment it is in something of a summer lull in policy making terms although of course past decisions carry on and markets move. Whilst there is increasing talk about the US equity market being becalmed others take the opportunity of the holiday period to make their move.

The Euro

This is a market which has been on the move in recent weeks and months as we have seen a strengthening of the Euro. It has pushed the UK Pound £ back to below 1.11 after the downbeat Inflation Report of the Bank of England last week saw a weakening of the £.  More important has been the move against the US Dollar where the Euro has rallied to above 1.18 accompanied on its way by a wave of reversals of view from banks who were previously predicting parity such as my old employer Deutsche Bank. If we switch to the effective or trade weighted index we see that since mid April it has risen from the low 93s at which it spent much of the early part of 2017 to 99.16 yesterday.

So there has been a tightening of monetary policy via this route as we see in particular an anti inflationary impact from the rise against the US Dollar because of the way that commodities are usually priced in it. I note that I have not been the only person mulling this.

Such thoughts are based on the “Draghi Rule” from March 2014.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points

Some think the effect is stronger but let us move on noting that whilst the Euro area consumer and worker will welcome this the ECB is more split. Yes there is a tightening of policy without it making an explicit move but on the other side of the coin it is already below its inflation target.

Monetary policy

Rather oddly the ECB choose to tweet a reminder of this yesterday.

In the euro area, the European Central Bank’s most important decision in this respect normally relates to the key interest rates…….In times of prolonged low inflation and low interest rates, central banks may also adopt non-standard monetary policy measures, such as asset purchase programmes.

Perhaps the summer habit of handing over social media feeds to interns has spread to the ECB as the main conversation is about this.

Public sector assets cumulatively purchased and settled as at 04/08/2017 €1,670,986 (31/07/2017: €1,658,988) mln

It continues to chomp away on Euro area government debt for which governments should be grateful as of course it lowers debt costs. Intriguingly there has been a shift towards French and Italian debt. Some of this is no doubt due to the fact that for example in the case of German sovereign debt it is running short of debt to buy. But I have wondered in the past as to whether Mario Draghi might find a way of helping out the problems of the Italian banks and his own association with them.

is the main story this month the overweighting of purchases of rising again to +2.3% in July (+1.8% in June) ( h/t @liukzilla ).

With rumours of yet more heavy losses at Monte Paschi perhaps the Italian banks are taking profits on Italian bonds ( BTPs) and selling to the ECB. Although of course it is also true that it is rare for there to be a shortage of Italian bonds to buy!.

Also much less publicised are the other ongoing QE programmes. For example Mario Draghi made a big deal of this and yet in terms of scale it has been relatively minor.

Asset-backed securities cumulatively purchased and settled as at 04/08/2017 €24,719 (31/07/2017: €24,661)

Also where would a central bank be these days without a subsidy for the banks?

Covered bonds cumulatively purchased and settled as at 04/08/2017 €225,580 (31/07/2017: €225,040) mln

 

This gets very little publicity for two reasons. We start with it not being understood as two versions of it had been tried well before some claimed the ECB had started QE and secondly I wonder if the fact that the banks are of course large spenders on advertising influences the media.

Before we move on I should mention for completeness that 103.4 billion has been spent on corporate bonds. This leaves us with two thoughts. The opening one is that general industry seems to be about half as important as the banks followed by the fact that such schemes have anesthetized us to some extent to the very large numbers and scale of all of this.

QE and the exchange rate

The economics 101 view was that QE would lead to exchange rate falls. Yet as we have noted above the current stock of QE and the extra 60 billion Euros a month of purchases by the ECB have been accompanied for a while by a static-ish Euro and since the spring by a rising one. Thus the picture is more nuanced. You could for example that on a trade weighted basis the Euro is back where it began.

My opinion is that there is an expectations effect where ahead of the anticipated move the currency falls. This is awkward as it means you have an effect in period T-1 from something in period T .Usually the announcement itself leads to a sharp fall but in the case of the Euro it was only around 3 months later it bottomed and slowly edged higher until recently when the speed of the rise increased. So we see that the main player is human expectations and to some extent emotions rather than a formula where X of QE leads to Y currency fall. Thus we see falls from the anticipation and announcement but that’s mostly it. As opposed to the continuous falls suggested by the Ivory Towers.

As ever the picture is complex as we do not know what would have happened otherwise and it is not unreasonable to argue there is some upwards pressure on the Euro from news like this. From Destatis in Germany this morning.

In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 21.2 billion euros in June 2017.

Comment

There is plenty of good news around for the ECB.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.1% in the euro area ……The euro area (EA19) seasonally-adjusted unemployment rate was 9.1% in June 2017, down from 9.2% in May 2017 and down from 10.1% in June 2016.

So whilst we can debate its role in this the news is better and the summer espresso’s and glasses of Chianti for President Draghi will be taken with more of a smile. But there is something of a self-inflicted wound by aiming at an annual inflation target of 2% and in particular specifying 1.97% as the former ECB President Trichet did. Because with inflation at 1.3% there are expectations of continued easing into what by credit crunch era standards is most certainly a boom. Personally I would welcome it being low.

Let me sweep up a subject I have left until last which is the official deposit rate of -0.4% as I note that we have become rather used to the concept of negative interest-rates as well as yields. If I was on the ECB I would be more than keen to get that back to 0% for a start. Otherwise what does it do when the boom fades or the next recession turns up? In reality we all suspect that such moves will have to wait until the election season is over but the rub as Shakespeare would put it is that if we allow for a monetary policy lag of 18 months then we are looking at 2019/20. Does anybody have much of a clue as to what things will be like then?

 

Sweden has economic growth of 4% with an interest-rate of -0.5%

We can end the week with some good news as the economic growth figures produced so far today have pretty much varied between better and outright good. For example I note that the 0.5% growth for France makes its annual rate of 1.8% a smidgen higher than the UK for the first time in a while. Also Spain has continued its series of good numbers with quarterly GDP ( Gross Domestic Product) up by 0.9%. But the standout news has come from the country which I have described as undertaking the most extraordinary economic experiment of these times which is Sweden.

Sweden’s GDP increased by 1.7 percent in the second quarter of 2017, seasonally adjusted and compared with the first quarter of 2017. The GDP increased by 4.0 percent, working-day adjusted and compared with the second quarter of 2016.

Boom! In this case absolutely literally as we see quite a quarterly surge and added to that growth in the previous quarter was revised higher from 0.4% to 0.6%. This means that it grew in the latest quarter by as much as the UK did in the last year and is the highest quarterly number I can think of by such a first world country for quite some time.

If we look into the detail there is much to consider. There was something unusual for these times.

Production of goods rose by 3.0 percent, and service-producing industries grew by 1.7 percent

It also looks as though the demand was domestic as trade was not a major factor.

Both exports and imports grew by 0.7 percent

There was a sign of booming domestic consumption here.

Household consumption increased by 1.1 percent

Also investment went on a surge.

Gross fixed capital formation increased by 3.8 percent.

However there is kind of an uh-oh here as I note this from Nordea.

Residential construction continues to be a very important growth driver (scary!), but also other investments seem to have picked up and more than forecast.

We will look at that more deeply in a moment but first let us note that the numbers below suggest that productivity has picked up.

Employment measured as the total number of hours worked increased by 0.8 percent seasonally adjusted, and the number of persons employed increased by 0.6 percent.

The Riksbank

The latest minutes point out that the monetary policy pedal remains pressed pretty much to the metal.

At the Monetary Policy Meeting on 3 July, the Executive Board of the Riksbank decided to hold the repo rate unchanged at –0.50 per cent. The first rate increase is not expected to be made until the middle of 2018, which is the same assessment as in April. The purchases of government bonds will continue during the second half of 2017, in line with the plan decided in April.

Still they did say they were now less likely to push it even harder.

it is now somewhat less likely than before that the repo rate will be cut further in the near term

Rather amazingly they described the policy as “well-balanced” but I guess you have to think that to be able to vote for it. However today’s data will be welcome in a headline sense but is yet another forecasting failure as they expected 0.7% GDP growth. Now a 1% mistake in one-quarter makes even the Bank of England’s failures at forecasting to be of the rank amateur level.

Let us move on with the image of the Riksbank continually refilling the punch bowl as the party hits its heights as opposed to removing it.

What could go wrong?

Even the Riksbank could not avoid mentioning this.

the risks associated with high and rising household indebtedness were also discussed.

Did anybody mention indebtedness?

In June, the annual growth rate of households’ loans from monetary financial institutions (MFIs) was 7.1 percent, which means that the growth rate increased by 0.2 percentage points compared with May.

So the rough rule of thumb would be to subject economic growth and estimate inflationary pressure at 3% which of course would lead to interest-rates being in a very different place to where they are. Also if you look at the issue of the domestic consumption boom you be rather nervous after reading this.

Households’ loans for consumption had a growth rate of 9.4 percent in June, an increase compared with May, when it was 7.3 percent.

I noted earlier the fears over what is happening in the housing market and loans to it have just passed a particular threshold.

In June, households’ housing loans amounted to SEK 3 005 billion, which means that lending exceeded SEK 3 000 billion for the first time. This is an increase of SEK 27 billion compared with the previous month, and of SEK 198 billion compared with the corresponding month last year. This means that housing loans had an annual growth rate of 7.2 percent in June, an increase of 0.1 percentage point compared with May.

Another bank subsidy?

I have noted before that fears that negative interest-rates would hurt bank profits have been overplayed and as we note mortgage and savings rates we get a hint that margins are pretty good.

The average housing loan interest rate for households for new agreements was 1.57 percent in June…….In June, the average interest rate for new bank deposits by households was 0.07 percent, unchanged from May.

I also note that banks remain unwilling or perhaps more realistically afraid to pass on negative interest-rates to the ordinary depositor.

House prices

Of course this will look very good on the asset side of the balance sheets of the Swedish banks.

Real estate prices for one- or two-dwelling buildings rose by almost 4 percent in the second quarter of 2017 compared with the first quarter. Prices rose by nearly 10 percent on an annual basis in the second quarter, compared with the same period last year.

In terms of amounts or price it means this.

The average price at the national level for one- or two-dwelling buildings in the second quarter 2017 was just over SEK 2.9 million.

If we look back we see the index which was based at 100in 1981 ended 2016 at 711 and we learn a little more by comparing it to the 491 of 2008. There was a small dip in 2012 but in essence the message is up, up and away. For owners of Swedish houses it is time for some Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
Aha-ahaaa
All the things I could do
If I had a little money
It’s a rich man’s world

Comment

If we go for the upbeat scenario then it is indeed time for a party at the Riksbank as we see Sweden’s economic performance in the credit crunch era.

The problem with being top of the economic pop charts is that it so often ends in tears. The clear and present danger is the expansion of lending to the housing market and the consequent impact on house prices. Also the individual experience is not as good as the headline as the population grew by 1.5% in the year to May to 10.04 million which of course is presumably another factor in higher house prices.

 

 

The Brexit Breakfast saga

Yesterday saw quite an extraordinary missive from the offices of KPMG that combined economics and an insight into the apparent habits of staff at that organisation. It led to some debate and indeed some humour so let us take a look. From the Guardian.

Brexit breaks breakfast? Hard Brexit could mean hard luck for fry-up fans…….Shoppers would be forced to pay £3 more for a traditional British fry-up if the government fails to secure a trade deal with the EU, piling more pressure on already cash-strapped consumers.

That is a bit of a shock is it not as it implies such a breakfast would be £3 more each which seems rather extreme. Of course some products have risen in price already due to the lower value for the UK Pound £ as the UK imports quite a bit of the food it consumes.

Here is how Bloomberg released this.

The price attracted my attention so I enquired if they only ate in five-star hotels? It quickly turned out that I wasn’t the only one.

let’s just say I enjoyed a full English last week £7.50. Same price as a year ago at my same local coastal cafe. ( @mhewson_CMC )

 

Read this (and its comments) with your breakfast. £5 here at Totnes Waterside (  @RSR108 )

 

Tesco all you can eat £4,95 KPMG making a real dogs dinner of their analysis. No doubt you can get cheaper elsewhere ( @BarrattPeter )

The analysis stated that the ingredients came from the mid-range of a UK supermarket although some were not convinced.

“KPMG UK analysed the cost of mid-range ingredients of a fry-up from a leading UK supermarket” where…Fortnum and Mason??! ( @maximbroking )

I am not sure if the Guardian re wrote their article but anyway it now states that this was for a family breakfast, something missing from the original Bloomberg article. The debate then shifted to the choice of ingredients with the choice of olive oil to the fore.

Somewhere that cooks its breakfasts in a litre of olive oil? ( @dsquaredigest)

I have to confess I was beginning to feel a little queasy especially as it turned out that some might do this albeit if course we do not know what oil was used here.

I used to have a friend who did their fryups in about two inches depth of fat…utterly inedible! ( @MattBrookes3 )

There were some alternative suggestions for the use of olive oil.

You don’t cook in it, you barbarian. You wash down your meal with a couple of pints of it. ( @Birdyworld)

One Bloomberg journalist did appear willing to give it a go.

As I mulled the list I was curious about the addition of French butter to the list for two reasons as what I buy is mostly UK butter and of course French butter is usually unsalted giving a very different taste. I wasn’t the only one it would seem.

Welsh butter with mine please boyo ( @putt1ck )

 

I’m remain/internationalist but I always buy UK for my fry up, I don’t think these calcs will effect me? PS toss the oil, use butter! ( @LukeMcElligott )

Some took this a stage further.

I find Swiss organic grass-fed butter goes better with baked beans………but only ever fair-trade Himalayan Yak butter with my Japanese Kotoka Strawberry jam. Obviously, ( @WEAYL )

The issue of strawberry jam got a mention.

and who puts strawberry jam on their fry-up!? ( @ChrisB_IG )

Although hope springs eternal for one Bloomberg customer.

Bacon=NL,bread=local,Cherry vine tomato=Spain/NL/or Kent UK 😉 Strawberry jam= free with Bloomburg subscription (I would hope) ( @Svedenmacher )

We did discover someone keen on French butter albeit for a modern reason.

I often buy President butter, especially lately … to piss off the Brexiteers ;). ( @ClausVistensen )

Thus we found quite a bit of debate over the ingredients which then seemed to be reflected off Bloomberg Towers.

Also there’s no ketchup or hash browns. The moral of this story is don’t go for breakfast at KPMG ( @Lucy_meakin )

Considering the cost some were unhappy with the quality.

Funny looking sausage anyway. I think I’ll give it a miss. ( @PaulKingsley16 )

As ever some were hoping for a bright side to the issue.

Does anyone know if KPMG have vacancies for analysts economists researchers -will come out of retirement for their hourly Breakfast rates. ( @BarrattPeter)

Whereas the other side of the atlantic felt we needed to widen our perspective somewhat.

You Europeans are so dense. It’s the labor cost component of the typical Chinese household cook that’s driving up breakfast costs. ( @EquityTrader44 ).

Still it could all have been much worse. Imagine this for breakfast or anything really.

Another salvo in the war on cash

There is much to consider in the report on the gig economy by Matthew Taylor today but one bit in particular caught my eye.

The author of a government review into work practices would like to see an end to the “cash-in-hand economy”.

Matthew Taylor, whose report is out on Tuesday, said cash jobs such as window cleaning and decorating were worth up to £6bn a year, much of it untaxed.

Although he wants to present it as progress.

Mr Taylor also said he did not want to ban cash payments outright, but hoped, over time, the increasing popularity of transaction platforms such as PayPal and Worldpay would see a shift from cash-in-hand work.

“In a few years time as we move to a more cashless economy, self-employed people would be paid cashlessly – like your window cleaner. At the same time they can pay taxes and save for their pension,” he said.

This has many of the features of so-called blue sky thinking reports. In itself the cash in hand economy is hard to defend because tax is not paid and it is therefore unfair on those who pay taxes on income. However his effort to claim it would benefit the workers is risible “they can pay taxes and save for their pension.” From a magic money tree? Also it is hard not to think that the establishment wanted this review as part of an effort to raise more tax like the Chancellor’s attempt to increase National Insurance on the self-employed of a fee months ago. If they cannot make a relatively minor change without a fast U-Turn how exactly will they tax these workers?

But we have a theme of more tax being paid which will please the establishment and another feature these days which is of things being leaked before they are announced properly. Why not wait a few hours? It is all about expectations management which moves me to my  main point which is that the establishment seems ever more desperate to get rid of cash.

You would think that it is one of the barriers to them introducing negative interest-rates in the future……Oh hang on!

Comment

Economic life is often much more complicated than it first appears as for example we are on the road to more electronic payments. Over the past few years I have found myself paying for things with a card that would have been unthinkable before. Yet this is also true . From the Bank of England.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

Evidence of stockpiling?

As to the breakfast saga there are a few bits to consider. The first is the British obsession with a fry-up which goes in hot pursuit of our obsession with tea. Although apparently not the latter at KPMG who drink coffee. Next we have the click bait effort of claiming breakfast would cost £26.61 where even the family addition from the Guardian does not work unless you use all of the olive oil ( I am getting queasy again) and drink several gallons of coffee with slabs of butter.

Meanwhile there are issues one of which is a regular theme of mine which is that we import so much food in the UK and could do much better on that front. Some things we cannot grow (oranges) but some we can. Actually KPMG seems unaware of what we do produce as apparently we grow a lot of mushrooms. Of course we could end up paying higher tariffs for some products as we seem to have become rather dependent on Danish bacon. But for other products such as olive oil ( assuming you use it) Europe is not the only source and transport costs are often low.

Could the Bank of England step in with some Sledgehammer Breakfast QE?

 

The Swedish Riksbank is facing the consequences of its own policy

The Riksbank of Sweden meets today and announces its policy decision tomorrow morning. It is facing a period where its policy if out of kilter with pretty much everything. Long gone are the days when its policy members were called “sadomonetarists” by Paul Krugman of the New York Times. These days it is in the van of those expanding monetary policy as you can see from its last policy announcement.

The Executive Board has decided to hold the repo rate unchanged at −0.50 per cent and to extend the purchases of nominal government bonds by SEK 7.5 billion and the purchases of real government bonds by SEK 7.5 billion. At the end of 2017, the purchases will thus amount to a total of SEK 290 billion, excluding reinvestments. Until further notice, maturities and coupon payments will also be reinvested in the government bond portfolio.

It is using negative interest-rates and QE ( Quantitative Easing) which is putting the pedal close to the metal but is also what can be called pro cyclical as it is expanding into an expansion.

Swedish economic activity is good and is expected to strengthen further over the next few years

Actually if you take any notice of Forward Guidance they even upped their efforts.

The first repo-rate increase is now expected to be made in the middle of 2018. The repo rate path also reflects the fact that there is still a greater probability of the rate being cut than of it being raised in the near term.

They justified this on the grounds that they expected inflation to take longer to reach its target. This shows us a facet of central bank behaviour these days. If the economy slows they use it as an excuse to ease policy but if it is doing well they are then prone to switching to the inflation rate if it is below target in an example of cherry-picking.

What do they think now?

The mid-June business survey from the Riksbank could not be much more bullish.

The strong economic situation will continue in the months ahead……Export companies are encountering ever-stronger demand from abroad. Europe stands out in particular.

Oh and as a warning for an issue we will look at in a bit there was this.

Demand has been strong in the construction and property sectors in recent years and the development of housing construction in particular continues to be very strong.

Today’s manufacturing PMI from Swedbank looks strong as well.

Sweden Jun Manufacturing PMI 62.4 Vs. 58.8 In May

The Kronor

The conventional view is that all the monetary easing should have sent it lower but in fact it has not done an enormous amount in recent times. If we look back to June 2014 the KIX effective exchange-rate averaged 106.7 and last month it averaged 114.4. So a bit weaker ( confusingly higher is weaker on this index) but this must have been a disappointment to the Riksbank especially as it has strengthened since late 2016. As we have noted before 2017 has been a year where many exchange-rates seem to have simply ignored any flow effect from ongoing QE programs.

One conclusion is that the backwash of moves in the US Dollar and the Euro swamp most of Sweden’s apparent currency independence. Especially if we note that a fair bit of the monetary easing is simply keeping up with the Euro area Joneses.

Household Debt

It was hardly a surprise after reading the above that the June Financial Stability Report rather majored on this.

Households’ high and rising indebtedness form a serious threat to financial and macroeconomic stability……….Household indebtedness and housing prices are still rising, and indebtedness is also expected to rise in the period ahead. This entails major risks for the Swedish economy.

What will they do?

Further measures need to be introduced to increase the resilience of the household sector and reduce risks.

So they will raise interest-rates? Oh hang on.

Both measures to achieve a better balance between supply and demand on the housing market and tax reforms to reduce the willingness or ability of households to take on debt are required. Further macroprudential policy measures also need to be taken.

It is interesting these days how central bankers so often end up telling central bankers what to do! Also it is notable that the rise of macroprudential policies ignores they fact that such policies were abandoned in the past because they were more trouble than they were worth.

All this came with an ominous kicker.

The vulnerabilities in the Swedish banking system are linked to its size, concentration and interlinkage, as well as the banks’ large percentage of wholesale funding and their substantial exposures to the housing sector.

A decade into the credit crunch we note that the rhetoric of reform and progress so often faces a reality of “vulnerabilities” and these get worse as we peer deeper.

Liquidity risks arise partly as a result of Sweden having a large, cross-border banking sector with significant commitments in foreign currency.

If you take the two quotes together then you have the feeling that the TARDIS of Dr.Who has transported you back to 2006. Still we know that the interest and concentration of the Riksbank will be on this issue now as the “precious” may have troubles. Oh and they have a sense of humour too.

It is essential that the banks insure themselves

In reality the Swedish taxpayer is likely to find they have got the gig and this is very different to the usual Riksbank rhetoric on foreign-exchange intervention although if you think about it the result they want would be rather likely to say the least!

At the same time, it is necessary that the Riksbank has a sufficiently large foreign currency reserve if liquidity requirements should arise in foreign currency that the banks themselves are unable to manage.

At the end of last month and after the Report Sweden Statistics updated us further on the state of play.

In May, households’ housing loans amounted to SEK 2 977 billion. This is an increase of SEK 18 billion compared with the previous month and SEK 195 billion compared with the corresponding month last year. Housing loans thus had an annual growth rate of 7.1 percent in May,

Some ( obviously not central bankers ) might think that low mortgage rates are a major driver of this.

The average interest rate for housing loans for new agreements was 1.57 percent in May.

House Prices

The Real Estate Price Index was up by 2% in the first quarter of 2017 making it some 8% higher than a year before. Last year’s UBS Bubble index told us that Stockholm was leading the way.

The sharpest increase in the UBS Global Real Estate
Bubble Index in Europe over the last four quarters
was measured in Stockholm, followed by Munich,
London and Amsterdam

Comment

The Riksbank has in its own mind invented a new type of monetary theory where you expand policy into a boom. It so far has ignored the dangers of higher household debt and booming house prices. Being a first-time buyer in Stockholm looks as grim as being one in London. As to the announcement I am not expecting much change after Friday’s wages data showed a slowing. These days wage growth is the crucial number as we looked at last week.

Total average hourly wages for manual workers in April 2017 were SEK 165.80 excluding overtime pay and SEK 168.20 including overtime pay. These numbers reflects an increase increase of 1.7 percent and 1.8 percent compared
to April 2016. The average monthly salary for non-manual workers in April 2017 excluding variable supplements was SEK 38 420 while it was SEK 39 390 including variable supplements. These numbers reflects an increase of 1.5
percent and 1.7 percent compared to April 2016.

Bank of England

I see its staff have voted to strike as Mark Carney’s increasingly troubled reign as Governor continues. My advice to the staff is to keep away from the subject of performance related pay.

 

 

 

 

The ECB “taper” meets “To infinity! And beyond!”

Yesterday was central banker day when we heard from Mark Carney of the Bank of England, Mario Draghi of the ECB and Janet Yellen of the US Federal Reserve. I covered the woes of Governor Carney yesterday and note that even that keen supporter of him Bloomberg is now pointing out that he is losing the debate. As it happened Janet Yellen was also giving a speech in London and gave a huge hostage to fortune.

Yellen today: “Don’t see another crisis in our lifetimes” Yellen May 2016: “We Didn’t See The Financial Crisis Coming” ( @Stalingrad_Poor )

Let us hope she is in good health and if you really wanted to embarrass her you would look at what she was saying in 2007/08. However the most significant speech came at the best location as the ECB has decamped to its summer break, excuse me central banking forum, at the Portuguese resort of Sintra.

Mario Draghi

As President Draghi enjoyed his morning espresso before giving his keynote speech he will have let out a sigh of relief that it was not about banking supervision. After all the bailout of the Veneto Banks in Italy would have come up and people might have asked on whose watch as Governor of the Bank of Italy the problems built up? Even worse one of the young economists invited might have wondered why the legal infrastructure covering the Italian banking sector is nicknamed the “Draghi Laws”?

However even in the area of monetary policy there are problems to be faced as I pointed out on the 13th of March.

It too is in a zone where ch-ch-changes are ahead. I have written several times already explaining that with inflation pretty much on target and economic growth having improved its rate of expansion of its balance sheet looks far to high even at the 60 billion Euros a month due in April.

Indeed on the 26th of May I noted that Mario himself had implicitly admitted as much.

As a result, the euro area is now witnessing an increasingly solid recovery driven largely by a virtuous circle of employment and consumption, although underlying inflation pressures remain subdued. The convergence of credit conditions across countries has also contributed to the upswing becoming more broad-based across sectors and countries. Euro area GDP growth is currently 1.7%, and surveys point to continued resilience in the coming quarters.

That simply does not go with an official deposit rate of -0.4% and 60 billion Euros a month of Quantitative Easing. Policy is expansionary in what is in Euro area terms a boom.

This was the first problem that Mario faced which is how to bask in the success of economic growth whilst avoiding the obvious counterpoint that policy is now wrong. He did this partly by indulging in an international comparison.

since January 2015 – that is, following the announcement of the expanded asset purchase programme (APP) – GDP
has grown by 3.6% in the euro area. That is a higher growth rate than in same period following QE1 or QE2 in the United States, and a percentage point lower than the period after QE3. Employment in the euro area has also risen by more than four million since we announced the expanded APP, comparable with both QE2 and QE3 in the US, and considerably higher than QE1.

You may note that Mario is picking his own variables meaning that unemployment for example is omitted as are differences of timing and circumstance. But on this road we got the section which had an immediate impact on financial markets.

The threat of deflation is gone and reflationary forces are at play.

So we got an implicit admittal that policy is pro-cyclical or if you prefer wrong. A reduction in monthly QE purchases of 20 billion a month is dwarfed by the change in circumstances. But we have to be told something is happening so there was this.

This more favourable balance of risks has been already reflected in our monetary policy stance, via the adjustments we have made to our forward guidance.

You have my permission to laugh at this point! If he went out into the streets of Sintra I wonder how many would know who he is let alone be running their lives to the tune of his Forward Guidance!? Whilst his Forward Guidance has not been quite the disaster of Mark Carney the sentence below shows a misfire.

This illustrates that core inflation does not
always give us a clear reading of underlying inflation dynamics.

The truth is as I have argued all along that there was no deflation threat in terms of a downwards spiral for inflation because it was driven by this.

Oil-related base effects are also the main driver of the considerable volatility in headline inflation that we have seen, and will be seeing, in the euro area………. As a result, in the first quarter of 2017, oil-sensitive items  were still holding back core inflation.

I guess the many parts of the media which have copy and pasted the core inflation/deflation theme will be hoping that their readers have a bout of amnesia. Or to put it another way that Mario has set up a straw (wo)man below.

What is clear is that our monetary policy measures have been successful in avoiding a deflationary spiral and securing the anchoring of inflation expectations.

Actually if you look elsewhere in his speech you will see that if you consider all the effort put in that in fact his policies had a relatively minor impact.

Between 2016 and 2019 we estimate that our monetary policy will have lifted inflation by 1.7 percentage points,
cumulatively.

So it took a balance sheet of 4.2 trillion Euros ( and of course rising as this goes to 2019) to get that? You can look at the current flow of 60 billion a month which makes it look a little better but it is not a lot of bang for your Euro.

Market Movements

There was a clear response to the mention of the word “reflationary” as the Euro rose strongly. It rose above 1.13 to the US Dollar as it continued the stronger  phase we have been seeing in 2017 as it opened the year more like 1.04.  Also government bond yields rose although the media reports of “jumps” made me smile as I noted that the German ten-year yield was only 0.4% and the two-year was -0.57%! Remember when the ECB promised it was fixing the issue of demand for German bonds?

Comment

On the surface this is a triumph for Forward Guidance as Mario’s speech tightens monetary policy via higher bond yields and a higher value for the Euro on the foreign exchanges. Yet if we go back to March 2014 he himself pointed out the flaw in this.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

You see the effective or trade-weighted index dipped to 93.5 in the middle of April but was 97.2 at yesterday’s close. If we note that Mario is not achieving his inflation target and may be moving away from it we get food for thought.

Euro area annual inflation was 1.4% in May 2017, down from 1.9% in April.

So as the markets assume what might be called “tapering” ( in terms of monthly QE purchases) or “normalisation” in terms of interest-rates we can look further ahead and wonder if “To infinity! And Beyond!” will win? After all if the economy slows later this year  and inflation remains below target ………

There are two intangible factors here. Firstly the path of inflation these days depends mostly in the price of crude oil. Secondly whilst I avoid politics like the plague it is true that we will find out more about what the ECB really intends once this years major elections are done and dusted as the word “independent” gets another modification in my financial lexicon for these times