UK Retail Sales are seeing quite a surge

These times are ones where the news is often a combination of bad or grim.Indeed the mainstream media seems to be revelling in it. From time to time we do get some better news which I welcome.In the UK version of the pandemic that has regularly come from the retail sales data and this morning is no exception.

In September, we saw growth across all measures. The value of retail sales increased by 1.4% and volume sales by 1.5% when compared with the previous month.

The first point is that we have seen another month of growth which means that the pattern has been of a very strong recovery.

A strong rate of growth is seen in the three-month on three-month growth rate at 17.7% and 17.4% for value and volume sales respectively. This is the biggest quarterly growth seen on record as sales recovered from the low levels experienced earlier in the year.

If course a lot of care is needed because there was quite a previous fall.

In Quarter 2 (Apr to June), the volume of retail sales fell by 9.7%.

The effect of this is that we are now quite a bit above the pre pandemic level of retail sales.

When compared with February 2020’s pre-pandemic level, total retail sales were 3.9% and 5.5% higher in value and volume terms respectively.

Also one of my themes has been in play. Regular readers will recall that I argued back on the 29th of January 2015 that low inflation and indeed falling prices boost retail sales by making them cheaper in real terms, especially relative to wages. If you now look at the numbers again there has been a registered price fall of the order of 1.6% ( the difference between the value and volume figures above) and it has been associated with strong growth. This is bad news for those who argue that we need more inflation such as those setting policy at the Bank of England as they are replying on a “Wages Fairy” that has been absent for more than a decade now.

Breaking it down

The pandemic era seems to have made as hungry.

When compared with February, volume sales within food stores were 3.7% higher in September. Food retailers had suggested that the peak in March 2020 was because of panic buying at the start of the pandemic, and despite seeing a notable fall in sales following this peak, spending remained high. This may be a result of the government tightening restrictions for other services such as bars and restaurants at the end of September, which may have encouraged spending in food stores.

More seriously as the release above suggests there has been a shift here with people eating out less and therefore eating more at home. Unfortunately it is pretty much impossible to quantify. Perhaps some people still have cupboards full of tinned food and freezers full up as well.

There has also been a shift towards online retailing, or more accurately what was already happening got turbocharged.

In September, volume sales within non-store retailing were 36.6% higher than in February. Despite some contraction from the sharp rate of increase in this sector, consumers were still carrying out much of their shopping online when compared with February.

It is a case of what the Black-Eyed Peas would call “Boom! Boom! Boom!”

Despite monthly declines across all sectors except department stores, the proportion of online sales was at 27.5%, compared with the 20.1% reported in February. The proportion of online sales increased across all sectors with food stores nearly doubling their online proportions from 5.4% in February to 10.4% in September.

Putting it another way online sales are up 53% on a year ago.

I guess we should not be surprised that times like these have led to higher sales reflecting people passing the time by gardening and doing some home improvements.

Many retailers selling gardening products commented on increased demand during lockdown as consumers socially distanced in their gardens where possible.Flowers, plants and seeds stores provided strong positive contributions at 0.5 percentage points………Volume sales in household goods stores and “other” non-food stores increased to 11.0% and 10.7% above February, respectively. Feedback from household goods stores had informed us that home improvement sales from DIY and electrical goods stores did well in recent months and helped with the recovery of sales

There should be no great surprise with so many working from home that fuel sales are down.

In September, fuel sales volumes were still 8.6% below February with reduced travel as many continued to work from home, and clothing sales volumes were still 12.7% below February.

But as you can see clothing sales have suffered too. Perhaps a lack of work clothes.O have dome my bit for the October figures by buying a new sweatshirt and some running shorts.

In terms of the overall index we are now at 107.6 with 2018 as the benchmark of 100.

On the other side of the coin this was reported as well.

The GfK Consumer Confidence Index tumbled to -31 in October, its lowest level since late May and down sharply from a nine-month high of -25 in September, as well as being below all forecasts in a Reuters poll of economists. ( Reuters)

It is hard not to laugh at the forecasts.We have had a litany of simply dreadful ones in the pandemic era yet some still seem to have faith in them.As to the numbers October has its issues but I find a survey that is at -25 at a time of record retail sales in September somewhat puzzling.

Business Surveys

Today’s Purchasing Managers Index or PMI was also positive. Whilst the reading fell unlike in the Euro area we retained at least some growth.

The pace of UK economic growth slowed in October to
the weakest since the recovery from the national COVID-19
lockdown began. Not surprisingly the weakening is most
pronounced in the hospitality and transport sectors, as firms reported falling demand due to renewed lockdown measures and customers being deterred by worries over rising case numbers.

The growth that we are seeing is to be found here.

Where a rise in output was reported, survey
respondents pointed to factors such as pent up demand in the manufacturing sector, rising residential property transactions and the restart of work on projects that had been delayed at the start of the pandemic.

 

Comment

If we continue with today’s optimistic theme we see that we do have an example of a V-Shaped recovery in the UK economy. This is because retail sales are now a fair bit above pre pandemic levels. So a clear V shape. However this area has been the one which has benefited the most from income being supported by the furlough scheme which ends soon. The replacements are stronger than they were but we may see an impact from the November data. Also there are some extraordinary goings on in Wales which will be affecting retail sales there from tomorrow.

Supermarkets will be unable to sell items like clothes during the 17-day Covid firebreak lockdown in Wales.

First Minister Mark Drakeford said it would be “made clear” to them they are only able to open parts of their business that sell “essential goods”.

Many retailers will be forced to shut but food shops, off-licences and pharmacies can stay open when lockdown begins on Friday at 18:00 BST.

Retailers said they had not been given a definition of what was essential. ( BBC)

Frankly that looks quite a shambles in the making.

So in an echo of the weather as the sun has come out in Battersea we have received some good news today but sadly I suspect the Moody Blues were right about future prospects.

The summer sun is fading as the year grows old
And darker days are drawing near
The winter winds will be much colder

The UK will continue to see quite a surge in the national debt

Today I thought it was time to take stock of the UK economic situation. This is because we find ourselves experiencing a sort of second wave of the Covid-19 pandemic.

Official figures show the UK has recorded a further 22,961 cases of COVID-19 after Public Health England announced it has identified 15,841 cases that were not included in previous cases between 25 September and 2 October due to a technical issue. ( Sky News )

Those numbers are something of a shambles and as a TalkTalk customer it does seem to have similarities to when Baroness Harding was in charge of it. Fortunately we are not experiencing a similar rise in deaths ( 33) as we try to allow for the lags in this process. But however you look at the numbers economic restrictions look set to remain and maybe increased as we note what is about to take place in Paris.

Paris and neighbouring suburbs have been placed on maximum coronavirus alert on Monday, the prime minister’s office announced on Sunday, with the city’s iconic bars closing, as alarming Covid-19 infection numbers appeared to leave the French government little choice. Mayor Anne Hidalgo is to outline further specific measures Monday morning. ( France24)

We have already seen more restrictions for Madrid. So the overall picture is not a good one for those who have asserted the likelihood of a V-Shaped economic recovery.Some area yes but others not and on a purely personal level passing bars and pubs in South-West London trade looks thin. All of this is also before we see the end of the furlough scheme at the end of the month.

Car Registrations

This morning’s update showed an area which is still in trouble.

The UK new car market declined -4.4% in September, according to figures published today by the Society of Motor Manufacturers and Traders (SMMT). The sector recorded 328,041 new registrations in the month – the weakest September since the introduction of the dual number plate system in 1999 and some -15.8% lower than the 10-year average of around 390,000 units for the month.

There are quite a few factors at play here. The car industry had its issues pre the pandemic. But added to it was the lockdown earlier this year followed by several U-Turns. People were encouraged to drive to work as the previous official view of encouraging public transport changed. But in London this was accompanied by the sprouting of cycle lanes in many places that looked rather bizarre to even a Boris Biker like me. This was not helped by problems with a couple of bridges and now official policy is for people to work from home again.

There is the ongoing background as to what cars we should buy? The internal combustion engine is out of favour but there are plenty of issues with batteries made out of toxic elements. The net effect of all the factors is this.

 With little realistic prospect of recovering the 615,000 registrations lost so far in 2020, the sector now expects an overall -30.6% market decline by the end of the year, equivalent to some £21.2 billion2 in lost sales.

Business Surveys

This was more optimistic this morning as Markit released the main PMI data.

The UK service sector showed encouraging resilience in
September, with business activity continuing to grow solidly despite the government’s Eat Out to Help Out scheme being withdrawn……….However, growth across the services sector was uneven with gains principally focussed on areas such as business-to-business services. Those sub-sectors more exposed to social contact such as Hotels, Restaurants & Catering reported a downturn in business during the month,

The better news for the large services sector fed straight into the wider measure.

The UK Composite Output Index….. recorded 56.5 to
signal a third month of growth.

This continues a welcome trend and was much better than the Euro area which recorded 50.4. However there are contexts to this which include the fact that the UK economy contracted more in the second quarter so we would expect a stronger bounce back. Also these numbers have proved unreliable so we should take them as a broad brush.

Also even with the furlough scheme the jobs situation looks weak.

Less positive, however, was on the jobs front, with private
sector employment continuing to fall at a steep rate.
September marked a seventh successive month of job
losses, with the greater decline again seen in services.
Cost considerations amid an uncertain near-term outlook
continued to weigh on the labour market.

National Debt

This has been an extraordinary year for UK debt markets which began like this.

The Net Financing Requirement (NFR) for the DMO in 2020-21 is forecast to be £156.1 billion; this will be financed exclusively by gilt sales.

Looking back to March we see that some £97.6 billion was due to redemptions of existing bonds. So we were planning to raise £58.5 billion of new debt. Also you might like to note that back then National Savings and Investments were expected to raise £6 billion this financial year.

If we press the fast forward button we now see this.

The UK Debt Management Office (DMO) is today publishing a further revision to its 2020-21 financing remit covering the period to end-November 2020. In line with the
update on the government’s financing needs announced by HM Treasury today, the DMO is planning to raise a minimum of £385 billion during the period April to November 2020 (inclusive) through the issuance of conventional and index-linked gilts.

So an just under an extra £229 billion and that is only until the end of next month. As of the beginning of this month we have issued in total some £330.5 billion or more than double what we planned for the whole financial year.

Bank of England

I am including it because the numbers above have been reduced in net terms by its purchases. So far it has bought an extra £241 billion. That number does not strictly match the numbers above as it began in late March but it does give an idea of the flows involved here.

That will continue this week with the Bank of England buying another £4.4 billion of UK bonds or Gilts and the Debt Management Office issuing another £8.5 billion.

Comment

We see a situation where we have seen a welcome bounce in UK economic activity but it still has quite a distance to travel. Sadly some areas look likely to be hit again. There must be a subliminal influence on going out and more restrictions seem probable. Thus the rate of recovery will slow and moving onto my next theme the size of the national debt and the fiscal deficit will grow. As to its size there are different ways of measuring it but here is the Office for National Statistics version.

At the end of August 2020, there was £1,718.0 billion of central government gilts in circulation (including those held by the Bank of England (BoE) Asset Purchase Facility Fund).

That will continue to grow pretty rapidly but there are a couple of reasons why we should not be immediately concerned. The average yield at the end of June was 0.29% so it is not costing much and the average maturity if we include index-linked Gilts was a bit over 18 years.

One way of measuring the surge in bond prices is to note that the market value then was some £2,659 billion so some have made large profits. This does not get much publicity. One area which has been affected is index-linked Gilts which if you allow for inflation were worth some £441.5 billion but had a market value of £805.2 billion. Why? Well they do offer a yield that is much higher than elsewhere as we see another casualty of all the QE bond purchases as they are at the wrong price and could manage to fall in price if inflation rises. Or their “yield” is -2.5%.

Imagine being a pension fund manager and having to match an inflation liability with that! It is a much larger issue than the debates over the Retail Price Index but strangely barely gets a flicker of a mention.

Podcast

 

 

 

The ECB must be noting the Euro area slow down with dismay

Yesterday we noted the communications problems of the Bank of England as it performs the dance known as the Hokey Cokey on the subject of negative interest-rates. Today we have the opportunity to note what the European Central Bank which applies what is negative interest-rate policy or NIRP 2.0. What do I mean by that? Well it has had negative interest-rates since the 11th June 2014 and the Deposit rate is now -0.5%. But due to the negative impact of this in the banks they have introduced a -1% interest-rate for them as the ECB attempts to shovel cash to The Precious. This is the 2.0 part.

The next issue is how is this going? So let me hand you over to Yves Mersch who has been interviewed by Bloomberg today.

I must say that since the last time we took action, the least one could say is that things in the economy have not gone for the worse. And even with sometimes conflicting incoming information, most of it has led us to say that the risk balance may still be somewhat to the downside but less so than it has been, and that led us to no change because we said we are broadly in line with our baseline.

Looking also at new incoming information I think nothing is pointing to a further deterioration at least not on the front of prices and production.

Of course he quickly moved onto the subject of the banks.

The second element of uncertainty is the feedback from the banking sector, let’s call it the financial amplification. Measures have been taken and this is not only measures from the monetary policy side: collateral, ample liquidity, the TLTROs, tiering PEPP. It is also the supervisory actions, the regulatory adjustment

This reminds me of Monday’s press release on the banks.

The ESCB report proposes to reduce the reporting burden for banks in the fields of statistical, resolution and prudential reporting without losing the information content that is indispensable to monetary policy, resolution and supervisory tasks.

I do not know about you but in a situation where Deutsche Bank has been alleged to be the largest player ( US $1.3 trillion) in a money laundering scandal this is not the best time for such an announcement.

Today’s Evidence

The Markit PMI for the Euro area posed a question about the Mersch view above.

Business activity stalled across the eurozone in
September, albeit with increasingly divergent trends
by sector and country. Faster growth of
manufacturing, led by Germany, was offset by a
renewed downturn in the service sector, which was
often linked to resurgent coronavirus disease 2019
(COVID-19) infection rates.

We see that according to Markit manufacturing in Germany is growing ( 56.6) but France is finding things tougher.

France meanwhile saw business activity
deteriorate for the first time in four months as falling
service sector output more than offset a modest
rise in factory production.

The reading of 48.5 was driven by the services sector (47.5). It contrasted quite a bit with the 53.7 recorded by Germany.

These numbers and readings need a fair bit of qualification these days, as they too have had problems. The first is that they simply tell us the difference between last month and this means that rather than continuing to recover the economy has stalled.

We may learn a little from the employment view because the official data is frankly useless right now due to the definitions not allowing for things like furlough schemes.

Employment was meanwhile cut for a seventh
successive month. Although the rate of job losses
moderated further from April’s record peak, the
pace remained higher than at any time since June 2013 prior to the pandemic. An easing in
manufacturing job cutting to the lowest since
February contrasted with a slight increase in the
rate of job losses in services, reflecting the
divergent business activity trends between the two
sectors. Reduced staff cuts in Germany and France
were partly countered by greater job losses in the
rest of the region.

So we see a slowing economy with falling employment which I think is the most we can take from a PMI release.

The Green Green Grass of Home

Meanwhile the ECB is about to get active in other areas.

A journey of a thousand miles must begin with a single step. ( Isabel Schnabel )

which relates this this announcement.

The European Central Bank (ECB) has decided that bonds with coupon structures linked to certain sustainability performance targets will become eligible as collateral for Eurosystem credit operations and also for Eurosystem outright purchases for monetary policy purposes, provided they comply with all other eligibility criteria.

However I think Yves Mersch covered it in his interview.

Of course the markets like if we buy up everything that they have.

I have two main views on this. The first is that such matters are decisions for elected politicians and governments not technocrats looking for good PR. So it is a type of mission creep. Next comes the issue that we need large improvements in our ability to store energy for this to work. As we stand that relies on battery technology and as yesterday was Tesla Battery Day let me hand you over to Wired.

To be sure, Tesla’s new battery appears to offer large performance gains in a few key areas, but it was unclear whether Tesla has actually achieved these upgrades or whether this is the projected performance for the finalized battery.

To be fair to Yves Mersch he has his own concerns.

The difficult part is the circumscription, definition, there’s a lot of greenwashing going around as well

Comment

As the ECB stretches for the outer limits of monetary policy we are being taught a different type of limit. Let me give you an example which would have been regarded as a triumph in its early days and indeed some are promoting it as one this morning.

AMSTERDAM, Sept 23 (Reuters) – Italy’s 30-year bond yield fell to a record low on Wednesday…….Italian bond yields tumbled on Tuesday and on Wednesday the 30-year yield dropped to as little as 1.76% in early trade .

So relative to Germany which is the benchmark bond yields have tightened which ceteris paribus is a success for the Euro ( more consistency of interest-rates). In a market sense it is indeed very welcome for those punting, or excuse me, investing in it.As I do not get the opportunity to type this very often it is some good news for Italian banks who hold lots of Italian government bonds. It is also good news for the Italian government which can borrow more cheaply.

The catch is that it is being driven by the purchases of the ECB. It has two programmes buying government bonds. But the crucial point is more than this because if we move to expectations markets expect the ECB to be not only a buyer of last resort but currently a buyer of first resort. Also my financial lexicon for these times will expect the purchases to be permanent.

It is subject to constraints vetted by the ECJ, and it is temporary as we have already once suspended it. The PEPP is exceptional and therefore temporary.  ( Yves Mersch )

But if we switch to the real economy we see another type of limit which is that economic growth was poor pre pandemic and now the recovery from the drop is fading. So markets can be manipulated but economies are still in trouble.

However maybe in the morass there are some seeds of hope as I note this from Yves which would be quite an improvement.

Another question is whether we collect only prices of goods and services, or should look into experiences with a cost of living index rather than a CPI.

 

 

Some welcome good economic news for the UK

Today is proving to be something of a rarity in the current Covid-19 pandemic as it has brought some better and indeed good economic news. It is for the UK but let us hope that such trends will be repeated elsewhere. It is also in an area that can operate as a leading indicator.

In July 2020, retail sales volumes increased by 3.6% when compared with June, and are 3.0% above pre-pandemic levels in February 2020.

As you can see not only did July improve on June but it took the UK above its pre pandemic levels. If we look at the breakdown we see that quite a lot was going on in the detail.

In July, the volume of food store sales and non-store retailing remained at high sales levels, despite monthly contractions in these sectors at negative 3.1% and 2.1% respectively.

In July, fuel sales continued to recover from low sales levels but were still 11.7% lower than February; recent analysis shows that car road traffic in July was around 17 percentage points lower compared with the first week in February, according to data from the Department for Transport.

As you can see food sales dipped ( probably good for our waistlines) as did non store retailing but the recovery in fuel sales from the nadir when so few were driving was a stronger influence. I suspect the fuel sales issue is likely to continue this month based on the new establishment passion for people diving their cars to work. That of course clashes with their past enthusiasm for the now rather empty looking public transport ( the famous double-decker red buses of London are now limited to a mere 30 passengers and the ones passing me these days rarely seem anywhere near that). Actually it also collides with the recent public works for creating cycle lanes out of is not nowhere restricted space in London which has had me scratching my head and I am a regular Boris Bike user.

As we look further I thought that I was clearly not typical as what I bought was clothing but then I noted the stores bit.

Clothing store sales were the worst hit during the pandemic and volume sales in July remained 25.7% lower than February, even with a July 2020 monthly increase of 11.9% in this sector.

Online retail sales fell by 7.0% in July when compared with June, but the strong growth experienced over the pandemic has meant that sales are still 50.4% higher than February’s pre-pandemic levels.

In fact the only downbeat part of today;s report was the implication that the decline of the high street has been given another shove by the current pandemic. On the upside we are seeing innovation and change. Also if we look for some perspective we see quite a switch on terms of trend.

When compared with the previous three months, a stronger rate of growth is seen in the three months to July, at 5.1% and 6.1% for value and volume sales respectively. This was following eight consecutive months of decline in the three-month on three-month growth rate.

It is easy to forget in the melee of news but UK Retail Sales growth had been slip-sliding away and now we find ourselves recording what is a V-Shaped recovery in its purest form.

There is another undercut to this which feeds into a theme I first established on the 29th of January 2015 which is like Kryptonite for central bankers and their lust for inflation. If we look at the value and volume figures we see that prices have fallen and they have led to a higher volume of sales.I doubt that will feature in any Bank of England Working Paper.

Purchasing Manager’s Indices

These do not have the street credibility they once did. However the UK numbers covering August also provided some good news today.

August’s data illustrates that the recovery has gained speed
across both the manufacturing and service sectors since July. The combined expansion of UK private sector output was the fastest for almost seven years, following sharp improvements in business and consumer spending from the lows seen in April.

Public-Sector Finances

This is an example of a number which is both good and bad at the same time.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in July 2020 is estimated to have been £26.7 billion, £28.3 billion more than in July 2019 and the fourth highest borrowing in any month on record (records began in 1993).

That is because we did need support for the economy ( how much is of course debateable) and even so the monthly numbers are falling especially if we note this as well.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in June 2020 was revised down by £6.0 billion to £29.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions.

We can now switch to describing the position as the good the bad and the ugly.

Borrowing in the first four months of this financial year (April to July 2020) is estimated to have been £150.5 billion, £128.4 billion more than in the same period last year and the highest borrowing in any April to July period on record (records began in 1993), with each of the months from April to July being records.

The size of the debt is a combination of ugly and bad but we see that the numbers look like they are falling quite quickly now. Indeed if we allow for the effect of the economy picking up that impact should be reinforced especially if we allow for this.

Self-assessed Income Tax receipts were £4.8 billion in July 2020, £4.5 billion less than in July 2019, because of the government’s deferral policy;

National Debt

There has been some shocking reporting of this today which basically involves copy and pasting this.

Debt (public sector net debt excluding public sector banks, PSND ex) has exceeded £2 trillion for the first time; at the end of July 2020, debt was £2,004.0 billion, £227.6 billion more than at the same point last year.

It is a nice click bait headline but if you read the full document you will spot this.

The Bank of England’s (BoE’s) contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund (APF), Term Funding Schemes (TFS) and Covid Corporate Financing Facility Fund (CCFF).

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of BoE, PSND ex at the end of July 2020 would reduce by £194.8 billion (or 9.8 percentage points of GDP) to £1,809.3 billion (or 90.7% of GDP).

Regular readers may be having a wry smile at me finally being nice to the Term Funding Scheme! But its total should not be added to the national debt and nor should profits from the Bank of England QE holdings. Apparently profit is now debt or something like that.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £115.8 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase.

Comment

It is nice to report some better news for the economy and let us hope it will continue until we arrive at the next information point which is how the economy responds to the end of the furlough scheme in October. As to the Public Finances I have avoided any references to the Office for Budget Responsibility until now as they have managed to limbo under their own usual low standards. Accordingly even my first rule of OBR Club that the OBR is always wrong may need an upwards revision.

Let me now take you away from the fantasy that the Bank of England has taken UK debt above £2 trillion and return to an Earth where it is implicitly financing the debt. Here is the Resolution Foundation.

These high fiscal costs of lockdown look to be manageable, though. 1) The @UK_DMO   has raised over £243bn since mid-March. 2) While debt is going up, the costs are still going down. Interest payments were £2.4bn in July 2020, a £2bn fall compared with July 2019.

That shows how much debt we have issued but how can it be cheaper? This is because the Bank of England has turned up as a buyer of first resort. At the peak it was buying some £13,5 billion of UK bonds a week and whilst the weekly pace has now dropped to £4.4 billion you can see that it has been like a powered up Pac-Man. Or if you prefer buying some £657 billion of something does tend to move the price and yield especially if we compare it to the total market.

Gilts make up the largest component of debt. At the end of July 2020 there were £1,681.2 billion of central government gilts in circulation.

Finally the UK Retail Prices Index consultation closes tonight and please feel free to contact HM Treasury to ask why they are trying to neuter out best inflation measure?

 

 

UK Retail Sales surge in June

The Covid-19 pandemic has brought about all sorts of economic events. Yesterday evening I went for a stroll in Battersea Park and it was quite noticeable how the number of people going for a picnic there has increased. We do not know how permanent that will be but I suspect at least some of it will be as people discover that the same bottle of wine is so much cheaper than at a wine bar or pub. Oh yes and some seem to forget the food part of the picnic! I can see that BBC Breakfast have put their own spin on it.

9-year-old Sky had this message on #BBCBreakfast for people dropping litter in parks and open spaces

Yes more people have created more litter. Kudos to @PolemicPaine who pointed out ahead of a flurry of such media reports that it would happen. Some people’s behaviour is bad but in recent years the cleanliness of Battersea Park has improved a lot and thank you to the workers there.

Retail Sales

These are the numbers which were likely to be harbingers of change in the trajectory of the UK economy. So this morning’s news was rather welcome.

In June 2020, the volume of retail sales increased by 13.9% when compared with May 2020 as non-food and fuel stores continue their recovery from the sharp falls experienced since the start of the coronavirus (COVID-19) pandemic.

That was quite a surge and means this.

The two monthly increases in the volume of retail sales in May and June 2020 have brought total sales to a similar level as before the coronavirus pandemic; however, there is a mixed picture in different store types.

There is another way of looking at this.

In June, total retail sales continued to increase to reach similar levels as before the pandemic, with a fall of just 0.6% when compared with February.

So is it in modern language, like well over? Not quite as the text is a little reticent in pointing this out but volumes were some 1.6% lower than last June. Whilst growth had been slowing we usually have some so perhaps 3% lower than we might usually expect. However these are strong numbers in the circumstances and will have come as an especial shock to readers of the Financial Times with the economics editor reporting this. I have highlighted the bit which applies to June.

The latest numbers on card payments and bank account transactions from Fable Data show that in the week to July 19, total spending in the UK was 25 per cent down on the same week in 2019, a deterioration from a 13 per cent decline four weeks earlier.

As you can see whilst consumption is a larger category than Retail Sales there is quite a difference in the numbers here. According to the report by the economics editor of the FT a bad June was followed by a woeful July.

The latest indications from unofficial data on spending patterns in the UK suggests the economic recovery that began in late April has stalled — and possibly even moved backwards in July. Separate figures from the Bank of England’s payment system and from card payments collected by Fable Data show a worse picture for spending in mid-July than at the start of the month.

More on this later.

The Breakdown

Whilst the overall picture is pretty much back to February there have been some ch-ch-changes in the pattern.

In June, while non-food stores and fuel sales show strong monthly growths in the volume of sales at 45.5% and 21.5% respectively, levels have still not recovered from the sharp falls experienced in March and April.

My personal fuel sales shot up as I bought some diesel and went to visit an aunt and my mother;s house at the end of June but on a more serious level traffic in Battersea picked up noticeably. This is in spite of the official effort to discourage driving just after telling people to drive! Anyway switching sectors this is interesting.

Following this peak, sales returned to a level higher than before the pandemic. In June 2020, despite a small monthly decline of 0.1% in volume sales, food stores remained 5.3% higher than in February 2020.

I say that because of this.

Feedback from food retailers had suggested that consumers were panic buying in preparation for the impending lockdown.

If they were we would expect a dip going ahead. On a personal level I did put some extra stuff in my freezer in case I had to quarantine ( it was 7 days then) and bought some more tinned food. But collectively the other side of that has not been seen so far. Maybe it is because the June numbers do not see the opening of restaurants and the like which began on July 4th.

I doubt anyone is going to be surprised by this.

Non-store retailing has reached a new high level in June 2020, with continued growth during the pandemic and a 53.6% increase in volume sales when compared with February 2020.

Let me now give you the two polar opposites starting with the bad.

Textile, clothing and footwear stores show the sharpest decline in total sales at negative 34.9%. This was because of a combination of a large fall within stores at negative 50.8% along with a slower uptake in online sales, with a 26.8% increase from February.

Now the up,up and away.

Household goods stores, as the only store type to show an increase since the start of the pandemic, has a large uptake in online sales, increasing by 103.2%. In addition, household goods stores saw the smallest decline in store sales when compared with other non-food stores, at negative 15.2%.

I am glad to see my friend who has been painting his garage door and some windows pop up in the figures.

In June, electrical household appliances, hardware, paints and glass, and furniture stores all returned to similar levels as before the pandemic.

Comment

This is welcome news for the UK economy and it provides another piece of evidence for one of my themes. For newer readers I argued back in January 2015 that lower prices boost the economy ( the opposite of the Bank of England view) and we see that lower prices in retail have led us to getting right back to where we started from. I am sure that some PhD’s at the Bank of England are being instructed to sufficiently torture the numbers to disprove this already.

Actually the Bank of England is in disarray as in response to the FT data above one of its members seems to have switched to analysing health.

Jonathan Haskel, an external member of the BoE’s Monetary Policy Committee, said the evidence was beginning to show that household concerns about health were more likely to drive spending than government lockdown rules.

Oh well. Also this made me laugh, after all who provided all the liquidity?

“The need for more equity finance creates a case for authorities to be ambitious in reforming the financial system to remove any biases against the patience that’s needed for many equity investments,” he said.

“Even investors who should have the longest horizons seem to have a fetish for liquidity and an aversion to really illiquid growth capital assets.” he said. ( Reuters)

I do hope somebody pointed out to Alex Brazier, the BoE’s Executive Director for Financial Stability Strategy and Risk that the speech should be given to his own colleagues who have been singing along to Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

Let me finish by pointing out that these retail numbers are imprecise in normal times and will be worse now. So we have seen quite an upwards shift of say around 10%. Moving onto numbers which are even more unreliable there was more good news but regular readers will know to splash some salt around these.

At 57.1 in July, up from 47.7 in June, the headline seasonally
adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered above the 50.0 no-change value for the first time since February.

Where next for the economy of Spain and house prices?

We can pick up on quite a lot of what is happening economically by taking a look at Spain which has been something of a yo-yo in the credit crunch era. It was hit then began to recover then was affected by the Euro area crisis but from around 2014/15 was maybe the clearest case of the Euro boom as it posted GDP (Gross Domestic Product) growth as high as 4.2% in late 2015. Since then in something of a contradiction for the policies of the ECB economic growth has slowed but nonetheless Spain was an outperformer. Indeed such that things were quiet on the usual metrics such as national debt and so on. It shows how a burst of GDP growth can change things.

Of course that was this and we are now in the eye of the economic storm of the Covid-19 pandemic. At the end of last month Spain’s official statisticians fired an opening salvo on the state of play.

The Spanish GDP registered a variation of ─5.2% in the first quarter of 2020 with respect to the previous quarter in terms of volume. This rate was 5.6 points lower than that
recorded for the fourth quarter…….. Year-on-year GDP variation of GDP stood at ─4.1%, compared with 1.8% in the previous quarter.

To be fair to them they had doubts about the numbers but felt they had a duty to at least produce some.

Today

Markit INS offered us some thoughts earlier.

Record falls in both manufacturing and service sector output ensured that the Spanish private sector overall experienced a considerable and unprecedented contraction of economic activity during April. After accounting for seasonal factors, the Composite Output Index* recorded a new low of 9.2, down from 26.7 in March.

A single-digit PMI still comes as a bit of a shock as we recall that Greece in its crisis only fell to around 30 on this measure. Here is some more detail from their report.

The sharp contraction was driven by rapid reductions in
demand and new business as widespread government
restrictions on non-essential economic activity – both
at home and abroad – weighed heavily on company
performance. There was a record reduction in composite
new business and overall workloads – as measured by
backlogs of work – during April.

We can spin that round to an estimated impact on GDP.

Allowing for a likely shift in the traditionally strong linear relationship between GDP and PMI data, we estimate the economy is currently contracting at a quarterly rate of around 7%.

They then confess to something I have pointed out before about the way they treat the Euro area.

Whilst startling enough, this figure may well prove
to be conservative, with the depth of the downturn
undoubtedly greater than anything we have ever seen
before.

For our purposes we see that a double-digit fall in GDP seems likely and even this morning’s forecasts from the European Commission are on that road.

For the year as whole, GDP is forecast to
decline by almost 9½%.

I do like the 1/2% as if any forecast is that accurate right now! One element in the detail that especially concerns me is the labour market because it had been something of a laggard in the Spanish boom phase.

The unemployment rate is expected to rise rapidly, amplifying the shock to the economy, although job losses should be partly reabsorbed as activity picks up again. However, the recovery in the labour market is expected to be slower amid high uncertainty, weak corporate balance-sheet positions, and the disproportionate impact of the
crisis on labour intensive sectors, such as retail and
hospitality.

This was the state of play at the end of March.

The unemployment rate increased 63 hundredths and stood at 14.41%. In the last 12 months, this rate decreased by 0.29 hundredths.

Actually if we note the change in the inactivity rate then the real answer was more like 16%. As Elton John would say.

It’s sad, so sad (so sad)
It’s a sad, sad situation.

This bit is like licking your finger and putting it out the window to see how fast your spaceship is travelling.

This, together with a strong positive
carry-over from the last quarters of 2020, would bring annual GDP growth to 7% in 2021, leaving
output in 2021 about 3% below its 2019 level.

Perhaps the European Commission is worried about the effect on its own income which depends on economic output in the member states and does not want to frighten the horses.

ECB

I have already pointed out that Euro area monetary policy has been out of kilter with Spain. In fact the ECB got out the punch bowl when the Spanish economy was really booming in 2015 as an annual economic growth rate of 4.2% was combined with an official interest-rate of -0.2% and then -0.3%. Oh Well! As Fleetwood Mac would say.

One area that will have benefited is the Spanish government via the way that the QE bond buying of the ECB has reduced sovereign bond yields. Thus Spain can borrow very cheaply as it has a ten-year yield of 0.86% which reflects the 271 billion Euro purchased by the ECB. This will have oiled the public expenditure wheels although this gets very little publicity as the official bodies which tend to be copied and pasted by the media have no interest in pointing it out.

Yesterday though there was something to get Lyndsey Buckingham singing.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

This was when we learnt a couple of things from the German Constitutional Court. Firstly it would appear that judges everywhere were a quite ridiculous garb. Next that they discovered something they had previously overlooked was an issue and posed questions for the ECB QE programme or at least the Bundesbank version of it. This did affect Spain as whilst it still borrows cheaply yields have risen this week.

Comment

The first context is one of sadness as the Spanish economy recovery not only grinds to a halt but engages reverse gear and at quite a rate. As an aside I wonder what those who use “output gap” style analysis are doing now? I would say they would be hoping we have forgotten that but it is like an antibiotic resistant bacteria that keeps coming back. As to 2021 I find it amazing that we have forecasts when we do not even know where we are now!

Switching to the Bank of Spain ( which operates QE in Spain on behalf of the ECB) it must be having a wry smile. I expect a Euro area version of Yes Prime Minister to play out where the German Constitutional Court ends up taking so long to act that by the the new PEPP programme is over. There is a deeper issue though about the fact that the ECB has found itself trapped in a spiders web of QE and negative interest-rates from which it has been unable to escape from.

Also an important area for Spain which will have benefited from the NIRP policy is this.

The annual rate of the Housing Price Index (HPI) in the fourth quarter of 2019 decreased one
percentage point, standing at 3.6%. This was the lowest since the first quarter of 2015.

Let me leave that as a question. What do readers think will happen next?

The Investing Channel

 

The economy of China is not seeing a V-Shaped recovery

This morning has seen a does of economic news from the epicentre of the current pandemic and hence crisis which is China. This is keenly awaited as we see how the economy responds to the pandemic. Sadly we seem already to be charging into what might be described as Fake News so let us take a look.

BEIJING, March 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector firmed up to 52 in March from 35.7 in February, the National Bureau of Statistics (NBS) said Tuesday.
A reading above 50 indicates expansion, while a reading below reflects contraction.
The rebound came as the country’s arduous efforts in coordinating epidemic control and economic and social development have generally filtered through, NBS senior statistician Zhao Qinghe said.

Okay now first we need to remind ourselves that this is a sentiment indicator not an actual output number although tucked away we do get some clearer  guidance.

With positive changes taking place in domestic epidemic control and prevention, 96.6 percent of China’s large and medium-sized enterprises have resumed production, up 17.7 percentage points from one month ago, NBS survey showed.
A sub-index for production, rallied 26.3 points from one month earlier to 54.1, hinting at reviving production activities.

Below we seem some sectors which we would expect to pick-up and in fact are probably flat-out. Let’s face it demand for some protective equipment may never have been as high as this.

Meanwhile, the PMI for high-tech manufacturing, equipment manufacturing and consumer goods all stood in expansion zone, signaling quickened restoration in the sectors, according to Zhao.

The twitter feed of Xinhua News also continues with the line that things are in some cases back to normal.

As the outbreak of the novel #coronavirus has been basically contained in China, the construction of Xiongan, often billed as China’s “city of the future,” has resumed in an orderly manner.

I am sure some of you have already spotted the difference between “basically contained” and contained already. But the theme is of an economic recovery.

China’s March composite PMI rose significantly to 53, up 24.1 points from February.

This has been reported as being quite a rebound as the two tweet below highlight.

Wow! Impressive V-shape recovery in #China’s Manufacturing #PMI. Up to 52 from 35.7. ( @jsblokland) 

 

So far, data seems to support China’s prospects of a V-shaped economic recovery…. Strong PMI rebound.

The second tweet is from the editor of The Spectator Fraser Nelson.

A V-shaped recovery means that you are very quickly back to where you started. This was what was promised for Greece back in the day which is of course a troubling harbinger. After all the Greek economy promptly collapsed.

The National Bureau of Statistics

It published an explainer which tells a rather different story.

The purchasing manager index is a chain index, which reflects the economic changes in this month compared with the previous month. The magnitude of the change has a great relationship with the base of the previous month.

There was more.

the manufacturing PMI, non-manufacturing business activity index, and the comprehensive PMI output index fell sharply in February, and the base rose from the previous month. These data indicate that the production and operation status of enterprises in March has significantly changed from February.

This gets reinforced here.

Taking the production index as an example, according to the answer of the enterprise purchasing manager to the question “The production volume of the main products of this month has changed from last month”,

So as you can see the situation is likely to be as follows the reading of 52 is an improvement on the 35.7 of February. so for example might be 38 or 39 if we try to impose some sort of absolute moniker in this. Accordingly there has been an improvement but V-shaped?

The mire sanguine view I have expressed is much more in line with this from the South China Morning Post today.

China’s economic situation could get worse before it gets better, amid a second wave of demand shock that is set to hit both domestic and foreign trade, a Chinese government official has warned.Addressing a press conference in Beijing on Monday, the day after President Xi Jinping toured businesses in Zhejiang province, vice-minister of industry and information technology Xin Guobin delivered a candid and downbeat assessment of the economy, in a subtle break from recent optimistic rhetoric about economic recovery.

What is behind his thinking?

“With the further spread of the international epidemic, China’s foreign trade situation may further deteriorate,” Xin said. “Overseas and domestic demand are both slumping, having a significant impact on some export-oriented companies. These companies might face a struggle to survive.”

We also get a clue as to what “barely contained” in terms of the Corona Virus means.

After bringing the domestic epidemic under control, China gave the green light earlier this month for over 600 cinemas, thousands of tourism attractions and half the country’s restaurants to reopen.

But in sudden U-turn last Friday, the National Film Bureau ordered all cinemas to shut down again, without explaining why or when they might hope to reopen.

Shanghai municipal authorities also ordered a number of famous tourist attractions to close over the weekend, including the Oriental Pearl Tower and Shanghai Ocean Aquarium.

Is it back?

Hong Kong

We have looked at Hong Kong before because it had its economic troubles before this pandemic struck. However in terms of today’s subject it does give us something of a clue to what is happening in China and if so today’s Retail Sales numbers speak for themselves.

After netting out the effect of price changes over the same period, the provisional estimate of the volume of total retail sales in February 2020 decreased by 46.7% compared with a year earlier. The revised estimate of the volume of total retail sales in January 2020 decreased by 23.1% compared with a year earlier. For the first two months of 2020 taken together, the provisional estimate of the total retail sales decreased by 33.9% in volume compared with the same period in 2019.

It is not to say that some areas have not seen a boost.

 On the other hand, the value of sales of commodities in supermarkets increased by 11.1% in the first two months of 2020 over the same period a year earlier.  This was followed by sales of fuels (+6.5% in value).

The first part is no surprise but unless people were fleeing the place ( or perhaps preparing to) I am unsure about the second part.

For the other areas of retail sales it was basically the tale of woe you might expect.

Analysed by broad type of retail outlet in descending order of the provisional estimate of the value of sales and comparing the combined total sales for January and February 2020 with the same period a year earlier, the value of sales of food, alcoholic drinks and tobacco decreased by 9.3%. This was followed by sales of jewellery, watches and clocks, and valuable gifts (-58.6% in value); other consumer goods, not elsewhere classified (-21.9%); electrical goods and other consumer durable goods, not elsewhere classified (-25.1%); medicines and cosmetics (-42.7%); commodities in department stores (-41.4%); wearing apparel (-49.9%); motor vehicles and parts (-24.2%); footwear, allied products and other clothing accessories (-43.1%); furniture and fixtures (-19.6%); Chinese drugs and herbs (-23.7%); books, newspapers, stationery and gifts (-35.0%); and optical shops (-28.6%).

Comment

These are highly charged times both in terms of the pandemic and the subsequent economic outlook. As you can see the reports of China bouncing back are in fact beyond optimistic. Indeed even Xhinua News made the point.

However, Zhao said the single-month rise does not necessarily mean the production has been back to pre-outbreak levels, noting that more data should be observed. The upturn of economy, Zhao said, only comes when the PMI moves up for at least three consecutive months.

So today’s song lyrics come from Brian Ferry ( although originally written by Bob Dylan).

It’s a hard and it’s a hard and it’s a hard and it’s a hard
And it’s a hard rain’s a gonna fall

Italy faces yet more economic hardship

Italy is the country in Europe that is being most affected by the Corona Virus and according to the Football Italia website is dealing with it in Italian fashion.

In yet another change of plan, it’s reported tomorrow’s Juventus-Milan Coppa Italia semi-final will be called off due to the Corona virus outbreak.

In fact that may just be the start of it.

News agency ANSA claim the Government is considering a suspension of all sporting events in Italy for a month due to the Coronavirus outbreak, as another 27 people died over the last 24 hours.

Thus the sad human cost is being added to by disruption elsewhere which reminds us that only last week we noted that tourism represents about 13% of the Italian economy. Again sticking with recent news there cannot be much demand for Italian cars from China right now.

China has also suffered its biggest monthly drop in car sales ever, in another sign of economic pain.

New auto sales slumped by 80% year-on-year in February, the China Passenger Car Association reports. ( The Guardian )

Actually that,believe it or not is a minor improvement on what it might have been.

Astonishingly, that’s an improvement on the 92% slump recorded in the first two weeks of February. It underlines just how much economic activity has been wiped out by Beijing’s efforts to contain the coronavirus.

Backing this up was a services PMI reading of 26.5 in China and if I recall correctly even Greece only went into the low thirties.

GDP

The outlook here looks grim according to the Confederation of Italian industry.

ITALY‘S BUSINESS LOBBY CONFINDUSTRIA SEES ITALIAN GDP FALLING IN Q1, CONTRACTING MORE STRONGLY IN Q2 DUE TO CORONAVIRUS OUTBREAK ( @DeltaOne )

This comes on the back of this morning’s final report on the last quarter of 2019.

In the fourth quarter of 2019, gross domestic product (GDP), expressed in chain-linked values ​​with reference year 2015, adjusted for calendar effects and seasonally adjusted, decreased by 0.3% compared to the previous quarter and increased by 0.1 % against the fourth quarter of 2018.

That is actually an improvement for the annual picture as it was previously 0% but the follow through for this year is not exactly optimistic.

The carry-over annual GDP growth for 2020 is equal to -0.2%.

That was not the only piece of bad news as the detail of the numbers is even worse than it initially appeared.

Compared to previous quarter, final consumption expenditure decreased by 0.2 per cent, gross fixed capital formation by 0.1 per cent and imports by 1.7 per cent, whereas exports increased by 0.3 per cent.

There is a small positive in exports rising in a trade war but the domestic numbers especially the fall in imports are really rather poor. If you crunch the numbers then the lower level of imports boosted GDP by 0.5% on a quarterly basis.

The long-term chart provided with the data is also rather chilling. It shows an Italian quarterly economic output which peaked at around 453 billion Euros in early 2008 which then fell to around 420 billion. So far so bad, but then it gets worse as Italy has just recorded 430.1 billion so nowhere near a recovery. All these are numbers chain-linked to 2015.

Markit Business Survey

This feels like something from a place far, far away but this is what they have reported this morning.

Italian services firms recorded a further increase in business activity during February, extending the current sequence of growth to nine months. Moreover, the expansion was the quickest since October last year, as order book volumes rose at the fastest rate for four months. Signs of improved demand led firms to take on more staff and job creation accelerated to a moderate pace.

They go further with this.

The Composite Output Index* posted 50.7 in February, up
from 50.4 in January, to signal a back-to-back expansion in
Italian private sector output. The reading signalled a modest monthly increase in business activity.

Mind you even they seem rather unsure about it all.

“Nonetheless, Italian private sector growth remains
historically subdued”

You mean a number which has been “historically subdued” is now a sort of historically subdued squared?

ECB

This is rather stuck between a rock and a hard place. It has already cut interest-rates to -0.5% and is doing some 20 billion Euros of QE bond buying a month. Thus it has little scope to respond which is presumably why there are reports it did not discuss monetary policy on its emergency conference call yesterday. In spite of that there are expectations of a cut to -0.6% at its meeting next week.

Has it come to this? ( The Streets)

As you can see this would be an example of to coin a phrase fiddling while Rome Burns. Does anybody seriously believe a 0.1% interest-rate cut would really make any difference when we have had so many much larger cuts already? Indeed if they do as CNBC has just suggested they will look even sillier as why did they not join the US Federal Reserve yesterday?

ECB and BOE expected to take immediate policy action on coronavirus impact.

Those in charge of the Euro area must so regret leaving the ECB in the hands of two politicians. No doubt it seemed clever at the time with Mario Draghi essentially setting policy for them. But now things have changed.

Fiscal Policy

This is the new toy for central bankers and there is a new Euro area vibe for this.

French Finance Minister Bruno Le Maire says the euro-area must prepare fiscal stimulus to use if the economic situation deteriorates due to the coronavirus outbreak ( Bloomberg)

That is a case of suggesting what you are doing because as we have previously noted France had a fiscal stimulus of around 1% of GDP last year. But of course back when she was the French Finance Minister Christine Lagarde was an enthusiast “shock and awe” for exactly the reverse being applied to Greece and others.

The ECB has already oiled the wheels for some fiscal expansionism by the way its QE bond buying has reduced bond yields. It could expand its monthly purchases again but would run into “trouble,trouble,trouble” in Germany and the Netherlands, pretty quickly.

Comment

If we return to a purely Italian perspective we see some of the policy elements are already in play. For example the ten-year yield is a mere 0.94% although things get more awkward as the period over which it has fallen has also seen a fall in economic growth. The fiscal policy change below is relatively minor.

Italy is planning to hike its 2020 budget deficit target to 2.4% of its GDP from 2.2% to provide the economy with the funds it needs to battle the impact of coronavirus outbreak, Reuters reported on Monday, citing senior officials familiar with the matter.

By contrast according to CNBC the Corona Virus situation continues to deteriorate.

Italy is now the worst-affected country from the coronavirus outside Asia, overtaking Iran in terms of the number of deaths and infections from the virus.

The death toll in Italy jumped to 79 on Tuesday, up from an official total of 52 on Monday. As of Wednesday morning, there are 2,502 cases of the virus in Italy, according to Italian media reports that are updated ahead of the daily official count, published by Italy’s Civil Protection Agency every evening.

Now what about a regular topic the Italian banks? From Axa.

and banks such as Unicredit and Intesa have offered “payment holidays” to some of their affected borrowers.

The ECB could be the next central bank to start buying equities

It feels like quite a week already and yet it is only Monday morning! As rumours circulated and fears grew after some pretty shocking data out of China on Sunday the Bank of Japan was limbering up for some open mouth action. Below is the statement from Governor Kuroda.

Global financial and capital markets have been unstable recently with growing uncertainties about the outlook for economic activity due to the spread of the novel coronavirus.
The Bank of Japan will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.

Actually most people were becoming much clearer about the economic impact of the Corona Virus which I will come to in a moment. You see in the language of central bankers “uncertainties” means exactly the reverse of the common usage and means they now fear a sharp downturn too. This will be a particular issue for Japan which saw its economy shrink by 1.6% in the final quarter of last year.

But there was a chaser to this cocktail which is the clear hint of what in foreign exchange markets the Bank of Japan calls “bold action” or intervention. This not only added to this from Chair Powell of the US Federal Reserve on Friday but came with more.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

As an aside if the fundamentals of the US economy were strong the statement would not be required would it?

The Kuroda Put Option

The problem for the Bank of Japan is that it was providing so much liquidity anyway as Reuters summarises.

Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and pledges to cap long-term borrowing costs around zero. It also buys government bonds and risky assets, such as ETFs, as part of its massive stimulus program.

The Reuters journalist is a bit shy at the end because the Bank of Japan has been buying equity ETFs for some time as well as smaller commercial property purchases. I have been watching and all last week apart from the public holiday on Monday they bought 70.4 billion Yen each day.

Regular readers will be aware that the Bank of Japan buys on down days in the equity market and that the clip size is as above. Or if you prefer Japan actually has an explicit Plunge Protection Team or PPT and it was active last week. This morning though Governor Kuroda went beyond open mouth operations.

BoJ Bought Japan Stock ETFs On Monday – RTRS Market Sources BoJ Normally Does Not Buy ETFs On Day TOPIX Index Is Up In Morning ( @LiveSquawk )

As you can see they have changed tactics from buying on falls to singing along with Endor.

Don’t you know pump it up
You’ve got to pump it up
Don’t you know pump it up
You’ve got to pump it up

Also there was this.

BANK OF JAPAN BOUGHT RECORD TOTAL 101.4B YEN OF ETFS TODAY ( @russian_market )

Actually about a billion was commercial property but the principle is that the Bank of Japan has increased its operations considerably as well as buying on an up day. So the Nikkei 225 index ended up 201 points at 21,344 as The Tokyo Whale felt hungry.

Coordinated action

The Bank of England has also been indulging in some open mouth operations today.

“The Bank continues to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.

The Bank is working closely with HM Treasury and the FCA – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability.” ( The Guardian)

The rumours are that interest-rate cuts will vary from 1% from the Federal Reserve to 0.5% at places like the Bank of England to 0.1% at the ECB and Swiss National Bank. The latter are more constrained because they already have negative interest-rates and frankly cutting by 0.1% just seems silly ( which I guess means that they might….)

There have already been market responses to this. For example the US ten-year Treasury Bond yield has fallen below 1.1%. The ten-year at 0.75% is a full percent below the upper end of the official US interest-rate. So the hints of interest-rate cuts are in full flow as we see Treasuries go to places we were assured by some they could not go. Oh and you can have some full number-crunching as you get your head around reports that expectations of an interest-rate cut in Australia are now over 100%

The Real Economy

China

If we switch now to hat got this central banking party started it was this. From the South China Morning Post on Saturday.

Chinese manufacturing activity plunged to an all-time low in February, with the first official data published amid the coronavirus outbreak confirming fears over the impact on the Chinese economy.

The official manufacturing purchasing managers’ index (PMI) slowed to 35.7, the National Bureau of Statistics (NBS) said on Saturday, having slipped to 50.0 in January when the full impact of the corona virus was not yet evident.

The only brief flicker of humour came from this.

Analysts polled by Bloomberg had expected the February reading to come in at 45.0.

Although you might think that manufacturing would be affected the most there was worse to come.

China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also dropped, to 29.6 from 54.1 in January. This was also the lowest on record, below the previous low of 49.7 in November 2011, according to the NBS. Analysts polled by Bloomberg had expected the February reading to come in at 50.5.

To give you an idea of scale Greece saw its PMI ( it only has a manufacturing one) fell into the mid-30s as its economic depression began. So we are now facing not only a decline in economic growth in China but actual falls. This is reinforced by stories that factories are being asked to keep machines running even if there are no workers to properly operate them to conceal the size of the slow down.

Comment

The problem for central banks is that they are already so heavily deployed on what is called extraordinary monetary policy measures. Thus their ammunition locker is depleted and in truth what they have does not work well with a supply shock anyway as I explain in the podcast below. So we can expect them to act anyway but look for new tools and the next one is already being deployed by two central banks. I have covered the Bank of Japan so step forwards the Swiss National Bank.

Total sight deposits at the SNB rose by CHF3.51bn last week… ( @nghrbi)

Adding that to last weeks foreign exchange intervention suggests it has another 1 billion Swiss Francs to invest in (mostly US) equities.

Who might be next? Well the Euro is being strong in this phase partly I think because of the fact it has less scope for interest-rate cuts and partly because of its trade surplus. Could it copy the Swiss and intervene to weaken the Euro and investing some of the Euros into equities? It would be a “soft” way of joining the party. Once the principle is established then it can expand its activities following the model it has established with other policies.

As for other central banks they will be waiting for interest-rates to hit 0% I think. After all then the money created to buy the shares will be “free money” and what can go wrong?

Podcast

 

The Bank of England has got itself in a pickle

Today is a Bank of England day of a different sort and it comes from this spoken by ones of its policymakers Gertjan Vlieghe on the 13th of this month.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

At this time this combined with a speech a day before by Bank of England Governor Mark Carney revved up expectations of a Bank Rate cut next week. What Gertjan was doing was reflecting something of a shift in the reaction function of the Bank of England for which we can look at a speech given by the absent-minded professor Ben Broadbent back in early October 2016.

But human instinct in this area isn’t always so rational. We’re prone to over-interpret noisy events, seeing
structure and determination when, very often, there isn’t any

Indeed as he tries to make the policy error he had just made look reasonable. The link is that the Bank of England panicked in response to the Markit PMIs back then. Not only did it cut it’s official interest-rate to 0.25% and add an extra £60 billion of QE it gave Forward Guidance of a further interest-rate cut to 0.1%. In case you are wondering why 0.1%? That is as low as it thinks it can go ( lower bound) because it is terrified of what a zero interest-rate would do to the creaky IT infrastructure of the UK banking sector.

In another link to the present the absent-minded professor told us this.

It’s also that many economic indicators are in general very noisy, even at the best of times.
Retail sales, for example, are estimated to have fallen by 0.2% between July and August. Is this meaningful?
Not really. The index is extremely volatile – the average monthly change in retail sales volumes is over a
percentage point – and poorly correlated with quarterly GDP, even with consumption growth specifically.

So Deputy-Governor Broadbent would apparently overlook the weak retail sales data the UK saw in December. Indeed relying on PMI data back then got him spinning around more than Kylie Minogue, and the emphasis is mine.

All that said, there’s little doubt that the economy has performed better than surveys suggested immediately
after the referendum and, although we aimed off those significantly, somewhat more strongly than our nearterm forecasts as well.

That is a laugh out loud moment as we note that they planned to cut interest-rates as much as they could and as another example were so enthusiastic about Corporate Bond QE they had to buy bonds from foreign companies such as Maersk to make up the numbers ( £10 billion).

It just got better as we were advised not to do what Ben and his colleagues just had done.

Why might that be? Well, again, one shouldn’t rush to judgement here.

Let us move on after noting that using the PMI data misled the Bank of England back then and that apparently Ben Broadbent struggles with the past as well as the present and future.

And even after the event, it may not be clear
why a particular out-turn has differed from the central prediction, in one direction or the other.

What were the numbers?

The numbers may well have had Governor Carney spilling his morning espresso ( no milk as it is bad for climate change) in surprise.

January data from the IHS Markit / CIPS Flash UK Composite PMI® highlighted a decisive change of direction for the private sector economy at the start of 2020. Business activity expanded for the first time in five months, driven by the sharpest increase in new work since September 2018.

For these times that is like the “Boom! Boom! Boom!” of the Black-Eyed Peas. Or as you can see below what may well be a Boris Bounce.

The latest reading was the highest for almost one-and-a-half years and signalled a moderate expansion of business activity across the UK private sector economy. There were widespread reports that reduced political uncertainty following the general election had a positive impact on business and consumer spending decisions at the start of the year.

Looking into the detail we see first something familiar which is service sector strength and something welcome which is an improvement in the manufacturing sector.

Service providers experienced solid increases in business
activity and incoming new work in January. Meanwhile,
the performance of the manufacturing sector stabilised in
comparison to the end of 2019, but still trailed behind the
service economy amid ongoing weakness in export markets.

This was backed up by a suggestion that the positive labour market data we looked at on Tuesday may well be continuing.

Employment numbers increased for the second month running in January, with marginal growth seen in both the manufacturing and service sectors. Additional staff hiring was supported by a sustained rebound in output growth projections for the next 12 months, with business optimism reaching its highest level since June 2015.

The latter bit seems especially hopeful but of course may turn out to be Hopium.

Maybe manufacturing has returned to stagnation which is far from ideal but much better than where we were.

Manufacturing production meanwhile fell at a much slower
pace than in December, with the latest reduction only marginal and the smallest since the current phase of decline began in June 2019.

Putting it all together we are told this.

“The survey is indicative of GDP rising at a quarterly rate of approximately 0.2% in January, representing a welcome
revival of growth after the malaise seen in the closing months of 2019. Hiring has also picked up.”

Comment

The situation is now not a little confused. The Bank of England has gone out of its way to warm financial markets up for an interest-rate cut leading to speculation about next week. For example the benchmark ten-year Gilt yield which as recently as the 10th of this month was 0.8% is now 0.59%. This new trend  has had real world effects as Henry Pryor pointed out earlier.

A 95% LTV two-year fix at 2.77% and a 90% LTV five-year fix at 2.33% are currently the lowest available on the market. @Yorkshire_BS  launches record-low first-time buyer rates.

Yet we have seen the UK economic data show signs of improvement as for example this week both the labour market numbers and the tax receipt data for December suggested this. Against that was the weak retail sales number for December but as I pointed out earlier the Bank of England has previously stated it is an erratic indicator.

So we are left with the PMI business survey which has come in a fair bit stronger both in absolute and relative terms. As it happens we are now doing around 2 points better than my subject of yesterday the Euro area and according to the PMI have some growth. This has caught expectations on the hop and left a Bank of England which has guided us to it in a pickle because I believe they have wanted to cut interest-rates for a while. It seems the UK Gilt market thinks so too because nearly 2 hours have passed since the PMI number and it has not fallen as you might expect.

There are two undercuts to this. Firstly I would not base a policy decision on a PMI business survey. They have been rather unreliable for the UK as the summer of 2016 showed and also as one is supposed to be looking up to two years ahead then January 2020 matters but not that much. Next comes the issue that an interest-rate cut from 0.75% to 0.5% will do little good in my opinion and may even make things worse. After all we have had lots of interest-rate cuts but looking at where we are suggests they have not achieved much.