Even the UK consumer can not always spend “more more more”

The issue of retail sales is one that has become a signal of our times in various ways. It has long been considered a support for economic growth especially in my home country the UK. However there are places where economics would like more of it such as in the surplus countries Germany and Japan which would then help with rebalancing world trade via higher imports. In more recent times the green agenda clearly implies lower retail sales although something which is likely to be as unpopular is that tends not to get much publicity. Finally there is the issue of the decline of the high street and the rise of online shopping. It is hard for shops to compete with companies willing to deliver even at 9 o’clock on a Sunday evening as I have observed recently.

Measuring such things is complex and let me illustrate with a story which starts well. From the US Census Bureau.

Advance estimates of U.S. retail and food services sales for December 2019, adjusted for seasonal
variation and holiday and trading-day differences, but not for price changes, were $529.6 billion, an
increase of 0.3 percent (±0.4 percent)* from the previous month, and 5.8 percent (±0.7 percent) above
December 2018

I have highlighted the bit which shows that these are turnover or nominal rather than real figures. But there is more to it than meets the eye as whilst these look good there were downwards revisions I gather which mean that the Atlanta Fed GDP Nowcast thinks this.

 After this morning’s retail sales release from the U.S. Census Bureau, the nowcast of fourth-quarter real personal consumption expenditures growth declined from 2.3 percent to 1.6 percent.

As Avril Lavigne pointed out.

Why’d you have to go and make things so complicated?

The UK

The background has been provided by the British Retail Consortium.

Total sales for 2019 decreased by 0.1%, compared with 1.2% growth in 2018. This is the worst year on record…………Taking November and December together to iron out the Black Friday distortions, Total sales declined 0.9% compared with the same period in 2018…….Taking November and December together to iron out the Black Friday distortions, Like-for-Like sales declined 1.2% compared with the same period in 2018.

This is what produced the headlines which were copied across social media that this had been the worst year for UK retail since 1995. This was not the media’s finest hour as this was plainly rubbish to anyone who has any knowledge of the official data. Let us be generous and say that such a view is true for some of the department stores and so on struggling to compete with the virtual world.

Today’s data

We have been observing a slowing of the rate of growth as 2019 had developed and this continued in December.

Comparing the three months to December 2019 against the same three months a year ago, growth in the quantity bought increased by 1.6% in December 2019, despite a strong decline of 2.2% for department stores.

Along the way we get a reminder that department stores are essentially in a depression, which is backed up by this next bit,

Online sales as a proportion of all retailing was 19.0% in December 2019, compared with the 18.6% reported in November 2019.

Actually whilst we still have annual growth if we look more recently we have moved into a decline.

Looking at the three-month on three-month growth rate, the quantity bought in retail sales has not experienced growth for three consecutive months. The three months to October 2019 remained flat, while the three months to November and December fell by 0.5% and 1.0% respectively.

Indeed and it was a case of and the beat goes on if we look at December itself.

The quantity bought in December 2019 fell by 0.6% when compared with the previous month; the fifth consecutive month of no growth.

I am not quite sure why they say/write “no growth” when there is a perfectly useful word like decline available. Anyway we get very little detail for December but do from the three-monthly detail get more of a grip about what has happened in 2019.

Declines were seen across most sectors except for household goods stores and fuel. The strong decline of 3.2% in non-store retailing was largely because of a fallback from very strong growth in the previous three months for September at 4.0%, this included large monthly growth in July of 7.3%, which was attributed to large promotions in the sector. The quantity of goods bought in non-store retailing increased on the latest month by 1.0%.

This is a sort of a doppelganger of the situation in the US we observed earlier. There we saw December misleading as the trend whereas in the UK it was the surge in July and subsequent associated fall back which has muddied the water.

Also if we widen our perspective from pure economics perhaps the pressure on providers and sellers of cheap fashion clothing is having an impact.

Clothing experienced strong declines both on the month at negative 2.0% and in the three months to December at negative 2.3%. This is the sixth consecutive month of no growth for clothing stores for the three-month on three-month movement.

Comment

The situation regarding UK Retail Sales has been “slip-sliding away” as Paul Simon put it in the latter part of 2019. Care is needed as it had previously been very strong and it cannot keep surging. Even the UK consumer must tire eventually. But there are consequences from the apparent shift and clear food for thought is provided by the fact that an already weak last quarter of 2019 will have a downwards pull on its GDP of the order of 0.05%.

That then turns eyes to Threadneeedle Street and the Bank of England which told us this earlier this week. From Monday.

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.

The Retail Sales release is likely to have him at least singing along with Prince.

She’s never satisfied (She’s never satisfied)
Why do we scream at each other
This is what it sounds like
When doves cry

In a more sophisticated world where they are supposed to look forwards they should be noting that the sentiment reports have shown a post election rally. But back in the real world they have an itchy-finger for interest-rate cuts if the summer of 2016 is any guide. Although the Governor’s focus has changed.

Mark Carney said: “It’s an honour to be supporting the Prime Minister as the UK invites almost 200 countries to Glasgow in November to address the climate threat. This COP 26 Summit will be a critical moment for climate action.”

Will they fly in so that they can tell the rest of us not to fly?

If we return to the “worst year since 1995” release then even today’s weak numbers have scotched that. The lust for clickbait so often trumps reasoning and thought.

 

 

 

 

Where next for the Japanese Yen and the Bank of Japan?

As the third most traded currency the Japanese Yen is one of the bedrocks of the world economy. In spite of the size and strength of the Japanese economy the currency tail can wag the economy dog as we saw on the period of the “Carry Trade” and its consequences. For newer readers I looked at the initial impact back on the 19th of September 2016.

 Ironically if done on a large-scale as happened back in the day with the Swiss Franc and the Japanese Yen it lowers the currency and so not only is the interest cheaper but you have a capital gain. What could go wrong? Well we will come to that. But this same effect turned out to make things uncomfortable for both Japan and Switzerland as their currencies were pushed lower and lower.

At that point borrowers were having a party as the got a cheaper borrowing rate and a currency gain but the Japanese ( and Swiss) saw their currency being depressed. However the credit crunch ended that party as currency traders saw the risk and that people might buy Yen to cover the risk. Thus there was a combination of speculative and actual buying which saw the Yen strengthen from over 120 Yen to the US Dollar to below 80.

There were various impacts from this and starting in Japan life became difficult for its exporters and some sent production abroad as the mulled an exchange rate of around 78 to the US Dollar. For example some shifted production to Thailand. Looking wider the investors who remained in the carry trade shifted from profit to loss. On this road in generic terms the typical Japanese investor often described as Mrs. Watanabe was having a rough patch as in Yen terms their investments went being hit. Actually that is something of a generic over my career for Mrs Watanabe as timing of investments in say UK Gilts or Australian property has often been poor. Of course as it turns out property in Oz did work but you would have needed plenty of patience.

Enter the Bank of Japan

The next phase was a type of enter the dragon as the Bank of Japan in 2013 embarked on an extraordinary monetary stimulus programme. Under the banner of Abenomics that was designed to weaken the Yen although it was not officially one of the 3 arrows it was supposed to fire. For a while this worked as the Yen fell towards 125 to the US Dollar. But just as economics 101 felt it could celebrate a rare triumph the Yen then strengthened again and actually rallied to 101 in spite of negative interest-rates being deployed  leading to yet another new effort called QQE and Yield Curve Control in September 2016.

So we see that Japan had some success in weakening the Yen but that then ended and even with negative interest-rates and the purchases by the Bank of Japan below there was a fizzling out of any impact.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

But you see these things have unintended consequences as Brad Setser points out below.

Japanese investors have been big buyers of foreign bonds—and U.S. bonds in particular. The lifers, the Japanese government through the government pension fund (GPIF), the Japanese government through Post Bank (which takes in deposits and cannot make loans so it buys foreign bonds since it cannot make money buying JGBs), and Norinchukin*

So a policy to weaken the Yen has a side-effect of strengthening it and even worse makes the global financial system more risky. Back to Brad.

In broad terms, a number of Japanese financial institutions have become, in part, dollar based intermediaries. They borrow dollars from U.S. money market funds, U.S. banks, and increasingly the world’s large reserve managers (all of whom want to hold short-term dollar claims for liquidity reasons) and invest in longer dated U.S. bonds.

What about now?

Things are rather different to this time last year when we were trying to figure out what had caused this?

The Japanese yen soared in early Asian trading on Thursday as the break of key technical levels triggered massive stop-loss sales of the U.S. and Australian dollars in very thin markets. The dollar collapsed to as low as 105.25 yen on Reuters dealing JPY=D3, a drop of 3.2 percent from the opening 108.76 and the lowest reading since March 2018. It was last trading around 107.50 yen………. ( Reuters )

That was from January 3rd whereas overnight we see this.

The major was trading 0.1 percent up at 110.09, having hit a high of 110.21 earlier, its highest since May 23.  ( EconoTimes )

On its own this may seen the Governor of the Bank of Japan have a quiet smile and a celebratory glass of sake. But falls in the Yen are associated with something else which will please the head of The Tokyo Whale.

TOKYO (Kyodo) — Tokyo stocks rose Tuesday, with the benchmark Nikkei index ending above 24,000 for the first time since mid-December, as investor sentiment improved on expectations for further easing of U.S.-China trade tensions. ( The Mainichi)

The Mainichi seems to have missed the currency connection with this but no doubt Governor Kuroda   will be pointing out both thresholds to Prime Minister Shinzo Abe.

Has something changed?

On Monday JP Morgan thought so. Via Forex Flow.

But because in recent years the yen is no longer being sold off in the first place, it is not acting as much like a safe-haven currency as in the past.

Okay so why?

if interest rates increase in other countries (opening a wider gap with rates in Japan)

Well good luck with that one! Maybe some day but the credit crunch era has seen 733 interest-rate cuts. However the Financial Times has joined in.

First, Japan is running trade deficits, which would imply a weaker currency. Second, domestic asset managers are busy buying higher-yielding foreign assets. Third, Japanese companies, confronting a chronic shortage of decent ways to deploy their capital at home, are increasingly spending it on deals overseas.

The last point is a really rather devastating critique of the six years of Abenomics as one of the stated Arrows was for exactly the opposite. Also there us more trouble for economics 101 as a lower Yen has seen a trade surplus switch to a deficit. Actually I think that responses to exchange rate moves can be very slow and measured in years so with all the ch-ch-changes it is hard to know what move is in play.

Comment

There is much to reflect on here. For example today may be one to raise a smile at the Bank of Japan as it calculates the value of its large equity holdings and sees the Yen weaken across a threshold. But it is also true that exactly the same policies saw the “flash rally” of over a year ago. In addition we see that the enormous effort in play to weaken the Yen has seen compensating side-effects which raise the risk level in the international finance system. Really rather like the Carry Trade did.

A warning is required because in the short-term crossing a threshold like 110 Yen sees a reversal but we could see the Yen weaken for a while. This is problematic with so many others wanting to devalue their currency as well with the Bank of England currently in the van. From a Japanese perspective this will be see as a gain against a nation they have all sorts of issues with.

“China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability,” US Treasury Secretary, Steven Mnuchin, said.

President Donald Trump has repeatedly accused China of allowing the value of the yuan to fall, making Chinese goods cheaper.

But, on Monday, the US said that the value of the yuan had appreciated since August, at the height of the trade war. ( BBC )

How will that play out?

 

 

 

The Bank of England gets ready for another cut interest-rate cut

Yesterday saw Bank of England Governor Mark Carney in full flow at the Bank of England itself in a type of last hurrah. I am grateful to him for being kind enough to exhibit at least 4 of the themes of this blog in one go! That is quite an achievement even for him. I will start by looking at something of a swerve which was introduced by the then Chancellor George Osborne and it has never received the prominence I think it deserves.

A major improvement to the inflation targeting framework itself was to confirm explicitly beginning with the
2013 remit that the MPC is required to have regard to trade-offs between keeping inflation at the target and
avoiding undesirably volatility in output. In other words, the MPC can use the full flexibility of inflation
targeting in the face of exceptionally large shocks to return inflation to target in a manner that provides as
much support as possible to employment and growth or, if necessary, promotes financial stability.

I make the point because you could argue from that date the Bank of England was acknowledging that its priority was no longer inflation targeting. Some of this was accepting reality as back in 2010 it had “looked through” inflation over 5%. To be more specific it is now concerned about inflation under target but much less so if it is above it. This is confirmed in the speech in part of the section on the period after the EU Leave vote.

Inflation rose well above the 2% target, eventually peaking at 3.1% in late 2017, an overshoot entirely due to
the referendum-induced fall in sterling.
UK growth dropped from the fastest to the slowest in the G7.

He cut interest-rates in this period in spite of the fact that the lower UK Pound £ meant that inflation would go in his words well above the 2% target. Actually tucked away on the speech is something of a confession of this.

In the wake of the referendum, the MPC’s
aggressive monetary easing, despite a sharply depreciating currency and rising inflation,

The Unreliable Boyfriend

It seems he cannot escape behaving like this and this week he has given us a classic example. We only need to go back to Wednesday for this.

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

Yet a mere 24 hours or so later things were really rather different.

Of course, the effectiveness of unconventional policies means that there is considerable total policy space.
In the UK, the MPC can increase its purchases of both gilts and corporate bonds, providing stimulus through
a number of channels including portfolio rebalancing……..All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.

Glen Campbell must be a bit disappointed as he famously took 24 hours to get to Tulsa whereas Governor Carney has managed the road to Damascus in the same time. Perhaps the new Governor Andrew Bailey had been on the phone. Anyway however you spin it “running out of ammunition” morphed into “considerable total policy space”.

Cutting Interest-Rates

Regular readers will be aware that I have been suggesting for a while now that the next move from the Bank of England will be to return us to a 0.5% Bank Rate. This was regarded as an emergency official interest-rate at the time but as so often language has been twisted and manipulated as it turned out to be long-lasting. I will discuss Forward Guidance in detail in a moment but for the moment let us just remind ourselves that Mark Carney has regularly promised interest-rate rises during his Governorship. Whereas yesterday we were given a hint of another U-Turn.

This rebound is not, of course, assured. The economy has been sluggish, slack has been growing, and
inflation is below target. Much hinges on the speed with which domestic confidence returns. As is entirely
appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the
expected recovery in UK growth and inflation.

For newer readers central bankers speak in their own language and in it this is a clear hint of what is on its way.

Forward Guidance

The Governor cannot avoid a move which backfired rather quickly in his term.

The message the Committee gave UK households and businesses was simple: the MPC would not even
think about tightening policy at least until the unemployment rate had fallen below 7%, consistent with the creation of around three quarter of a million jobs.

The simple sentence below must have stung as he wrote it and later spoke it.

In the event, the unemployment rate fell far faster than the MPC had expected, falling below 7% in February
2014.

I will spare you the re-writing of history that the Governor indulges in but he cannot avoid confirming another issue I have raised many times.

As part of these exercises, the MPC revised down its (hitherto private) estimate of equilibrium unemployment rate from 6½% in August 2013 to 5½% in August 2014,

Actually the “hitherto private” claim is not true either as we knew. Also the equilibrium unemployment rather according to the Bank of England continued to fall and is now 4.25%. Thus as a concept it is effectively meaningless not only because it became a laughing stock but it’s use as an anchor was undermined by all the changes.

Anyway as we approach the end of the week it is opportune to have some humour, at least I hope this is humour.

 People understood the conditionality of guidance, as they and the MPC had learnt that there was still considerable
spare capacity in the economy.

I do love the idea that the (wo)man on the Clapham Omnibus had any idea of this! For a start it would have left them better informed than the Governor himself.

Inflation Targeting

I have argued many times that it needs reform and a major part of this should be to realise the influence of asset prices both pre and post credit crunch. On that road house prices need to go into the consumer inflation measure.

But apparently things have gone rather well.

This performance underscores that the bar for changing the regime is high.

I am not sure where to start with this.

Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.

After all the Bank of England’s own survey told us this only last month.

 Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.6%, up from 3.1% in August.

Comment

We can continue the humour with some number crunching Mark Carney style.

At present, there is sufficient headroom to at least
double the August 2016 package of £60 billion asset purchases, a number that will increase with further gilt
issuance. That would deliver the equivalent of around a 100 basis point cut to Bank Rate on top of the near
75 basis points of conventional policy space. Forward guidance at the ELB adds to this armoury. All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.

So if 1% is from QE and 0.65% from an interest-rate cut to his “lower bound” of 0.1% then that means he is claiming that Forward Guidance can deliver the equivalent of 0.85% of interest-rate cuts. That really is something from beyond even the outer limits of credibility. Oh and I have no idea why he says “near 75 basis points of conventional policy space” when it is 0.65%.

As I have been writing this article a fifth theme of mine has been in evidence which is that these days Monetary Policy Committee members only seem to exist to say ” I agree with Mark”.

“If uncertainty over the future trading arrangement or subdued global growth continued to weigh on UK demand then my inclination is towards voting for a cut in bank rate in the near term,” she says. ( The Guardian)

That is Silvano Tenreyro who has rushed to be in line and it is especially disappointing as she is an external member. It is the internal members that have historically been the Governor’s lapdogs.

Has there been a more unreliable boyfriend than Mark Carney?

After looking this week at the trend toward negative interest-rates and the establishment lust for higher inflation today we can take a look at some of the case for their defence. It comes from Bank of England Governor Mark Carney and he will be relaxed as he has been able to do so in its house journal the Financial Times. Although I note that even it does not label him as a “rock star” central banker anymore and there does not seem to be any mention of film star good looks. Mind you film stars I guess are not what they were after this from Stella McCartney after the Golden Globes.

This man is a winner… wearing custom Stella because he chooses to make choices for the future of the planet. He has also chosen to wear this same Tux for the entire award season to reduce waste. I am proud to join forces with you… x Stella #JoaquinPhoenix
#GoldenGlobes

Saving the planet one tux at a time.

Monetary Policy

Governor Carney opens with this.

The global economy is heading towards a “liquidity trap” that would undermine central banks’ efforts to avoid a future recession, according to Mark Carney, governor of the Bank of England.

As ever he is trying to lay a smoke screen over reality so let us break this down. Actually we have been in a type of “liquidity trap” for quite some time now. A major driver of it has in fact been central banking terror of a future recession which means that zombie companies and especially banks have been propped up. There has been little or none of the “creative destruction” of Josef Schumpeter where capitalism clears up many of its failures. Bad at the time but it also provides some of the fertile ground for new companies and growth. The deflection element is that by claiming a liquidity trip is in the future it deflects from his role in where we are now.

Er, who fired the ammunition?

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

If we look at it we see that if we just look at interest-rates there is 0.65% left according to Governor Carney. That is the current 0.75% Bank Rate to his view of the lower bound which was 0.5% but is now 0.1%. Sadly he is not challenged on this allowing him to imply this is a worldwide problem.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” he said.

An opportunity was missed here to expose the Governor’s rather odd thinking. The blanket view that there is less ammunition has sub-plots. For example the European Central Bank or ECB has an interest-rate of -0.5% and considered -0.6% and yesterday we looked at the Swiss National Bank with its -0.75% official interest-rate. So suddenly we have up to an extra 0.85% compared to his “lower bound”. Also the ECB and SNB could cut further.

I am not sure the explanation about a liquidity trap helps much as it describes a situation we have been in for some time.

A liquidity trap occurs on the rare occasions when monetary policy loses all effectiveness to manage economic swings and looser policy does not encourage any additional spending.

Somehow the editor of the FT Lionel Barber and its economics editor Chris Giles seem to have missed that the credit crunch era has seem many examples of a liquidity trap as highlighted by the use of “rare occasions”

Alternatives

Is there any other sphere where people who have asked for tools used them far more than expected but with little success would be given even more powers?

That meant there was a need to look for supplements to monetary tools, including interest rate cuts, quantitative easing and guidance on future interest rates, he said. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space.”

It is nice that the FT below confirms the central banking group think or if you prefer they borrow the same brain cell.

Mr Carney echoed other central bankers, such as the European Central Bank’s Mario Draghi and his successor, Christine Lagarde, in recommending that governments consider fiscal policy tools, such as tax cuts or public spending increases when tackling a downturn. However, he accepted “it’s not [central bankers’] job to do fiscal policy”.

Also this is something that Paloma Faith sang about.

I’ll tell you what (I’ll tell you what)
What I have found (what I have found)
That I’m no fool (that I’m no fool)
I’m just upside down (just upside down)

Central banks were supposed to be independent and run monetary policy yet a confession of failure seems to make them think they can tell elected politicians what to do. I would call it mission creep but it is more of a leap than a creep.

But I’m a creep, I’m a weirdo
What the hell am I doing here?
I don’t belong here
I don’t belong here ( Radiohead )

Mind you the unreliable boyfriend seems to be having doubts about his commitment to his own statement.

The governor said monetary policy was not yet a spent force internationally, with US and eurozone interest rate cuts last year encouraging borrowing and spending. “We’re starting to see that stimulus flow to the global economy.”

Indeed suddenly we find that his successor has loads of room.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

“The Precious! The Precious!”

Oh and weren’t we raising the banks capital requirements to make the system safer? The unreliable boyfriend does seem to enjoy a U-Turn.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

Being the FT the failures of his initial period of tenure get skated by.

Demand returned in 2013, just as he took up his position.

The 7% unemployment rate debacle gets a new spin.

how many people could be employed without inflation

I am sure that readers think it is really unfair that the Bank of England had to deal with a changing situation.

The monetary policy committee also had to grapple with structural difficulties

I like the use of “grapple” to describe confusion and inertia as it would be hard to be more misleading. The reality is that the chance to raise interest-rates around 2014 was missed and the boat sailed with the Governor still on the shore dithering over whether to buy a ticket.

Comment

It is perhaps most revealing that the Governor sets out the challenges for the Bank of England without mentioning monetary policy at all.

Amid these economic uncertainties, the main task of the BoE, according to the governor, was to finish core reforms to the global financial system and react appropriately to the political upheavals of the Scottish and Brexit referendums and the challenges of climate change. Mr Carney insists that rather than be too political, as his predecessor Mervyn King has suggested, the BoE had to get involved because it now had a duty to preserve financial stability.

Also there seems to be some form of amnesia about the fact that Governor Carney got into trouble for playing politics when he was at the Bank of Canada.

But frustrations of UK life in the crosshairs of polarised political debate will also haunt him in the search of a new job. “This role is just much more public than the same role in Canada,” said Mr Carney.

Oh and did I mention mission creep?

But he was clear that the financial sector could not mitigate global warming alone and without wider agreements to limit global warming and action to enforce targets.

The Investing Channel

Will the US deploy negative interest-rates?

On Saturday economists  gathered to listen to the former Chair of the US Federal Reserve Ben Bernanke speak on monetary policy in San Diego. This is because those who used to run the Federal Reserve can say things the present incumbent cannot. So let me get straight to the crux of the matter.

The Fed should also consider maintaining constructive ambiguity about the future use of negative short-term rates, both because situations could arise in which negative short-term rates would provide useful policy space; and because entirely ruling out negative short rates, by creating an effective floor for long-term rates as well, could limit the Fed’s future ability to reduce longer-term rates by QE or other means.

It is no great surprise to see a central banker suggesting that the truth will be withheld. But let us note that he is talking about “policy space” in a situation described by the New York Times like this.

While the economy has recovered and unemployment has fallen to a 50-year low, interest rates have not returned to precrisis levels. Currently, the policy interest rate is set at 1.5 percent to 1.75 percent, leaving far less room to cut in the next crisis.

The apparent need for ever lower interest-rates looks ever more like an addiction of some sort for these central planners. Although as ever they are try to claim that it has in fact been forced upon them.

Since the 1980s, interest rates around the world have trended downward, reflecting lower inflation, demographic and technological forces that have increased desired global saving relative to desired investment, and other factors.

As we so often find the truth is merged with more dubious implications. Yes interest-rates and bond yields did trend lower and let me add something Ben did not say. There were economic gains from this period as for example I remember  mortgage rates in the UK being in double-digits. Also higher rates of inflation caused economic problems and it is easy to forget it caused a lot of problems back then. Younger readers probably find the concept of wage-price spirals as something almost unreal but they were very real back then. Yet Ben seems to want to put a smokescreen over this.

Another way to gain policy space is to increase the Fed’s inflation target, which would eventually raise the nominal neutral interest rate as well.

Curious as they used to tell us interest-rates drove inflation, now they are trying to claim it is the other way around! Are people allowed to get away with this sort of thing in other spheres?

Is there a neutral interest-rate?

Ben seems to think so.

The neutral interest rate is the interest rate consistent with full employment and inflation at target in the long run.  On average, at the neutral interest rate monetary policy is neither expansionary nor contractionary. Most current estimates of the nominal neutral rate for the United States are in the range of 2-3 percent.

The first sentence is ridden with more holes than a Swiss cheese which is quite an achievement considering its brevity. If we ever thought that we were sure what full employment is/was the credit crunch era has hit that for six ( for those who do not follow cricket to get 6 the ball is hit out of the playing area). For example the unemployment rate in Japan is a mere 2.2% so well below “full” but there is essentially no real wage growth rather than it surging as economics 101 text books would suggest. Putting it another way in spite of what is apparently more than full employment real wages may well have ended 2019 exactly where they were in 2015.

This is an important point as it was a foundation of economic theory as the “output gap” concept shifted from output (GDP) to the labour market when they did not get the answers they wanted. Only for the labour market to torpedo the concept and as you can see above it was not just one torpedo as it fired a full spread. Yet so many Ivory Towers persist with things accurately described by Ivan van Dahl.

Please tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high?

Quantitative Easing

Ben is rather keen on this but then as he did so much of it he has little choice in the matter.

Quantitative easing works through two principal channels: by reducing the net supply of longer-term assets, which increases their prices and lower their yields; and by signaling policymakers’ intention to keep short rates low for an extended period. Both channels helped ease financial conditions in the post-crisis era.

Could there be a more biased observer? I also note that there seems to be a titbit thrown in for politicians.

The risk of capital losses on the Fed’s portfolio was never high, but in the event, over the past decade the Fed has remitted more than $800 billion in profits to the Treasury, triple the pre-crisis rate.

A nice gift except and feel free to correct me if I am wrong there is still around US $4 trillion of QE out there. So how can the risk of losses be in the past tense with “was”? It is one of the confidence tricks of out era that establishments have been able to borrow off themselves and then declare a profit on it hasn’t it?

Ben seems to have an issue here though. So by buying trillions of something you increase the supply?

and increases the supply of safe, liquid assets.

Forward Guidance

I do sometimes wonder if this is some form of deep satire Monty Python style.

 Forward guidance helps the public understand how policymakers will respond to changes in the economic outlook and allows policymakers to commit to “lower-for-longer” rate policies. Such policies, by convincing market participants that policymakers will delay rate increases even as the economy strengthens, can help to ease financial conditions and provide economic stimulus today.

Another way of looking at it is that it has been and indeed is an ego trip. The  majority of the population will not know what it is and in the case of my country that is for the best as the Bank of England misled by promising interest-rate rises and then cutting them. Sadly some did seem to listen as more fixed-rate mortgages were incepted just before they got cheaper. So we see that if we return to the real world the track record of Forward Guidance makes people less and not more likely to listen to it. After all who expects and sustained rises in interest-rates anyway?

Comment

These speeches are useful as they give us a guide to what central bankers are really thinking. It does not matter if you consider them to be pack animals or like the large Amoeba that tries to eat the Starship Enterprise in an early episode of Star Trek as the result is the same. This will be what they in general think.

When the nominal neutral rate is in the range of 2-3 percent, then the simulations suggest that this combination of new policy tools can provide the equivalent of 3 percentage points of additional policy space; that is, with the help of QE and forward guidance, policy performs about as well as traditional policies would when the nominal neutral rate is 5-6 percent. In the simulations, the 3 percentage point increase in policy space largely offsets the effects of the zero lower bound on short-term rates.

Actually if we look at the middle-section “traditional policies” did not work but I guess he is hoping no-one will point that out. If they did we would not be where we are! Also you may not that as I have often found myself pointing out why do we always need more of the same!

Still if you believe the research of the Bank of England interest-rates have been falling for centuries. Does this mean that to coin a phrase they have been doing “God’s work” in the credit crunch era?

global real rates have shown a
persistent downward trend over the past five centuries, declining within a corridor of between -0.9 (safe
asset provider basis) and -1.59 basis points (global basis) per annum, with the former displaying a
continuous decline since the deep monetary crises of the late medieval “Bullion Famine”. This downward
trend has persisted throughout the historical gold, silver, mixed bullion, and fiat monetary regimes, is
visible across various asset classes, and long preceded the emergence of modern central banks.

The catch is that if you are saying events have driven things people might start to wonder what your purpose it at all?

Podcast

 

The problems faced by the QE era make me wonder if QT is a mirage

If we were to step back in time to when the new QE era began around a decade ago we would not find any central bankers expecting us to be where we are now. In a way that is summarised by the fact that the original QE pamphlet of the Bank of England from the Charlie Bean tour of the summer of 2009 has a not found at this address description on the website these days. Or if we look back this speech from policymaker David Miles finishes like this.

Concluding, David Miles says that quantitative easing will assist spending but also notes it is hard to decide
what the “.appropriate scale of purchases is when the power of the mechanisms at work are difficult to
gauge.” He also notes that the timing and means of reversing this monetary easing will “.depend on the
economic outlook, which in turn depends on conditions in financial markets in general and with banks in
particular.

As to the reversing we are still waiting as all we have had is “More! More! More!” as we note that despite record highs for equity and bond markets financial market conditions are apparently still not good enough.

Switching to the real economy we see that in fact we are back in something of a trough right now. We discovered yesterday that the UK is flat lining and we know the Euro area is similar and the United States has been slowing down as well.

The New York Fed Staff Nowcast stands at 0.6% for 2019:Q4 and 0.7% for 2020:Q1. ( the numbers are annualised )

To that we can add Japan which faces the impact of the rise in the Consumption Tax to 10% this quarter.

Next and in some ways most revealingly is the way that QE has acquired a new name. In Japan it has morphed into QQE or Quantitative and Qualitative Easing at the time purchases of equities and commercial property began. Since then it has become QQE with Yield Curve Control. We await to see if the review being conducted by President Lagarde leads to changes at the ECB but we do know this about the US Federal Reserve. From CNBC on the 8th of October.

Powell stressed the approach shouldn’t be confused with the quantitative easing done during and after the financial crisis.

“This is not QE. In no sense is this QE,” he said in a question and answer session after the speech.

The reality is that it fulfils the description of David Miles above in the case of the Treasury Bill purchases with the difference that they have a shorter maturity, although of course back then QE was not meant to be long-term.

The Bank of England looks ahead

Last night Andrew Hauser who is the Executive Director looked at the state of play.

Before the financial crisis, our balance sheet was modest, at 4% of GDP. Since then, and in direct response to the
crisis, that figure has risen to around 30%: a more than seven-fold increase.

He then looks ahead and point one covers a lot of ground to say the least.

The first is that, judged by historical standards, big
balance sheets are here to stay. That’s not a prediction that QE will never unwind: it will. But we have a
bigger responsibility than we did to provide liquidity to the system, in good times and bad, and to a wider set
of organisations, to maintain financial stability. And that’s not going away.

It was nice of him to give us a good laugh about it being permanent! At least I hope he was joking. The liquidity mention doffs it cap to some extent to the mess that the US Federal Reserve has got itself into as well as the fact that changes to the structure of the system such as banks being required to have more capital have put increased pressure on this area.

The next point meanders a bit but we eventually get to an estimate of circa £200 billion for a QT target or objective,

Point two is that big doesn’t mean outsized – so the balance sheet will eventually shrink from where it is today. That’s something the Bank has been stressing for some time. But the Discussion Paper has allowed us to put a tighter range on that forecast, and suggests our liabilities probably only need to be half the size they are today to carry out our
mission once QT is underway/

Ah “eventually!” Also some would think the sort of sum he is thinking of is indeed outsized.

Point three contains some welcome honesty.

Neither we nor the firms who use our liquidity really know what their demand will be when conditions normalise.

Finally we have this

The final message, therefore, is that we must have as our ultimate goal an end-state framework that can cope with
that ambiguity without shaking itself, and us, to bits.

How Much?

The Bank of England balance sheet is more than just QE

Three quarters of the Bank’s assets is in the form of a loan to the Asset Purchase Facility backing £435bn of
gilt holdings and £10bn of corporate bonds, while another £127bn has been lent to banks under the
Term Funding Scheme. A further £13bn of liquidity has been extended under the so-called
‘Index Linked Term Repo’ facility, part of the Sterling Monetary Framework (SMF).
Nearly all of that activity has been financed by an increase in central bank reserves.

He does not point it out but this structure led to another consequence which is that the Term Funding Scheme (and some smaller factors) adds to the official definition of the national debt raising it by around 8% of GDP.

Hard Astern Captain

I have long considered the Bank of England course reversal plan to be unwise and perhaps stupid.

First, the MPC does not intend to begin QT until Bank Rate has risen to a level from which it could
be cut materially if required. The MPC currently judges that to be around 1.5%.

– Second, QT will be conducted over a number of years at a gradual and predictable pace, chosen by
the MPC in light of economic and financial market conditions at the time.

– Third, the QT path will take account of the need to maintain the orderly functioning of the gilt and
corporate bond markets including through liaison with the Debt Management Office.

– And, fourth, the QT path can be amended or reversed as required to achieve the inflation target.

 

Comment

Frankly the very concept of the Bank of England raising interest-rates as high as 1.5% is laughable under the present stewardship. I have long thought that the plan as described above demonstrates that there is no real intention to reverse QE. There are former policymakers who explicitly endorse this such as David Blanchflower. But there are also implicit issues such as waiting for yields to rise and prices to fall as well as thinking there can be an “orderly market” when the biggest holder sells. When you intervene in a market on such a large scale there is always going to be trouble exiting. One answer to that is to not get too exposed in the first place and to me selling when others might be selling because of losses as well is classic Ivory Tower thinking.

None of that is Andrew Hausers fault as he is in this regard merely a humble functionary. So we shuld thank him for his thoughts that even if QE somehow was teleported away things would still be different.

Bringing all this together, our conversations with firms suggest the current sterling PMRR is of the
order of £150-250bn.

Meanwhile if Livesquawk are correct Switzerland might be adding more not less extraordinary monetary action. Also the original reason was external ( Swiss Franc) whereas now it seems to have spread.

Oxley said, “There is good reason to take the SNB’s forecasts seriously: it has not tended to change its policy stance in the past unless its inflation forecast foresees deflation at some point over its three-year horizon. If the bank crosses the deflationary Rubicon again, this would lend support to our below-consensus view that the bank will end up cutting the policy rate to -1.00pct in the first half of 2020.”

 

 

 

Is the Bundesbank still sure that Germany is not facing a recession?

The year so far has seen a development which has changed the economic debate especially in Europe.This is the malaise affecting the German economy which for so long has been lauded. This continued in 2017 which saw quarterly GDP growth of 1.2%, 0.6%, 0.9% and 0.7% giving the impression that it had returned to what had in the past been regarded as normal service. However before the trade war was a glint in President Trump’s eye and indeed before the ECB QE programme stopped things changed. As I have pointed out previously we did not know this at the time because it is only after more recent revisions that we knew 2018 opened with 0.1% and then 0.4% rather changing the theme and meaning that the subsequent -0.1% would have been less of a shock. We can put the whole situation in perspective by noting that German GDP was 106.04 at the end of 2017 and was 107.03 at the end of the third quarter this year. As Talking Heads would put it.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride

Industrial Production

This has been a troubled area for some time as regular readers will be aware. Throughout it we have seen many in social media claim that in the detail they can see reasons for an improvement, whereas in fact things have headed further south. This morning has produced another really bad number. .

WIESBADEN – In October 2019, production in industry was down by 1.7% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In September 2019, the corrected figure shows a decrease of 0.6% from August 2019, thus confirming the provisional result published in the previous month.

If we look at the breakdown we see that the future is not bright according to those producing capital goods.

Within industry, the production of intermediate goods increased by 1.0% and the production of consumer goods by 0.3%. The production of capital goods showed a decrease by 4.4%. Outside industry, energy production was up by 2.3% in October 2019 and the production in construction decreased by 2.8%.

There is a flicker of hope from intermediate goods but consumer goods fell. There is an additional dampener from the construction data as well.

Moving to the index we see that the index set at 100 in 2015 is at 99.4 so we are seeing a decline especially compared to the peak of 107.8 in May last year. If we exclude construction from the data set the position is even worse as the index is at 97.6.

The annual comparison just compounds the gloom.

-5.3% on the same month a year earlier (price and calendar adjusted)

Looking Ahead

Yesterday also saw bad news on the orders front.

WIESBADEN – Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in October 2019 a seasonally and calendar adjusted 0.4% on the previous month.

This was a contrast to a hint of an uptick in the previous month.

For September 2019, revision of the preliminary outcome resulted in an increase of 1.5% compared with August 2019 (provisional: +1.3%).

If we peer into the October detail we see that this time around the problem was domestic rather than external.

Domestic orders decreased by 3.2% and foreign orders rose 1.5% in October 2019 on the previous month. New orders from the euro area were up 11.1%, new orders from other countries decreased 4.1% compared to September 2019.

The oddity here is the surge in orders from the rest of the Euro area when we are expecting economic growth there to be very flat. If we switch to Monday’s Markit PMI then there was no sign of anything like it.

At the aggregate eurozone level, ongoing declines in
output and new orders were again recorded.

Indeed ICIS reported this in October based on the Markit survey.

Sharp declines in order book volumes weighed on operating conditions during the month, concentrated on intermediate goods producers, while consumer goods makers saw significantly milder levels of deterioration.

If we look back we see that this series has turned out to be a very good leading indicator as the peak was in November 2017 at 108.9 where 2015 = 100. Also we see that in fact it is domestic orders which have slumped the most arguing a bit against the claim that all of this is trade war driven.

The annual picture is below.

-5.5% on the same month a year earlier (price and calendar adjusted)

Monetary Policy

This has remained extraordinarily easy but does not appear to have made any difference at all. The turn in production took place when ECB QE was still going full steam ahead for example. Indeed even those who voted for such measures seem to have lost the faith as this from yesterday’s twitter output from former Vice-president Vitor Constancio suggests.

In 2014 when the main policy rate reached zero, keeping a corridor implied a negative deposit rate. There was then a risk of deflation and it was supposed to be a temporary tool.Since last year I have been tweeting against going to deeper negative rates.

A welcome realisation but it is too late for him to change policy now.

The problem for monetary policy is that with the German ten-year yield being -0.3% and the official deposit rate being -0.5% what more can be done? It all has the feeling of the famous phrase from Newt in the film Aliens.

It wont make any difference

Fiscal Policy

The policy was explained by Reuters in late October.

Eurostat said Germany’s revenues last year exceeded expenses by more than previously estimated, allowing Berlin to post a budget surplus of 1.9% of its output, above the 1.7% that Eurostat had calculated in April.

That has been the state of play for several years now and the spending increases for next year may not change that much.

The total German state budget for next year is to be €362 billion ($399 billion), €5.6 billion more than is being spent this year. ( DW )

Although further down in the article it seems that the change may be somewhat limited.

As in previous years, and following the example of his conservative predecessor, the Social Democrat Finance Minister Scholz has pledged not to take on any more debt – maintaining Germany’s commitment to the so-called “black zero”: a balanced budget.

Some more spending may have an implicit effect on the industrial production numbers. Indeed defence spending can have a direct impact should orders by forthcoming for new frigates or tanks.

Yesterday FAZ reported that this fiscal year was more or less the same as the last.

German state is facing a significant surplus this year. All in all, revenues will exceed spending by around 50 billion euros. This is apparent from an internal template for the Stability Council meeting on 13 December. It contains the information on the state’s net lending of between € 49.5 and 56.5 billion.

Comment

There is a case here of living by the sword and perhaps then dying by it as it is what has been considered a great success for Germany which has hit the buffers last year then this. The manufacturing sector is around 23% of the economy and so the production figures have a large impact. October is only the first month of three but such weak numbers for an important area pose a question for GDP in the quarter as a whole? Rather awkwardly pay rates seem to have risen into the decline.

The third quarter saw an exceptionally strong
increase in negotiated pay rates. Including additional benefits, these rates rose year-on-year
by 4.2% in the third quarter of 2019, compared
with 2.1% in 2018. This temporary, considerably higher growth rate was mainly due to new
special payments in the metal-working and
electrical engineering industries, which had
been agreed last year and were first due in July
2019.

Before we knew the more recent data the Bundesbank was telling us this.

The slowdown of the German economy will
probably continue in the fourth quarter of
2019. However, it is not likely to intensify markedly. As things currently stand, overall economic output could more or less stagnate.
Thus, the economy would largely tread water
again in the second half of this year as a whole.

Then they left what is now looking like a hostage to fortune.

However, from today’s vantage point, there is
no reason to fear that Germany will slide into recession.