What next for the Bank of England?

Today is what used to be called Super Thursday for the Bank of England. It was one of the “improvements” of the current Governor Mark Carney which have turned out to be anything but. However he is not finished yet.

Starting on 7 November, the Bank of England Inflation Report is to become the Monetary Policy Report. The Report is also to undergo some changes to its structure and content.

These changes are part of the Bank’s ongoing efforts to improve its communications and ensure that those outside the institution have the information they need in order to understand our policy decisions and to hold us to account.

Really why is this?

The very latest changes represent the next step in the evolution of our communications.

I suppose when you tell people you are going to raise interest-rates and then end up cutting them you communication does need to evolve!

Communication let me down,
And I’m left here
Communication let me down,
And I’m left here, I’m left here again! ( Spandau Ballet )

The London Whale

There was so news this morning to attract the attention of a hedge fund which holds some £435 billion of UK Gilt securities as well as a clear implication for its £10 billion of Corporate Bonds. From the Financial Times.

Pimco, one of the world’s largest bond investors, is giving UK government debt a wide berth, reflecting concerns that a post-election borrowing binge promised by all the major political parties could add to pressure on prices. Andrew Balls, Pimco’s chief investment officer for global fixed income, said the measly yields on offer from gilts already makes them one of Pimco’s “least favourite” markets. The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive, he said, forecasting that the cost of UK government borrowing would rise.

Yes Andrew Balls is the brother of Ed and he went further.

“Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight,” he told the Financial Times.

Actually pretty much every bond market looks like that at the moment. Also as I pointed out only yesterday bond markets have retraced a bit recently.

The cost of financing UK government debt has been rising over the past month. The 10-year gilt yield has reached 0.76 per cent, from 0.42 per cent in early October. That remains unattractive compared with the 1.84 per cent yield available on the equivalent US government bond, according to Mr Balls,

Mind you there is a double-play here which goes as follows. If you were a large holder of Gilts you might be pleased that Pimco are bearish because before one of the biggest rallies of all time they told us this.

Bond king Bill Gross has highlighted the countries investors should be wary of in 2010, singling out the UK in particular as a ‘must avoid’, with its gilts resting ‘on a bed of nitroglycerine.’ ( CityWire in 2010 ).

Also there is the fact that the biggest driver of UK Gilt yields is the Bank of England itself with prospects of future buying eclipsing even the impact of its current large holding.

House Prices

As the Bank of England under Mark Carney is the very model of a modern central banker a chill will have run down its spine this morning.

Average house prices continued to slow in October, with a modest rise of 0.9% over the past year. While
this is the lowest growth seen in 2019, it again extends the largely flat trend which has taken hold over
recent months ( Halifax)

Indeed I suggest that whoever has to tell Governor Carney this at the morning meeting has made sure his espresso is double-strength.

On a monthly basis, house prices fell by 0.1%

This is the new reformed Halifax price index as it was ploughing rather a lonely furrow before. We of course think that this is good news as it gives us another signal that wages are gaining ground relative to house prices whereas the Bank of England has a view similar to that of Donald Trump.

Stock Markets (all three) hit another ALL TIME & HISTORIC HIGH yesterday! You are sooo lucky to have me as your President (just kidding!). Spend your money well!

The Economy

This is an awkward one for the Bank of England as we are on the road to a General Election and the economy is only growing slowly. Indeed according to the Markit PMI business survey may not be growing at all.

The October reading is historically consistent with GDP
declining at a quarterly rate of 0.1%, similar to the pace
of contraction in GDP signalled by the surveys in the third
quarter

Although even Markit have had to face up to the fact that they have been missing the target in recent times.

While official data may indicate more robust growth
in the third quarter, the PMI warns that some of this could
merely reflect a pay-back from a steeper decline than
signalled by the surveys in the second quarter, and that the
underlying business trend remains one of stagnation at
best.

The actual data we have will be updated on Monday but for now we have this.

Rolling three-month growth was 0.3% in August 2019.

So we have some growth or did until August.

The international environment is far from inspiring as this just released by the European Commission highlights.

Euro area gross domestic product (GDP) is now forecast to expand by 1.1% in 2019 and by 1.2% in 2020 and 2021. Compared to the Summer 2019 Economic Forecast (published in July), the growth forecast has been downgraded by 0.1 percentage point in 2019 (from 1.2%) and 0.2 percentage points in 2020 (from 1.4%).

The idea that they can forecast to 0.1% is of course laughable so it is the direction of travel that is the main message here.

Comment

If we move on from the shuffling of deckchairs at the Bank of England we see that its Forward Guidance remains a mess. From the September Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

Does anybody actually believe they will raise interest-rates? If we move to investors so from talk to action we see that in spite of the recent fall in the Gilt market the five-year yield is 0.53% so it continues to suggest a cut not a rise.

More specifically there was a road to a Bank of England rate cut today as this from the 28th of September from Michael Saunders highlights and the emphasis is minr.

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further.

He was an and maybe the only advocate for higher interest-rates so now is a categorised as a flip-flopper. But it suggested a turn in the view of the Bank in general such that this was suggested yesterday by @CNBCJou.

Looking forward to the BOE tomorrow where the new MONETARY POLICY REPORT will be presented (not to be confused with the now defunct INFLATION REPORT). A giant leap for central banking. * pro tip: watch out for dovish dissenters (Saunders, Vlieghe?) $GBP

The election is of course what has stymied the road to a return to the emergency Bank Rate of 0.5% as we wait to see how the Bank of England twists and turns today. Dire Straits anyone

I’m a twisting fool
Just twisting, yeah, twisting
Twisting by the pool

The Investing Channel

 

 

Where will Christine Lagarde lead the ECB?

We find ourselves in a new era for monetary policy in the Euro area and it comes in two forms. The first is the way that the pause in adding to expansionary monetary policy which lasted for all of ten months is now over. It has been replaced by an extra 20 billion Euros a month of QE bond purchases and tiering of interest-rates for the banking sector. The next is the way that technocrats have been replaced by politicians as we note that not only is the President Christine Lagarde the former Finance Minister of France the Vice-President Luis de Guindos is the former Economy Minister of Spain. So much for the much vaunted independence!

Monetary Policy

In addition to the new deposit rate of -0.5% Mario Draghi’s last policy move was this.

The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP), i.e. the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP), at a monthly pace of €20 billion as from 1 November 2019.

It is the online equivalent of a bit of a mouthful and has had a by now familiar effect in financial markets. Regular readers will recall mt pointing out that the main impact comes before it happens and we have seen that again. If we use the German ten-year yield as our measure we saw it fall below -0.7% in August and September as hopes/expectations of QE rose but the reality of it now sees the yield at -0.3%. So bond markets have retreated after the pre-announcement hype.

As to reducing the deposit rate from -0.4% to -0.5% was hardly going to have much impact so let us move into the tiering which is a way of helping the banks as described by @fwred of Bank Pictet.

reduces the cost of negative rates from €8.7bn to €5.0bn (though it will increase in 2020) – creates €35bn in arbitrage opportunities for Italian banks – no signs of major disruption in repo, so far.

Oh and there will be another liquidity effort or TLTRO-III but that will be in December.

There is of course ebb and flow in financial markets but as we stand things have gone backwards except for the banks.

The Euro

If we switch to that we need to note first that the economics 101 theory that QE leads to currency depreciation has had at best a patchy credit crunch era. But over this phase we see that the Euro has weakened as its trade weighted index was 98.7 in mid-August compared to the 96.9 of yesterday. As ever the issue is complex because for example my home country the UK has seen a better phase for the UK Pound £ moving from 0.93 in early August to 0.86 now if we quote it the financial market way.

The Economy

The economic growth situation has been this.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area in the third quarter of 2019 ( Eurostat)

As you can see annual economic growth has weakened and if we update to this morning we were told this by the Markit PMI business survey.

The IHS Markit Eurozone PMI® Composite
Output Index improved during October, but
remained close to the crucial 50.0 no-change mark.
The index recorded 50.6, up from 50.1 in
September and slightly better than the earlier flash
reading of 50.2, but still signalling a rate of growth
that was amongst the weakest seen in the past six and-a-half years.

As you can see there was a small improvement but that relies on you believing that the measure is accurate to 0.5 in reality. The Markit conclusion was this.

The euro area remained close to stagnation in
October, with falling order books suggesting that
risks are currently tilted towards contraction in the
fourth quarter. While the October PMI is consistent
with quarterly GDP rising by 0.1%, the forward looking data points to a possible decline in economic output in the fourth quarter.

As you can see this is not entirely hopeful because the possible 0.1% GDP growth looks set to disappear raising the risk of a contraction.

I doubt anyone will be surprised to see the sectoral breakdown.

There remained a divergence between the
manufacturing and service sectors during October.
Whereas manufacturing firms recorded a ninth
successive month of declining production, service
sector companies indicated further growth, albeit at
the second-weakest rate since January.

Retail Sales

According to Eurostat there was some good news here.

In September 2019 compared with August 2019, the seasonally adjusted volume of retail trade increased by 0.1% in the euro area (EA19). In September 2019 compared with September 2018, the calendar adjusted retail sales index increased by 3.1% in the euro area .

The geographical position is rather widespread from the 5.2% annual growth of Ireland to the -2.7% of Slovakia. This is an area which has been influenced by the better money supply growth figures of 2019. This has been an awkward area as they have often been a really good indicator but have been swamped this year by the trade and motor industry problems which are outside their orbit. Also the better picture may now be fading.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

In theory it should rally due to the monthly QE but in reality it is far from that simple as M1 growth picked up after the last phase of QE stopped.

Comment

As you can see there are a lot of challenges on the horizon for the ECB just at the time its leadership is most ill-equipped to deal with them. A sign of that was this from President Lagarde back in September.

“The ECB is supporting the development of such a taxonomy,” Lagarde said. “Once it is agreed, in my view it will facilitate the incorporation of environmental considerations in central bank portfolios.” ( Politico EU)

Fans of climate change policies should be upset if they look at the success record of central banks and indeed Madame Lagarde. More prosaically the ECB would be like a bull in a China shop assuming it can define them in the first place.

More recently President Lagarde made what even for her was an extraordinary speech.

There are few who have done so much for Europe, over so long a period, as you, Wolfgang.

This was for the former German Finance Minister Wolfgang Schauble. Was it the ongoing German current account surplus she was cheering or the heading towards a fiscal one as well? Perhaps the punishment regime for Greece?

As to the banks there were some odd rumours circulating yesterday about Deutsche Bank. We know it has a long list of problems but as far as I can tell it was no more bankrupt yesterday than a month ago. Yet there was this.

Mind you perhaps this is why Germany seems to be warming towards a European banking union…..

A decade after the credit crunch hit UK banks have made so little progress

This week has opened with an outbreak of cognitive dissonance in my home country the UK. It opens with a worthy enough spirit and principle from the Treasury Select Committee of HM Parliament.

Regulators must act to reduce unacceptable number of IT failures in financial services sector, warns Treasury Committee.

There is an obvious flaw in the “Regulators must act” opening as we so often see examples of them being fast asleep although of course the official term for this is “vigilance.” Indeed I note that in the comments section last week the issue of regulatory capture had arisen again which for newer readers is where an industry infiltrates and takes control of its regulator. It does not have to be an industry as we see how HM Treasury alumni are every single Deputy Governor at the Bank of England which is officially “independent” of er the Treasury…..

Moving back to the issue at hand the TSC summarised it here.

The Treasury Committee launched its IT failures in the financial services sector inquiry on 23 November 2018. It followed a series of high-profile service disruptions within the financial services sector, most notably the TSB IT migration in 2018. Issues following the migration caused significant disruption to customers for a prolonged period of time, and we have an ongoing inquiry into Service Disruption at TSB1. There have also been many
other incidents, including those at Visa and Barclays.

They do not say it but the prolonged failure at TSB was especially embarrassing as it was supposed to be a new bank but in reality was a bureaucratic exercise exhuming it out of the bloated Lloyds Banking Group. So it turned out to have all the same and maybe worse problems than the other banks as its IT meltdown showed.

It was far from just being the TSB though.

IT failures, or incidents (used interchangeably), within the financial services sector appear to be becoming more common. Over the past 18 months there have been major
incidents at TSB and Visa, along with a litany of incidents at other firms. This increasing trend is recognised by the FCA, which stated in 2018 that “outages in the financial services sector are becoming more frequent and publicised” and that “the number of incidents reported to the FCA has increased by 187 per cent in the past year”.

This matters more these days as we switch to banking online.

Research by UK Finance found that 71 per cent of UK adults used online banking in 2017, and that this trend has been increasing. At the same time, the number of high-street
bank branches has been falling, with a 17 per cent reduction in the number of branches between 2012 and 2018.

The Problem

The real issue here is the fact that the UK establishment have been happy to use taxpayer’s money and the policies of the Bank of England to provide a put option for banks and their management. The subsequent zombified banking sector has no great incentive to improve its IT which was so bad when the credit crunch hit that the Bank of England felt it could not cut interest-rates below 0.5%. This was because the creaking IT infrastructure could not handle 0% let alone negative interest-rates. When this did happen at the Cheltenham and Gloucester which was part of Lloyds Banking Group the work around was that the capital owed was reduced to save a 2001 A Space Odyssey HAL 9000 style moment from happening.

Next comes the idea of the Regulator acting quickly and decisively as Citywire points out.

Calls for the Financial Conduct Authority to offer ‘stronger and faster intervention’ are at least partially ‘justified’ the regulator’s chief executive Andrew Bailey has admitted.

There was this issue.

At the beginning of the year mini-bond manufacturer London Capital & Finance went bust after the FCA ordered it to freeze its accounts, following what appeared to be many years or warnings about the business.

Which led to this bit.

It remains unclear how the firm was able to promote unregulated mini-bonds via regulated Sipp and ISA wrappers for many years.

Sometimes it is so bad it is funny.

It also faced much ridicule after banning former Co-operative Bank chair and church minister Paul Flowers in 2018, five years after the organisation collapsed and the tabloids dubbed him  the crystal Methodist due to his drug use.

More recently this has hit the headlines.

The shuttering last week of Woodford Investment Management after a series of big bets went sour and put it in breach of FCA rules on liquidity limits will be freshest in the mind.

Also in a rather familiar fashion the regulator seems to have overlooked this.

Former star fund manager Neil Woodford and his business partner reaped close to £20m in dividends in the last financial year amid a crisis at their investment house, according to an FT analysis ( Financial Times )

HSBC

The story here was supposed to be an HSBC boom driven by its involvement in the Far East. You may well recall its regular hints of its head office leaving the UK when it wants to put pressure on the UK government. Of course being a major bank in Hong Kong is not quite what it was so let me hand you over to the South China Morning Post.

HSBC, one of three lenders authorised to issue currency in Hong Kong, said on Monday that its third-quarter profit fell 24 per cent as it reported weaker results in its retail banking and global markets businesses.

The bank said its business in the city remained “resilient” despite a weakened business climate in its largest market, as months of protests and civil unrest have sent the city’s economy into a “technical recession”.

“Resilient” eh? I did not realise that things were quite that bad! The share price is down over 4% today at £5.90 and whilst HSBC has done better than other banks until now the future does not look quite as bright.

Barclays and RBS

From CNBC.

The British lender posted £292 million in net loss attributable to shareholders for the three-month period ending Sept 30. Data from Reuters’ Eikon predicted a loss of a £19.2 million for the quarter. Barclays had posted a £1 billion net profit in the same period last year.

The shares have risen due to rising Brexit hopes recently but £1.70 is still very poor.

From City-AM.

RBS reports an operating loss of £8m for the nine months to the end of September 2019, falling from £961m in the same period last year.

A challenging quarter in the NatWest Markets division, where total income plunged by £419m to £150m in the wake of flattening yield curves, also dragged down the bank.

This leads to this response.

The mis-selling and other charges overshadowed underlying progress at the bank

Oh no sorry. That was from November 2nd 2012 on here!

Metro Bank

I hardly know where to start with this one, so let me point out that the £8 share price of this summer has been replaced by one of £2

Comment

The fundamental issue here is that we are now more than a decade away from the credit crunch. The major flaw in bailing out the banks was that they then had no incentive to change. Even worse that we would repeat the mistakes of Japan and end up with a zombified banking structure. If we look at the world of IT we see the Bank of England confirming it here.

The TFS was designed to reinforce pass-through of a cut in Bank Rate from 0.5% to 0.25% and in doing so
reduce the effective lower bound in the UK…….The existence of the TFS meant that the MPC reduced its estimate of the effective lower bound from 0.5% to
close to, but a little above, 0%. ( Governor Carney June 18th )

So in spite of a sweetener of £116.7 billion the banks still cannot cope with 0% interest-rates. Ironically they may be doing us a favour of course.

Next comes the way that PPI has been a type of Helicopter Money QE for the UK economy and here we get on a rather dark road. That a quid pro quo for the banking scandals and bonuses as well as the put option for bank survival is that they put some of the money in the hands of the UK consumer.

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The central banks are losing their grip as well as the plot

The last 24 hours have shown an instance of a central bank losing its grip and another losing the plot. This is significant because central banks have been like our overlords in the credit crunch era as they slashed interest-rates and when that did not work expanded their balance sheets using QE and when that did not work cut interest-rates again and did more QE. This made Limahl look rather prescient.

Neverending story
Ah
Neverending story
Ah
Neverending story
Ah

Also in terms of timing we have today the last policy meeting of ECB President Mario Draghi who has been one of the main central banking overlords especially after his “What ever it takes ( to save the Euro) ” speech. Next month he will be replaced by Christine Lagarde who has given an interview to 60 Minutes in the US.

Christine Lagarde shows John Dickerson how she fakes drinking wine at global gatherings.

US Repo Problems

Regular readers will recall that we looked at the words of US Federal Reserve Chair Jerome Powell on the 9th of this month.

To counter these pressures, we began conducting temporary open market operations. These operations have kept the federal funds rate in the target range and alleviated money market strains more generally.

This involved various moves as the overnight Repos found this added too.

Term repo operations will generally be conducted twice per week, initially in an offering amount of at least $35 billion per operation.

These have been for a fortnight and added to this was a purchase programme for Treasury Bills.

In accordance with this directive, the Desk plans to purchase Treasury bills at an initial pace of approximately $60 billion per month, starting with the period from mid-October to mid-November.

Regular readers will recall that I described this as a new version of QE and it has turned out that the Treasury Bill purchases will be larger than the early estimates by at least double.

This theme of “More! More! More!” continued yesterday with this announcement from the New York Federal Reserve.

Consistent with the most recent FOMC directive, to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation, the amount offered in overnight repo operations will increase to at least $120 billion starting Thursday, October 24, 2019.  The amount offered for the term repo operations scheduled for Thursday, October 24 and Tuesday, October 29, 2019, which span October month end, will increase to at least $45 billion.

Apologies for their wordy opening sentence but I have put it in because it contradicts the original statement from Jerome Powell. Because the “strains” seem to be requiring ever larger interventions. Or as Brad Huston puts it on Twitter.

9/17: We’re doing repos today and tomorrow.

9/19: We’re extending repos until 10/10. $75B overnight, $30B term

10/4: We’re extending repos until 11/4

10/11:We’re extending repos until Jan 2020

10/23:We’re expanding overnight repo offering to $120B, $45B term

This reinforces the point that I believe is behind this as I pointed out on the 25th of September

The question to my mind going forwards is will we see a reversal in the QT or Quantitative Tightening era? The supply of US Dollars is now being reduced by it and we wait to see what the consequences are.

This added to the US Dollar shortage we have been looking at for the past couple of years or so. It would seem that the US Federal Reserve is worried about a shortage at the end of this month which makes me wonder what they state of play will be at the year end when many books are squared? Also in terms if timing we will get the latest repo announcement at pretty much the same time as Mario Draghi starts his final ECB press conference.

The Riksbank of Sweden

It has made this announcement today.

In line with the forecast from September, the Executive Board has therefore decided to leave the repo rate unchanged at –0.25 per cent. As before, the forecast indicates that the interest rate will most probably be raised in December to zero percent.

I will come to my critique of this in a moment but we only have to progress another sentence or two to find that the Riksbank has provided its own critique.

The forecast for the repo rate has therefore been revised downwards and indicates that the interest rate will be unchanged for a prolonged period after the expected rise in December.

That is really quite a mess because we are supposed to take notice of central bank Forward Guidance which is now for lower interest-rates which will be achieved by raising them! Time for a reminder of their track record on this front.

As you can see their Forward Guidance has had a 100% failure rate. You do well by doing the reverse of what they say. As for now well you really could not make the bit below up!

If the prospects were to change, monetary policy may need to be adjusted going forward. Improved prospects would justify a higher interest rate. If the economy were instead to develop less favourably, the Executive Board could cut the repo rate or make monetary policy more expansionary in some other way.

QE

Well that never seems to go away does it?

In accordance with the decision from April 2019, the Riksbank is purchasing government bonds for a nominal total amount of SEK 45 billion, with effect from July 2019 to December 2020.

The central bank will keep the government sweet by making sure it can borrow very cheaply. The ten-year yield is negative albeit only just ( -0.03%) although in an undercut Sweden is running a fiscal surplus. That becomes really rather odd when we look at the next bit.

The Economy

I have criticised the Riksbank for pro-cyclical monetary policy and it seems set to do so again.

after several years of good growth and
strong economic activity, the Swedish economy is now growing more slowly.

So they have cut interest-rates in the good times and now seem set to raise them in weaker times.

Next comes this.

As economic activity has entered a phase of lower growth in
2019, the labour market has also cooled down. Unemployment is deemed to have increased slightly during the year.

If we switch to last week’s release from Sweden Statistics we see something of a challenge to the “increased slightly” claim.

In September 2019 there were 5 110 000 employed persons. The unemployment rate was 7.1 percent, an increase of 1.1 percentage points compared with September 2018……In September 2019, there were 391 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 62 000 compared with September 2018.

If we move to manufacturing then the world outlook seemed to hit Sweden in pretty much one go in September according to Swedbank.

The PMI dropped by 5.5 points in September to 46.3 from a downward revision of 51.8 in August. This is the largest monthly decline since autumn 2008 and was part of the reason why the PMI fell in the third quarter to the lowest level since early 2013.

Comment

The US Federal Reserve is the world’s central bank of last resort and currently that is not going especially well. So far it has added around US $200 billion to its balance sheet and seems set to push it back over US $4 trillion. Yet the problem seems to be hanging around rather than going away as it feels like a plaster is being applied to a broken leg. A gear or two is grinding in the banking system.

Moving to Sweden we see a case of a central bank adopting pro-cyclical monetary policy and now finds itself planning to raise interest-rates in a recession. Yet the rise seems to make interest-rates lower in the future! I am afraid the Riksbank has really rather jumped the shark here. It now looks as if it has decided that negative interest-rates are a bad idea which I have a lot of sympathy with but as I have argued many times the boom was the time to end it.

Sweden has economic growth of 4% with an interest-rate of -0.5% ( 28th of July 2017)

The Investing Channel

Worrying signs for the economy of France as the manufacturing downturn bites

Today has opened with some troubling news for the economy of France and the area driving this will not be a surprise. The official confidence survey series has produced this headline.

In October 2019, the business climate has deteriorated in the manufacturing industry

This is a sign that the problems we see in so much of the world have been hitting France and there has been a particularly rapid deterioration this month.

According to the business managers surveyed in October 2019, the business climate in industry has deteriorated compared to September. The composite indicator has lost three points to 99, moving just below its long term average (100).

If we look back at this series we see that it peaked at 113,5 back in February 2018 and is now at 99.4 so quite a decline which has now moved it below its long-term average, This matters as it is a long-running series and of course 100 for manufacturing means relative decline.

If we look for specific areas of weakness we find these.

In the manufacture of equipment goods, the business climate has lost three points and moved below its long-term average (97). In the in the electrical equipment and in the machinery and equipment branches, the balances of opinion have get worse, more sharply than in September, to stand significantly below their average.

And also these.

The business climate has deteriorated in almost all subsectors, particularly in chemicals where the deterioration is the most significant. In this subsector, as in basic metals, the business climate indicator stands largely below its long-term average.

Maybe a little surprisingly this area seems to be hanging in there.

In the manufacture of transport equipment, the business climate indicator has lost two points in October, after a stability in the previous month, and stands slightly below its long-term average.

That is in spite of this.

The climate indicator has decreased again in the automotive industry and has practically returned to the low point of July. The balance of opinion on general production prospects contributes the most sharply to this deterioration.

They do not say it but the motor industry has fallen to 91.

On the other side of the coin the computing and optical sector seems to be improving.

If we bring it all together then there are concerns for other economic measures from this.

Considering employment, the balances opinion on their past variation and perspectives have declined slightly. Both indicators stand however largely above their long-term average.

That does not seem set to last and for what it is worth ( it is volatile) there is also this.

The turning-point indicator has moved down into the area indicating an uncertain economic outlook.

For context the official output series has been telling us this.

In August 2019, output diminished in the manufacturing industry (−0.8%, after +0.4%)……..Over the last three months, output declined in manufacturing industry (−1.2%)……Manufacturing output of the last three months got worse compared to the same three months of 2018 (−0.8%),

That was something of a troika as all three ways of measuring the situation showed falls.

Is it spreading to other sectors?

So far the services sector is not only ignoring this it is doing rather well.

According to business managers surveyed in October 2019, the business climate in services is stable. At 106, it stands well above its long-term average (100).

The only real flicker is here.

More business managers than in July have reported demand difficulties only.

Construction is apparently continuing the boom which began in 2015.

According to the business managers in the building construction industry surveyed in October 2019, the business climate is stable. The composite indicator stands at 112, its highest level since May 2008, largely above its long-term average (100).

This brings me to the official forecast for economic growth from the beginning of the month.

However, the macroeconomic scenario for France remains virtually unchanged since the June 2019 Conjoncture in France report (with projected growth of +0.3% each quarter through to the end of the year, and +1.3% as an annual average in 2019.

The problems you see are all the fault of whatever is French for Johnny Foreigner.

The international economic environment is deteriorating, due to a combination of several factors: protectionist pressures, uncertainties surrounding Brexit, doubts about the orientation of economic policies in certain countries, etc. Growth forecasts for most of France’s economic partners are therefore revised downwards.

Indeed their statisticians seem to abandon European unity and indulge in some trolling.

These international shocks have had a more negative impact on economic activity in Germany than in France. Indeed, growth in Germany stagnated in the spring (–0.1% after +0.4%), with the weakening of international trade and the slowdown in corporate investment hitting industry much harder than services.

If only German had a word for that. Meanwhile this bit just seems cruel.

Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).

Monetary Policy

Here we go.

the European Central Bank (ECB) extended its highly accommodating monetary policy in September, among other things by lowering the deposit rate and resuming its bond purchases as of November 2019 for a total of €20 billion per month.

I like the way they have cottoned onto my idea that markets mostly respond to QE before it happens and sometimes quite a bit before.

As a result, Eurozone sovereign yields entered negative territory (in the spring for the German ten-year yield and in the summer for the French yield).

Fiscal Policy

There is a clue above that there have been ch-ch-changes. That is represented by the ten-year yield in France being -0.1% as I type this. Borrowing is not a complete freebie as the thirty-year yield is 0.7% but ECB policy ( 420 billion Euros of French government bonds and about to rise) means France can borrow very cheaply.

France is taking more of an advantage of this than my country the UK because it borrowed at an annual rate of 3,5% of GDP in the first quarter of the year and 3.4% in the second. Contrary to much of the official rhetoric we see rises of the order of 1% of GDP here so we can see how domestic demand in the economy has been “resilient”. It is also presumably a response to the Gilet Jaunes issue.

France in debt terns is quite tight on a big figure change and Japan excepted the big figure change as the debt to GDP ratio was 99.6% at the end of June. It will be under pressure from the extra borrowing and thus very dependent on economic growth remaining to stay under 100%.

The number being like that explains why the Governor of the Bank of France diverted us somewhat when he was in New York a week ago.

The euro area has a lower level of public debt (85%) than in the United-States (104 %) or the UK (87%),

Actually the UK is in fact below 85% so it was not his finest hour.

Comment

Today’s journey brings us two main themes. The first is that the French economy has been boosted by some extra government spending. This is in stark contrast to Germany which is running a fiscal surplus. But the ~1% of GDP increase seems to have got a little lost in translation as economic growth has only been ~0.6% so far. However it is a case for counter cyclical fiscal policy as otherwise the French economy may have contracted.

Now we see signs of a downwards turn in the already weakened manufacturing sector which poses a problem with fiscal policy already pushing the boundaries of the Maastricht rules. Also if we look deeper I find this deeply troubling from the Governor of the Bank of France.

Despite this gloomy context, the French economy is resilient, with growth at 1.3% close to its potential.

This is a reference to what is the new central banking standard of annual GDP growth having something of a speed limiter at 1.5%. Let me give you two problems with it. Firstly they seem to get a free pass as to their role in this as one of the biggest changes has been their own actions. Secondly it ignores countries like Spain which may now be slower but have in recent times done much better than this.

 

 

 

 

The UK has opened the fiscal taps and started a fiscal stimulus

The credit crunch era has seen some extraordinary changes in the establishment view of monetary policy. The latest is this from the Peterson Institute from earlier this month.

On October 1, Prime Minister Shinzo Abe’s government raised the consumption tax from 8 percent to 10 percent. Our preference would have been that he not do it. We believe that, given the current Japanese economic situation, there is a strong case for continuing to run potentially large budget deficits, even if this implies, for the time being, little or no reduction in the ratio of debt to GDP.

Indeed they move on to make a point that we have been making for a year or two now.

Very low interest rates, current and prospective, imply that both the fiscal and economic costs of debt are low.

The authors then go further.

When the interest rate is lower than the growth rate—the situation in Japan since 2013—this conclusion no longer follows. Primary deficits do not need to be offset by primary surpluses later, and the government can run primary deficits forever while still keeping the debt-to-GDP ratio constant.

As they mean the nominal rate of growth of GDP that logic also applies to the UK as I have just checked the 50 year Gilt yield. Whilst UK yields are higher than Japan we also have (much) higher inflation rates and in general we face the same situation. As it happens the UK 50 year Gilt yield is not far off the annual rate of growth of real GDP at 1.17%.

They also repeat my infrastructure point.

To the extent that higher public spending is needed to sustain demand in the short run, it should be used to strengthen the supply side in the long run.

However there are problems with this as it comes from people who told us that monetary policy would save us.

Monetary policy has done everything it could, from QE to negative rates, but it turns out it is not enough.

Actually in some areas it has made things worse.One issue I think is that the Ivory Towers love phrases like “supply side” but in practice it does not always turn out to be like that. Also there is a problem with below as otherwise Japan would have been doing better than it is.

And the benefits of public deficits, namely higher activity, are high…….The benefits of budget deficits, both in sustaining demand in the short run and improving supply in the long run are substantial.

Are they? There are arguments against this as otherwise we would not be where we are. In addition it would be remiss of me not to point out that one of the authors is Olivier Blanchard who got his fiscal multipliers so dreadfully wrong in the Greek crisis.

UK Policy

If we look at the latest data for the UK we see that in the last fiscal year the UK was not applying the logic above. Here is the Maastricht friendly version.

In the financial year ending March 2019, the UK general government deficit was £41.5 billion, equivalent to 1.9% of gross domestic product (GDP) ; this is the lowest since the financial year ending March 2002 when it was 0.4%. This represents a decrease of £14.7 billion compared with the financial year ending March 2018.

In fact we were applying the reverse.

Fiscal Rules

The Resolution Foundation seems to have developed something of an obsession with fiscal rules which leads to a laugh out loud moment in the bit I emphasise below.

Some of the strengths of the UK’s approach have been the coverage of the entire public sector, the use of established statistical definitions, clear targets, a medium term outlook, and a supportive institutional framework. But persistent weaknesses remain, including the disregard for the value of public sector assets, reliance on rules which are too backward or forward looking, setting aside too little headroom to cope with forecast errors and economic shocks, and spending too little time building a broad social consensus for the rules.

Actually the “clear targets” bit is weak too as we see them manipulated and bent. But my biggest critique of their obsession is that they do not acknowledge the enormous change by the fall in UK Gilt yields which make it so much cheaper to borrow.

Today’s Data

That was then but this is now is the new theme.

Borrowing (public sector net borrowing excluding public sector banks) in September 2019 was £9.4 billion, £0.6 billion more than in September 2018; this is the first September year-on-year borrowing increase for five years.

Actually there was rather a lot going on as you can see from the detail below.

Central government receipts in September 2019 increased by £4.0 billion (or 6.9%) to £61.2 billion, compared with September 2018, while total central government expenditure increased by £4.3 billion (or 6.8%) to £67.6 billion.

As to the additional expenditure we find out more here.

In the same period, departmental expenditure on goods and services increased by £2.6 billion, compared with September 2018, including a £0.9 billion increase in expenditure on staff costs and a £1.6 billion increase in the purchase of goods and services.

The numbers were rounded out by a £1.6 billion increase in net investment which shows the government seems to have an infrastructure plan as well.

It is noticeable too that the tax receipt numbers were strong too as we saw this take place.

Income-related revenue increased by £1.7 billion, with self-assessed Income Tax and National Insurance contributions increasing by £1.1 billion and £0.6 billion respectively, compared with September 2018.

VAT receipts were solid too being up £500 million or 4%. But the numbers were also flattered by this.

Over the same period, interest and dividends receipts increased by £1.6 billion, largely as a result of a £1.1 billion dividend payment from the Royal Bank of Scotland (RBS).

Stamp Duty

We get an insight into the UK housing market from the Stamp Duty position. September was slightly better than last year at £1.1 billion. But in the fiscal year so far ( since March) receipts are £200 million lower at £6.3 billion.

Comment

We find signs that of UK economic strength and extra government spending in September. They are unlikely to be related as the extra government spending will more likely be picked up in future months. If we step back for some perspective we see that the concept of the fiscal taps being released remains.

Over the same period, central government spent £392.4 billion, an increase of 4.5%.

The main shift has been in the goods and services section which has risen by £11.6 billion to £145.7 billion. Of this some £3.5 billion is extra staff costs. Some of this will no doubt be extra Brexit spending but we do not get a breakdown.

As to economic growth well the theme does continue but it also fades a bit.

In the latest financial year-to-date, central government received £366.5 billion in receipts, including £270.0 billion in taxes. This was 2.8% more than in the same period last year.

How strong you think that is depends on the inflation measure you use. It is curious that growth picked up in September. As to the total impact of the fiscal stimulus the Bank of England estimate is below.

The Government has announced a significant increase in departmental spending for 2020-21, which could raise GDP by around 0.4% over the MPC’s forecast period, all else equal.

If we move to accounting for the activities of the Bank of England then things get messy.

If we were to exclude the Bank of England from our calculation of PSND ex, it would reduce by £179.8 billion, from £1,790.9 billion to £1,611.1 billion, or from 80.3% of GDP to 72.2%.

Also it is time for a reminder that my £2 billion challenge to the impact of QE on the UK Public Finances in July has yet to be answered by the Office for National Statistics. Apparently other things are more of a priority.

 

 

What next in terms of interest-rates from the Bank of England?

There is much to engage the Bank of England at this time. There is the pretty much world wide manufacturing recession that affected the UK as shown below in the latest data.

The three-monthly fall in manufacturing of 1.1% is because of widespread weakness with 11 of the 13 subsectors decreasing; this was led by food, beverages and tobacco (2.0%) and computer, electronic and optical products (3.5%).

The recent declines have in fact reminded us that if all the monetary easing was for manufacturing it has not worked because it was at 105.1 at the previous peak in February 2018 ( 2015 = 100) as opposed to 101.4 this August if we look at a rolling three monthly measure. Or to put it another way we have seen a long-lasting depression just deepen again.

Also at the end of last week there was quite a bounce back by the value of the UK Pound £. Much of that has remained so far this morning as we are at 1.142 versus the Euro. Unfortunately the Bank of England has been somewhat tardy in updating its effective exchange rate index but using its old rule of thumb I estimate that the move was equivalent to a 0.75% rise in interest-rates. Actually there was another influence as the Gilt market fell at the same time with the ten-year yield rising to 0.7% on Friday.

Enter Dave Ramsden

I note that Sir David Ramsden CBE is now Dave but more important for me is the way that like all Deputy Governors these days he is a HM Treasury alumni.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017.

On a conceptual level there seems little point in making the Bank of England independent from the Treasury and then filling it with Treasury insiders. So the word independent needs to be in my financial lexicon for these times.

However Dave is in the news because he has been interviewed by the Daily Telegraph. So let us examine what he has said.

The UK’s “speed limit” for growth has been so damaged by uncertainty over Brexit that it could hamper the Bank of England’s ability to help a weak economy with lower interest rates, deputy Governor Sir Dave Ramsden warned today.

There are several issues raised already. For example the “speed limit” follows quite a few failures for the Bank of England Ivory Tower, There was the output gap failure and the Phillips Curve but all pale into insignificance compared to the unemployment rate where 4.25% is the new 7%. As to the “speed limit” of 1.5% for GDP growth then as we were at 1.3% at the end of the second quarter in spite of the quarterly decline of 0.2% seen Dave seems to be whistling in the wind a bit.

Also the issue of the Bank of England helping the economy with lower interest-rates has two issues. The first is that interest-rates were slashed but we are where we are. Next the responsibility for Bank Rate being at 0.75% is of course with Dave and his colleagues. That is also inconsistent with the claims of Governor Mark Carney that the 0.25% interest-rate cut and Sledgehammer QE of August 2016 saved 250,000 jobs.

Productivity

Dave’s main concern was this.

He said he was more cautious over the economy’s growth potential thanks to consistent disappointments on productivity, which sank at its fastest pace for five years in the three months to June.

For those who have not seen the official data here it is.

Labour productivity, as measured on an output per hour basis, fell by 0.5% compared with Quarter 2 (Apr to June) 2018. This follows two consecutive quarters of zero growth.

The problem with this type of thinking is that it ignores the switch to services which has been taking place for decades as they are areas where productivity is often hard to measure and sometimes you would not want at all. After my knee operation I had some 30 minute physio sessions and would not have been pleased if I was paying the same amount for twenty minutes!

Next comes the issue of the present contraction in manufacturing which will be making productivity worse. This is before we get to the issue that some of the claimed productivity gains pre credit crunch were an illusion as the banking sector inflated rather than grew.

Wages

Dave does not seem to be especially keen on the improvement in wage growth that has seen it rise to an annual rate of above 4%.

The critical economic ingredient has lagged since the crisis as businesses cut back investment spending, dampening the UK’s ability to produce more, fund sustainable pay rises and be internationally competitive. Company wage costs “are picking up quite significantly, which will drive domestic inflationary pressure”, he added.

Not much fun there for those whose real wages are still below the previous peak.We get dome further thoughts via the usual buzz phrase bingo central bankers so love.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth, because I think supply potential, the speed limit of the economy, is also slowing through this period. That comes through for me pretty clearly in the latest productivity numbers.

News of the Ivory Tower theoretical conceptual failure does not seem to have arrived at Dave’s door.

Policy Prescription

In a world of “entrenched uncertainty” – a likely temporary extension to the UK’s membership if the Prime Minister complies with the Benn Act – “I see less of a case for a more accommodative monetary position,” Sir Dave said.

Also taking him away from an interest-rate cut was this.

Sir Dave – who refused to comment on whether he had applied to replace outgoing Governor Mark Carney – said the MPC would also have to take account of the recent £13.4bn surge in public spending unveiled by Chancellor Sajid Javid in last month’s spending review. The Bank estimates that will add 0.4 percentage point to growth.

Comment

In the past Dave has tried to make it look as though he is an expert in financial markets perhaps in an attempt to justify his role as Deputy Governor for that area. Unfortunately for him that has gone rather awry. If he looked at the rise in the UK ten-year Gilt yield form 0.45% to 0.71% at the end of last week or the three point fall in the Gilt future Fave may have thought that his speech would be well timed. Sadly for him that has gone all wrong this morning as the Gilt market has U-Turned and as the Gilt future has rallied a point the ten-year yield has fallen to 0.62%

So it would appear he may even have negative credibility in the markets. Perhaps they have picked up on the tendency of Bank of England policymakers to vote in a “I agree with Mark ( Carney)” fashion. His credibility took quite a knock back in May 2016 when he described consumer credit growth of 8.6% like this.

Bank Of England’s Ramsden Says Weak Consumer Credit Data Was Another Factor That Made Me Fear UK Consumption Growth Could Slow Further, Need To Wait And See ( @LiveSquawk )

In terms of PR though should Sir Dave vote for an interest-rate cut he can present it as something he did not want to do. After all so much central banking policy making comes down to PR these days.

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