What is the purpose of the Monetary Policy Committee of the Bank of England?

This week has been one where we have found ourselves observing and analysing the both the reality and the consequences of the global economic slow down. Yesterday gave us an opportunity to peer into the mind of a Bank of England policymaker and first Gertjan Vlieghe was keen to establish why he is paid the big bucks.

When the global economy is doing well, the UK usually tends to do well too. When the global economy is
sluggish, the UK economy tends to be sluggish too.

Thanks for that Gertjan! Next comes something that has been an issue since the credit crunch hit which has been the issue of what David Bowie called ch-ch-changes.

We are in a period of unusual uncertainty around the economic outlook.
There is a tendency to say every quarter that things are more uncertain than before, and of course that
cannot always be true. It must be that sometimes uncertainty is less than it was before.

Now put yourself in Gertjan’s shoes as someone who has been consistently wrong and has turned it into something of an art form. The future must be terrifying to someone like that and indeed it is.

Setting monetary policy requires making decisions even when the outlook is uncertain.

Actually the outlook is always uncertain especially if we look back for Gertjan and his colleagues.

The Forward Guidance Lie

Here is Gertjan making his case.

Rather, we need to respond to news about the economy as
we receive it, in a systematic and predictable way that agents in the economy can factor into their decisions.

There are several problems with this. Firstly how many people even take notice of the Bank of England. Secondly that situation will have only have been made worse by the way that the Forward Guidance has not only been wrong it has been deeply misleading, For example in August 2016 after more than two years of hints and promises about a Bank Rate rise Gerthan voted instead for a Bank Rate cut and £60 billion of Sledgehammer QE. So those who had taken the Forward Guidance advice and for example remortgaged into a fixed-rate were materially disadvantaged.

Not content with that Gertjan seems on the road to doing it again. So let us remind ourselves of the official view.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Yet Gertjan has got cold feet again.

I will discuss what news we have had about the economy in recent quarters, and how that has changed my
thinking about the appropriate path of monetary policy.

Why do I have a feeling of deja vu? Here is the old Vlieghe.

When I first spoke about the future path of Bank Rate a year ago, I thought one to two quarter point hikes per
year in Bank Rate was the most likely central case

Here is the new Vlieghe.

On the assumption that global growth does not slow materially further than it has so far, that the path to Brexit
involves a lengthy transition period in line with the government’s stated objectives, that pay growth continues
around its recent pace, and that we start to see some evidence of pay growth leading to upward consumer
price pressure, a path of Bank Rate that involves around one quarter point hike per year seems a reasonable
central case.

As you can see Gertjan is trying to present himself in the manner of an engineer perhaps fine tuning an aircraft wing design. The first problem is that last time he tried this his aircraft crashed on take-off as a promised Bank Rate rise turned into a cut. Next comes the issue of why you would raise Bank Rate once a year? After all it would feel like forever before anything materially changed. Five years of it would get Bank Rate to only 2%!

The reality is that if we look at his view of a slowing world economy it is hard to believe that he wants to raise interest-rates at all. Also as his speech is very downbeat about Brexit as the Bank of England consistently is then it is hard not to mull what he told the Evening Standard back in April 2016.

“Theoretically, I think interest rates could go a little bit negative.”

Even that was an odd phrase as of course quite a few countries had them including the country where he was born. Anyway here is my immediate response on twitter to his speech.

Shorter Gertjan Vlieghe : Can I vote for a Bank Rate cut yet please Governor?

If we step back and look at the overall Bank of England picture we see that the Monetary Policy Committee is becoming an increasing waste of time. We are paying eight people to say “I agree with Mark” and flatter the Governor’s ego.

Retail Sales

Here Gertjan Vlieghe had almost impeccable timing.

Domestic growth has slowed somewhat more than expected, especially around the turn of the year.

Just in time for this official release today about UK Retail Sales.

Year-on-year growth in the quantity bought in January 2019 was 4.2%, the highest since December 2016; while year-on-year average store prices slowed to 0.4%, the lowest price increase since November 2016.

Those figures confirm my theme that lower inflation leads to better consumption data via higher real wages. This is a very awkward issue for the Bank of England as it wants to push the 0.4% inflation above up to 2% in what would be a clear policy error.

In the three months to January 2019, the quantity bought increased by 0.7% when compared with the previous three months.The monthly growth rate in the quantity bought increased by 1.0% in January 2019, following a decline of 0.7% in December 2018.

A good January has pulled the quarterly numbers higher and the driving force is show below.

The quantity bought in textile, clothing and footwear stores showed strong year-on-year growth at 5.5% as stores took advantage of the January sales, with a year-on-year price fall of 0.9%.

Comment

This speech just highlights what a mess the situation has become at the Bank of England. A policymaker gives a speech talking about interest-rate rises whilst the meat of the speech outlines a situation more suited to interest-rate cuts. The economy is smaller due to Brexit morphs into world economic slow down and yet Gertjan apparently thinks we are silly enough to believe he intends to raise interest-rates. Even in a Brexit deal scenario he doesn’t seem to have even convinced himself.

If a transition period is successfully negotiated, and a near term “no deal” scenario is therefore avoided, I
would expect the exchange rate to appreciate somewhat. The degree of future monetary tightening will in
part depend on how large this appreciation is.

Also 2018 taught us how useful the money supply data can be in predicting economic events and yet they have been ignored by Gertjan as we see a reason why he is groping in the dark all the time. That brings me to my point for today which is that the Bank of England has become one big echo chamber with a lack of diversity in any respect but most importantly in views. External members are supposed to bring a fresh outlook but this has failed for some time now. So it would be simpler if we saved the other eight salaries and let Governor Carney set interest-rates as really all they are doing is saying “I agree with Mark”. After all even the Bank of Japan with its culture of face manages to produce some dissent these days.

 

 

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Oh Italia!

Sometimes events just seem to gather their own momentum in the way that a rolling stone gathers moss so let me take you straight to the Italian Prime Minister this morning.

Italy Dep PM Di Maio: Low Growth Views `Theater Of The Absurd’: Messaggero ( @LiveSquawk )

I have to confess that after the way that the Italian economy has struggled for the last couple of decades this brought the Doobie Brothers to mind.

What a fool believes he sees
No wise man has the power to reason away
What seems to be
Is always better than nothing
And nothing at all

Then the Italian statistics office produced something of a tour de force.

In December 2018 the seasonally adjusted industrial production index decreased by 0.8% compared with
the previous month. The percentage change of the average of the last three months with respect to the
previous three months was -1.1.

As you can see these numbers are in fact worse than being just weak as they show a monthly and a quarterly fall. But they are in fact much better than the next one which is really rather shocking.

The calendar adjusted industrial production index decreased by 5.5% compared with December 2017
(calendar working days being 19 versus 18 days in December 2017); for the whole year 2018 the
percentage change was +0.8 compared with 2017.
The unadjusted industrial production index decreased by 2.5% compared with December 2017.

Just for clarity output was 2.5% lower but as there was an extra working day this year then on a like for like basis it was some 5.5% lower. I would say that was a depressionary type number except of course Italy has been in a long-standing depression.

Digging deeper into the numbers we see that on a seasonally adjusted basis there was a rally in industrial production as the 100 of 2015 nearly made 110 in November 2017, but now it has fallen back to 103.9. But even that pales compared to the calendar adjusted index which is now at 93.3. So whilst the different indices can cause some confusion the overall picture is clear. We do not get a lot of detail on manufacturing except that on a seasonally adjusted basis output was 5.5% lower in December than a year ago.

The drop is such that we could see a downwards revision to the Italian GDP data for the fourth quarter of last year which was -0.2% as it is. Actually the annual number at 0.1% looks vulnerable and might make more impact if the annual rate of growth falls back to 0%. Production in a modern economy does not have the impact it once did and Italy’s statisticians were expecting a fall but not one on this scale.

Monthly Economic Report

After the above we advance on this with trepidation.

World economic deceleration has spilled over into Q4, particularly in the industrial sector, which has
experienced a broad-based loss of momentum in many economies and a further slowing in global trade growth.
In November, according to CPB data the merchandise World trade in volume decreased 1.6%.

So it is everyone else’s fault in a familiar refrain, what is Italian for Johnny Foreigner? This is rather amusingly immediately contradicted by the data.

In Italy, real GDP fell by 0.2% in Q4 2018, following a 0.1% drop in the previous quarter. The negative result is
mainly attributable to domestic demand while the contribution of net export was positive.

So in fact it was the domestic economy causing the slow down. This thought is added to by the trade data where the fall in exports is dwarfed by the fall in imports at least in November as we only have partial data for December.

As for foreign trade, in November 2018 seasonally-adjusted data, compared to October 2018, decreased both
for exports (-0.4%) and for imports (-2.2%). Exports drop for EU countries (-1.3%) and rose for non EU
countries (+0.6%). However, according to preliminary estimates in December also exports to non-EU
countries decreased by 5.0%.

Now let me give an example of how economics can be the dismal science. Because whilst in isolation the numbers below are welcome with falling output they suggest falling productivity.

In the same month, the labour market, employment stabilized and the unemployment rate decreased only
marginally.

The future looks none too bright either,

In January 2019, the consumer confidence improved while the composite business climate
indicator decreased further. The leading indicator experienced a sharp fall suggesting a
worsening of the Italian cyclical position in the coming months.

Indeed and thank you for @liukzilla for pointing this out the Italian version does hint at some possible downgrades, Via Google Translate.

The data of industrial production amplify the tendency to reduce the rhythms of
activity started in the first few months of 2018 (-1.1% the economic variation in T4).

Also a none too bright future.

Data on industry orders also showed a negative trend, with a decrease for both markets in the September-November quarter (-1.3% and -1.0% respectively on the market).
internal and foreign).

The Consumer

Yesterday’s data provided no cheer either.

In December 2018, both value and volume of retail trade contracted by 0.7% when compared with the previous month. Year-on-year growth rate fell by 0.6% in value terms, while the quantity sold decreased by 0.5%.

Although on a quarterly basis there was a little bit assuming you think the numbers are that accurate,

In the three months to December (Quarter 4), the value of retail trade rose by 0.1%, showing a slowdown
to growth in comparison with the previous quarter (+0.4%), while the volume remained unchanged at
+0.3%.

Actually there was never much of a recovery here as the index only briefing rose to 102 if we take 2015 as 100 and now is at 101.5 according to the chart provided. Odd because you might reasonably have expected all the monetary stimulus to have impacted on consumer spending.

Population

This is now declining in spite of a fair bit of immigration.

On 1 st January 2019, the population was estimated to be 60,391,000 and the decrease on the previous year was
around 90,000 units (-1.5 per thousand)………The net international migration amounted to +190 thousand, recording a slight increase on the previous year (+188
thousand). Both immigration (349 thousand) and emigration (160 thousand) increased (+1.7% and +3.1%
respecitvely).

Bond Markets

I have pointed out many times that Italian bond yields have risen for Italy in both absolute and relative terms. Let me present another perspective on this from the thirty-year bond it issued earlier this week.

Today Italy issued 8bln 30yr BTPs. Had it issued the same bond last April, it would have received around 1.3 bilion more cash from the market. ( @gusbaratta ).

Comment

This is quite a mess in a lovely country. Also the ironies abound as for example expanding fiscal policy into an economic decline was only recently rejected by the Euro area authorities. They also have just ended some of the monetary stimulus by ending monthly QE at what appears to be exactly the wrong time. So whilst the Italian government deserves some criticism so do the Euro area authorities. For example if the ECB has the powers it claims why is it not using them?

Of course I don’t want to speculate about what contingency would call for a specific instrument but if you look at the number of instruments we have in place now, we can conclude that it’s not true that the ECB has run out of fuel or has run out of instruments. We have all our toolbox still available. ( Mario Draghi )

But just when you might have thought it cannot get any worse it has.

Me on The Investing Channel

Chinese economic growth looks set to slow further in 2019

This morning brings us up to date on what has been a theme for a little while now as we have observed one of the main engines of world economic growth starting to miss a beat or two. This from Bloomberg gives us some context and perspective.

China accounted for more than 36% of global GDP growth in 2016.

That sort of growth has led to this according to the Spectator Index.

China’s GDP as a share of US GDP. (nominal) 2009: 35.4% 2019: 65.8%

This has led to all sorts of forecasts around China overtaking the US in terms of total size of its economy with of course the same old problem so familiar of simply projecting the past into the future. Let us know switch to the official view published this morning.

In 2018, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the general working guideline of making progress while maintaining stability, committed to the new development philosophy, promoted high quality development, focused on the supply-side structural reform, stayed united and overcame difficulties.

And I thought I sometimes composed long sentences! It also provokes a wry smile if we convert that to the country where we are in as I mull Theresa May telling the UK we “stayed united and overcame difficulties.”

Gross Domestic Product

Firstly we are told a version of tractor production being on target.

According to the preliminary estimation, the gross domestic product (GDP) of China was 90,030.9 billion yuan in 2018, an increase of 6.6 percent at comparable prices over the previous year, achieving the set target of around 6.5 percent growth for the year.

But then we get a version of slip-sliding away.

Specifically, the year-on-year growth of GDP was 6.8 percent for the first quarter, 6.7 percent for the second quarter, 6.5 percent for the third quarter, and 6.4 percent for the fourth quarter.

The trend is exactly as we have been expecting. Also let us take a moment to note how extraordinary it is that a nation as described below can produce its economic output data in only 21 days. There’s mud in the eye of the western capitalist imperialists.

By the end of 2018, the total population of mainland China was 1,395.38 million  an increase of 5.30 million over that at the end of 2017.

That brings us to a clear problem which is that we can I think have confidence in the GDP trend but not in the outright number. Not everyone seems to believe that as many have repeated this sort of line.

According to just-released official statistics, ‘s grew 6.6% in 2018. While it’s the lowest annual annual expansion in almost 30 years, it still is quite a robust rate for an that faced — and is facing — several internal and external uncertainties.

That was Mohammed El-Erian of Allianz.

Industrial Production

Perspective is provided as I note that 6.2% growth is described as “slow but stable” and we remain on message with this.

the value added of the state holding enterprises was up by 6.2 percent……. and enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan, up by 4.8 percent.

A clear superiority of the state over foreign private investors and especially the pesky Taiwanese. But they cannot hide this.

In December, the total value added of the industrial enterprises above the designated size was up by 5.7 percent year-on-year, 0.3 percentage point higher than that of last month, or up by 0.54 percent month-on-month.

We are told about the monthly improvement which is welcome but it is still below the average.

The real growth of the total value added of the industrial enterprises above the designated size in 2018 was 6.2 percent, with slow yet stable growth.

So with 6.2% being slow and stable if 5.7% just slow? Many countries would love such a rate of growth but not China.

Services

Again we see a monthly rise being reported.

In December, the Index of Services Production was up by 7.3 percent year-on-year, 0.1 percentage point higher than that of last month.

However this is also against a backdrop of a weakening over the full year.

In 2018, the Index of Services Production increased by 7.7 percent over that of last year, maintained comparatively rapid growth.

That theme continues as we note that year on year growth was 8.3% in December of 2017.

Retail Sales

We find ourselves in familiar territory.

In 2018, the total retail sales of consumer goods reached 38,098.7 billion yuan, up by 9.0 percent over last year which kept fast growth……..In December, the growth of total retail sales of consumer goods was 8.2 percent year-on-year, or 0.55 percent month-on-month.

If we look back the reported growth rate in December 2017 was 10.2%.

Property

This has been an area that has fueled growth in China but Reuters now have their doubts about it.

Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2 percent in December from a year earlier, down from 9.3 percent in November, according to Reuters calculations based on data released by National Bureau of Statistics (NBS) on Monday.

That was just ahead of the slowest pace of growth last year at 7.7 percent recorded for October.

So the two lowest numbers were at the end of the year and compare to this.

For the full year, property investment increased 9.5 percent from the year-earlier period, down from 9.7 percent in January-November.

I note that in the official data whilst prices are still rising volume growth has slowed to a crawl in Chinese terms.

The floor space of commercial buildings sold was 1,716.54 million square meters, up by 1.3 percent. Specifically, the floor space of residential buildings sold was up by 2.2 percent. The total sales of commercial buildings were 14,997.3 billion yuan, up by 12.2 percent, among which the sales of residential buildings were up by 14.7 percent.

Trade

This was a factor in things slowing down as we note the faster import growth over 2018 as a whole.

The total value of exports was 16,417.7 billion yuan, up by 7.1 percent; the total value of imports was 14,087.4 billion yuan, up by 12.9 percent.

Those who consider the trade surplus to be one of the world’s economic imbalances should echo the official line.

the Trade Structure Continued to Optimize

Comment

So we find that the official data is catching up with our view of an economic slow down in China. Those late to the party have the inconvenience of December showing some data a little better on a monthly basis but the trend remains clear. Looking ahead then even the official business survey shows a decline because the 54s and 53s were replaced by 52.6 in December.

However if we switch to my favourite short-term indicator which is narrow money we see that the economic brakes are still on. The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

Still it is not all bad news as it has been a while since there has been so little publicity about the annual shindig in Davos. Perhaps someone has spotted that flying to an Alpine resort to lecture others about climate change has more than a whiff of hypocrisy about it.

Hard Times at the Bank of England on both Forward Guidance and inflation expertise

It is time for us to dip back into the data in the UK economy as we look at retail sales, But before we get there we have seen another development and it has come from UK Gilt yields which are the cost of borrowing for the UK government. I have been writing for some time that they have been very low due to the fear for some or expectation for others that the Bank of England will start a new phase of QE ( Quantitative Easing) bond purchases. At the nadir the UK ten-year yield dipped below 1.2% which still left plenty of margin as the Sledgehammer QE drove it down to 0.5%. I still consider that to be madness but it is something the media and other economists do not understand so any debate stalls. But the Gilt yield issue is that it has risen to 1.37% which if it goes a little further will have economic effects via fixed-rate mortgages and business borrowing.

In terms of context other bond yields have also risen but the UK has seen its rise faster. Even I cannot entirely avoid politics so let me add that there were roads this week when Brexit developments ,might have led to UK Gilt yields falling due to expectations of more Bank of England QE in spite of the international trend. Should fixed-rate mortgages rise in price then we can perhaps expect a little more of this.

The UK housing market ended 2018 on a weak note with uncertainty still biting, alongside continuing lack of stock and affordability issues, according to the December 2018 UK Residential Market Survey. ( Royal Institute of Chartered Surveyors or RICS)

Also they expect things to get worse.

Moving forward, however, over the next three months sales expectations are now either flat or negative across the UK. The headline net balance of -28% represents the poorest reading since the series was formed in 1999. The twelve-month outlook is a little more upbeat, suggesting that some of the near-term pessimism is linked to the lack of clarity around what form of departure the UK might make from the EU in March.

Worse for them I mean as lower house prices would benefit first time buyers who have seen house prices accelerate away from them in nominal and real terms in the credit crunch era.

Also they seem to have their doubts about the promised future supply.

Meanwhile it is hard to see developers stepping up the supply pipeline in this environment. Getting to the government’s 300,000 building target was never going to be easy but pushing up to anywhere near this figure will require significantly greater input from other delivery channels including local authorities taking advantage of their new-found freedom.

That of course would be a case of history on repeat or as the Four Tops put it.

Now it’s the same old song
But with a different meaning
Since you been gone

Ben Broadbent

The issues above will not make the Bank of England very happy and this will add to the dark cloud around Deputy Governor Broadbent otherwise known as the absent-minded professor. Here is an excerpt from something I posted on the Royal Statistics Society website in October.

” there are fewer than 10 million owner occupier mortgages. Is the cost of a house to someone who happens
already to have paid off his or her mortgage really zero?”

So we see that we cannot use something which is used around 10 million times but we can use the Imputed Rents which are used precisely zero times! I do not recall anyone arguing for mortgage costs to be used for those who do not have one, in the way he is calling for rents to be used for those who do not pay them. For example the RPI has mortgage costs, but also as a considerably larger component house prices  via  the use of depreciation.

The absent-minded professor spoke up strongly for the Rental Equivalence model which the House of Lords rejected this week. Also they were disappointed with other aspects of his performance.

Let me end by congratulating the Lords and Baroness Bowles on pressing the Deputy Governor responsible for the RPI on the issue of what Yes Prime Minster satirised as “Masterly Inaction”. As they point out there are changes which could have been made as opposed to the state of play during his tenure.

“That process seems to have stalled.”

Retail Sales

These were something of a journey and had a kicker that seems to have been missed in the melee so let me explain.

When compared with the previous month, the quantity bought in December 2018 decreased by 0.9%, as all sectors except food stores and fuel stores declined on the month.

So down except we know the numbers are regularly erratic and are likely to be even more so with the advent of Black Friday in November. Let us therefore look for more perspective.

In the three months to December 2018, estimates in the quantity bought decreased by 0.2% with declines across all main sectors except fuel.

As to the wider impact Rupert Seggins has crunched some numbers.

UK retail sales fell -0.2%q/q in the final quarter of 2018, indicating that the retail sector took -0.01% off GDP growth in Q4.

If we move to the annual comparison though we get some relief as the volume figures were 3% higher if we return to the December numbers with fuel sales and 2.6% without or a 0.17% addition to GDP using Rupert’s calculator. But there has been a slowing even with such numbers.

Looking at annual growth rates, the whole of 2018 increased by 2.7% in the quantity bought; an annual slowdown in comparison with the peak of 4.7% experienced in 2016.

One of the things which bemuses me from time to time is that it is often those who support issues such as climate change who seem most unhappy about a decline in retail sales growth missing the logical link. But my main point here is that if we compare the volume and sales figures retail inflation is a mere 0.7% on an annual basis.

Comment

It was only last week that I suggested that the Bank of England was giving the wrong Forward Guidance about interest-rates as the economic outlook darkens. If the rough and ready calculator for retail inflation is in any way accurate then that is reinforced by today;s number and that adds to the lower consumer inflation numbers we saw earlier this week. Added to that the Bank of England has publicly backed the wrong horse in the inflation measurement stakes.

Even worse it has backed the establishment line driven by Her Majesty’s Treasury which is precisely the body it is supposed to be independent from. Perhaps that is something to do with the fact that the Deputy-Governors are HM Treasury alumni in a case of what in another form we call “regulatory capture”.

Podcast

 

 

China adds to the list of slowing economies

This morning has seen a barrage of economic data released by the National Bureau of Statistics in China. This gives us an opportunity to see if they are catching the economic cold that we have been observing developing amongst us evil western capitalist imperialists. According to the rhetoric things are going really rather well.

In November, under the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the requirement of high-quality development, stuck to the general working guideline of making progress while maintaining stability, adopted the new development philosophy, deepened the supply-side structural reform, and intensified efforts in policy implementation to maintain stability in areas like employment, financial sector, foreign trade, foreign investment, domestic investment, and market expectation. The economy performed within the reasonable range and maintained the generally stable and growing momentum.

That is quite an opening sentence to say the least! Let us add to that with some perspective as we look back.

Next week marks 40 years since China opened up its economy to the world. It’s economy has grown to 80x the size of its 1978 version. For comparison, the U.S. has grown 8x. ( @DavidInglesTV)

So the rhetoric fits that but as we shall see fits what is currently taking place much less well.

Today’s Data

Industrial Production

Whilst the growth rate would be loved by many this is China and things are not what they used to be.

In November, the real growth of the total value added of the industrial enterprises above designated size was 5.4 percent year-on-year, 0.5 percentage point slower than last month.

This wrong-footed expectations based on the ongoing stimulus programme and was the lowest reading since early 2016. In terms of this year the annual growth rate has fallen from the 7.2% of January to a period of apparent stabilisation around 6% and now another leg lower. In terms of a breakdown we were told this.

In terms of sectors, the value added of the mining increased by 2.3 percent on a year-on-year base, the manufacturing grew by 5.6 percent and the production and supply of electricity, thermal power, gas and water grew by 9.8 percent.

Retail Sales

So with production falling was there a potential boost from consumer demand?

In November, the total retail sales of consumer goods reached 3,526.0 billion yuan, a year-on-year rise of 8.1 percent, 0.5 percentage point slower than last month.

If we switch to Reuters we see that it has been quite some time since growth has been at this level.

Retail sales rose 8.1 percent in November from a year earlier, data from the National Bureau of Statistics showed on Friday, below expectations for an 8.8 percent rise and the slowest since May 2003. In October, sales increased 8.6 percent.

If we look at the pattern we see the recent peak was 10.1% in March and the early part of the year saw several readings comfortably above 9%.

From January to November, the total retail sales of consumer goods grew by 9.1 percent year on year.

The official data set also gives us an idea of the scale of urbanisation in China now.

Analyzed by different areas, the retail sales in urban areas reached 2,999.0 billion yuan, up by 7.9 percent year-on-year, and the retail sales in rural areas stood at 527.0 billion yuan, up by 9.3 percent.

I doubt you will be surprised to learn what was particularly pulling the numbers down.

Auto sales fell a sharp 10.0 percent from a year earlier, in line with industry data showing sales dived 14 percent in November – the steepest drop in nearly seven years. ( Reuters).

Slowing auto sales on China are part of a pattern that has rumbled around the world this year. Only yesterday there was news about Ford closing a plant in Blanquefort in France and planning job cuts in Saarlouis Germany.

Service Sector

This was not as weak as the others but has also fallen in 2018.

In November, the Index of Services Production increased by 7.2 percent year on year, the same speed as last month………From January to November, the Index of Services Production increased by 7.7 percent year on year.

Taxes

Another way of looking at economic performance is to analyse what a country can collect in taxes and at first this looks good.

China’s fiscal revenue rose 6.5 percent year-on-year to 17.23 trillion yuan (about 2.5 trillion U.S. dollars) in the first 11 months of 2018, official data showed.

But it too has slowed quite a bit in the last couple of months.

The country’s fiscal revenue stood at 1.08 trillion yuan last month, with a 5.4-percent decline year-on-year, according to the Ministry of Finance.

The decline widened from a drop of 3.1 percent in October, the first fall this year.

In November, China’s tax revenue reached 805.1 billion yuan, down 8.3 percent year on year, compared with a 5.1-percent decline in October, the ministry said.

Some of this has been driven by the tax cuts applied to try to stimulate the economy so we will have to wait and see how this fully plays out.

Money Supply

Reuters updated us earlier this week.

Broad M2 money supply grew 8.0 percent in November from a year earlier, matching forecasts and October’s pace.

Adding to signs of stress on balance sheets and faltering business confidence, M1 money supply rose just 1.5 percent on-year, the weakest pace since January 2014. M1 reflects both the strength of corporate cash positions and whether they may be building up funds for possible future investments.

That is a fascinating perception of narrow money. What we would expect from such data ( the growth rate exceeded 10% in late 2015 and much of 2016) is for it to apply a brake to the Chinese economy and that is exactly what it appears to be doing. Furthermore the brake appears to be tightening.

Switching to broad money trends and subtracting inflation we get a suggestion that future economic growth will head towards and maybe below 6%.

Comment

Whilst the rhetoric may be different China has itself a dose of what the western capitalist imperialists are suffering from in 2018 and that is slower narrow money supply growth. We can argue about definitions and circumstances but as we look around Europe, the US and now China it seems the rhythm section are hammering out the same beat. There are different responses because countries start from different growth levels. For example the impact on France seems to have sent production into negative territory if this morning’s Markit business survey is any guide whereas Chinese production is still recording a growth rate above 5%.

But the direction of travel is the same and China has got used to high growth rates so there will be indigestion from the changes. So we can expect more stimuli and if the recent speeches from the PBOC are any guide some interest-rate reductions I think. They will be a bit late for the next few months though.

And so it begins?

China To Lift Retaliatory Tariff On US Cars For Three Months -Had Imposed 25% Retaliatory Tariff On Cars -To Lift Tariffs From On Jan 1 ( @LiveSquawk )

 

Italy faces another bond market crisis

The situation in Italy has returned to what we now consider as a bond market danger zone although this time around the mainstream media seems much less interested in a subject which it was all over only a fortnight ago. Before we get to that as ever we will prioritise the real economy and perhaps in a type of cry for help the Italian statistics office has GDP ( Gross Domestic Product) per capita at the top of its page. This shows that the post Second World War surge was replaced by such a decline since the 28,699 Euros of 2007 that the 26,338 of last year took Italy back to 1999. The lack of any growth this century is at the root cause of the current political maelstrom as it is the opposite of what the founders of the Euro promised.

Retail Sales

These attracted my attention on release yesterday and you will quickly see why.

In April 2018, both the value and volume of retail trade show a fall respectively of -4.6% and -5.4%
comparing to April 2017, following strong growth in March 2018.

Imagine if that had been the UK Twitter would have imploded! As we look further we see that there seems to be an Italian spin on the definition of a recession.

In April 2018, the indices of retail trade saw a monthly recession, with value falling by 0.7% and volume
dropping by 0.9%.

Taking a deeper perspective calms the situation somewhat but leaves us noting a quarterly decline.

Notwithstanding the monthly volatility, looking at the underlying pattern, the 3 months to April picture
reports a slight decline as value decreased by 0.5% and volume contracted by 0.2%.

This is significant as this is supposed to be a better period for the Italian economy which has been reporting economic growth for a couple of years now. It does not have the UK problem of inflation impacting on real wages because inflation is quite subdued.

In May 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.4% compared with April and by 1.1% with respect to May 2017 (it was +0.6% in the previous month).

Actually the rise in inflation there may further impact on retail sales via real wages. Indeed the general picture here sees retail sales in April at 98.6 compared to 2015 being 100. Seeing as that is supposed to have been a better period for the Italian economy I think it speaks for itself.

The economy overall

This is consistent with the general European theme we have been both observing and expecting. From yesterday’s official monthly report.

The downturn in the leading indicator continues, suggesting a deceleration in economic activity for the coming months.

This would continue the decline as in terms of GDP growth we have seen 0.5% twice then 0.4% twice and then 0.3% twice. Ironically that had shifted Italy up the pecking order after the 0.1% for the UK and the 0,2% for France after its downwards revision. But the detail is not optimistic.

Italian growth has been fostered by change in inventories (+0.7 percentage points) and by domestic consumption expenditures (+0.3 percentage points).

The inventory position seems to be a case of “what goes up must come down” from the aptly named Blood Sweat & Tears and we have already seen that retail sales will not be helping consumption.

The trade position is in general a strong one for Italy but the first quarter showed a weakening which seems to have continued in April.

In April, exports toward non-EU countries recorded a contraction (-0.9% compared to the previous month) less marked than in the previous months (- 3.1% over the last three months February-April). In the same quarter, total
imports excluding energy showed a negative change (-0.7%).

So lower exports are not good and lower imports may be a further sign of weakening domestic demand as well. As ever the monthly data is unreliable but as you can see below Italy’s vert strong trade position with non EU countries has weakened so far this year as we mull the stronger Euro.

The trade balance registered a surplus of 7,141 million euro compared to the surplus of 7,547 million euro in the same period of 2017.

An ominous hint of trouble ahead comes if we note the likely impact of a higher oil price on Italy’s energy trade balance deficit of 12.4 billion Euros for the first four months of 2018.

Bond Markets

These are being impacted by two main factors. Via @liukzilla we are able to award today’s prize for stating the obvious to an official at the Bank of Italy.

ROSSI SAYS YIELD SPREAD WIDER DUE TO -EXIT RISK: ANSA || brilliant…

It seems to have been a day where the Bank of Italy is indeed in crisis mode as we have also had a case of never believe anything until it is officially denied.

A GRADUAL RISE IN INTEREST RATES TO PRE-CRISIS LEVELS IS NOT A CAUSE FOR CONCERN FOR ITALY -BANK OF ITALY OFFICIAL ( @DeltaOne )

The other factor is the likelihood that the new Italian government will loosen the fiscal purse strings and spend more. It is already asking the European Union for more funds which of course will come from a budget that will ( May?) lose the net contribution from the UK.

Thus the bond market has been sold off quite substantially again this week. If we look at it in terms of the bond future ( BTP) we see that the 139 and a bit of early May has been replaced by just under 123 as I type this. Whilst there are implications for those holding such instruments such as pension funds the main consequence is that Italy seems to be now facing a future where the ten-year benchmark yields and costs a bit over 3%. This is a slow acting factor especially after a period where the ECB bond purchases under QE have made this cheap for Italy. But there has already been one issue at 3% as the new drumbeat strikes a rhythm.

There has also been considerable action in the two-year maturity. Now this is something that is ordinarily of concern to specialists like me but the sharp movements mean that something is going on and it is not good. It is only a few short week’s ago that this was negative before it then surged over 2% in a dizzying rise before dropping back to sighs of relief from the establishment. But today it is back at 1.68% as I type this. In my opinion something like a big trading position and/or a derivative has blown up here which no doubt will be presented as a surprise at some future date.

Meanwhile here is the Governor of the Bank of Italy describing the scene at the end of last month.

Having widened considerably during the sovereign debt crisis, the spread between the average cost of the debt and GDP growth narrowed to around
1 per cent. It could narrow further over the next few years so long as the economic situation remains positive. If the tensions of the last few days subside, the cost of debt will also fall, if only slightly, when the securities
that were placed at higher rates than newly issued ones come to maturity.

Comment

So to add to the other issues it looks like the Italian economy is now slowing and of course it was not growing very much in the first place. This makes me think of the banks who are of course central to this so let us return to Governor Visco’s speech.

Italian banks strengthened capital in 2017. Common equity increased by €23 billion, of which €4 billion was provided by the Government for the recapitalization of Monte dei Paschi di Siena.

Those who paid up will now be mulling losses yet again as even more good money seems to be turning bad and speaking of bad.

NPLs, net of loan loss provisions, have
diminished by about a third with respect to the end of 2015, to €135 billion. The coverage ratio, i.e. the ratio of the stock of loan loss provisions to gross NPLs, has reached 53 per cent, a much higher level than the average for the
leading European banks.

On and on this particular saga goes which will only really ever be fixed by some economic growth which of course is where we came in. Also whoever has done this has no doubt been suffering from a sleepless night or two recently.

The decrease in the stock of NPLs is partly due to the sharp rise in sales on the secondary market, facilitated by the favourable economic situation
(€35 billion in 2017 against a yearly average of €5 billion in the previous four years). This year sales are expected to reach €65 billion for the banking
system as a whole.

 

 

 

UK Retail Sales give a hint of stagflation

We move onto the official retail sales situation having been warned that times have been hard. On the 14th of this month the British Retail Consortium told us this.

Much could be made of the adverse impact on April’s footfall of Easter shifting to March, but even looking at March and April together – so smoothing this out – still demonstrates that footfall has plummeted. A -3.3% drop in April, following on from -6% in March, resulted in an unprecedented drop of -4.8% over the two months. Not since the depths of recession in 2009, has footfall over March and April declined to such a degree, and even then the drop was less severe at -3.8%.

The news there was no good and there was a rather ominous reference to 2009 as we all know what happened next. Part of this is the switch from high street to online shopping which is a major driver in this.

 in April nearly 1 in 10 shops in town centres was vacant.

That seems to be true in my area although I note that these are described as a “flagship store opportunity” on the Kings Road in Chelsea. This morning has seen more of the same. From the BBC.

The wave of cold weather dubbed the Beast from the East took a big bite out of B&Q’s sales in the three months to 30 April, its owner Kingfisher has said.

Like-for-like sales at the DIY chain tumbled 9% in the UK and Ireland.

The woe was not contained to the UK for Kingfisher, with sales at Kingfisher’s French DIY chain Castorama also dropping 8%.

The falls led to an overall 4% decline in like-for-like sales for the quarter.

This has been added to by the woes at Marks and Spencer which was a benchmark for quality retailing in the UK but certainly in my experience lost its way. It now plans to close 100 stores and as to the reasons well the Guardian puts it like this.

Wired world: M&S faces greater competition as the internet has made it easier than ever to shop around……Too many shops:……

Poor stores:………Fashion faux pas:…..This is not just M&S food … It’s too expensive and rivals have caught up. …….M&S Inc: The business culture at M&S has long been criticised for being too bureaucratic……..Peak stuff? M&S is exposed to a shift in spending that is seeing Britons spend less on wardrobe updates.

I have two main thoughts on that. Firstly wasn’t the structure at M&S supposedly turned round by Stuart Rose? The UK establishment certainly gave that impression by making him Baron Rose of Monewden. Also the “peak stuff” issue can be taken further and wider as you see until recently UK retail sales were seeing quite a boom.

“Retailers saw a strong end to 2016 with sales in the final quarter up 5.6% on the same period last year,”

Back then we were in a phase that I thought and argued would work but of course the central bankers and their media acolytes were too busy scaremongering about DEFLATION to figure out.

Longer term, retail sales have continued to grow strongly since 2014, following a stagnant period during the economic downturn. Growth in sales coincides with a continued decline in store prices as prices began to fall in March 2014

The index set at 100 in 2013 had risen to 114.7 and my point about “peak” is did even the British consumer to some extent satiate themselves? There is a potential element of rationality too because if they expected price rises from a weaker UK Pound £ it would be logical to buy more if you could.

Today’s data

I am pleased to report that I was on the case on Tuesday.

Even VAT rose a little from £11.2 billion to £11.5 billion which may suggest that the more apocalyptic surveys on retail sales have been exaggerated.

This was because the ONS reported this.

When compared with March 2018, the quantity bought in April increased by 1.6% as all sectors, excluding department stores, recovered from the declines seen in March.

If we look for some perspective we see this.

The quantity bought and amount spent increased by 1.4% and 3.5% respectively when compared with both the same month to a year earlier and the three months to a year earlier. There was little movement to growth in the three months to April, with a slight increase of 0.1% in the quantity bought compared with the previous three months.

So we see that in fact we have some growth and as it happens it is pretty similar to the rate of growth we think we have for the wider economy right now. Not quite what we keep being told as we cross our fingers that the slow down in the monetary data is just that rather than a reversal.

For our official statisticians the numbers presented a couple of problems. If you tell people that the weather was not a material effect in March then this is to say the least awkward.

Petrol sales reported the largest recovery in April, with a growth of 4.7% compared with a decline of negative 6.9% in the previous month as road closures affected travel in March.

Or this.

The effects of the adverse weather on sales introduces further volatility to the monthly growth rate in April 2018.

Also I am sorry to say that what used to be called the “Early Wire” seems to be still around for some at least.

Who knew

Remember when we were such fools
And so convinced and just too cool
Oh no (Pink)

Comment

So we now know we are in a phase of slower retail sales growth but what happens next. Well only on Tuesday the Bank of England gave its view.

As inflation falls back, and wage growth improves somewhat due to reduced labour market slack, household real income growth is set to pick up this year. That should support consumption growth………. A key risk for this year is to what extent household will spend the additional real income, or use it to rebuild the savings that were eroded
last year.  ( Gertjan Vlieghe)

So it should get better but it might not? Thanks for that Jan. Still when you cling to a failure like the Phillips Curve the world must seem an uncertain and frightening place.

A lower unemployment rate should still be expected to push up on wages.

In reality retail sales will be supported by the end of the decline in real wages and could get a boost if they rise but as we have seen from the inflation data yesterday the situation for late summer is not what it was. We could be heading for a period of what used to be called Stagflation. To the response that inflation is lower now I would reply that you are correct but it is the relationship between it and wage growth which is material now. The numbers may be lower but the impact on people is the same.

Meanwhile in a universe far.far, away a man responsible for a £60 billion Sledgehammer for markets announces this on the Bank of England social media feed.

Mark Carney looks at what’s been done to re-build market infrastructures so real markets can thrive.