What can we expect from the Bank of England in 2018?

Today we find out the results of the latest Bank of England policy meeting which seems set to be along the lines of Merry Christmas and see you in the new year. One area of possible change is to its status as the Old Lady  of Threadneedle Street a 200 year plus tradition. From City AM.

The Bank will use further consultations to remove “all gendered language” from rulebooks and forms used throughout the finance sector, a spokesperson said.

Perhaps it will divert attention from the problems keeping women in senior positions at the Bank as we have seen several cases of “woman overboard” in recent times some for incompetence ( a criteria that could be spread to my sex) but not so in the case of Kristin Forbes. There does seem to be an aversion to appointing British female economists as opposed to what might be called “internationalists” in the style of Governor Carney.

Moving onto interest-rates there is an area where the heat is indeed on at least in relative terms. From the US Federal Reserve last night.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative

The crucial part is the last bit with its clear hint of more to come which was reinforced by Janet Yellen at the press conference. From the Wall Street Journal.

Even with today’s rate increase, she said the federal-funds rate remains somewhat below its neutral level. That neutral level is low but expected to rise and so more gradual rate hikes are likely going forward, she said.

The WSJ put the expectation like this.

At the same time, they expect inflation to hold steady, and they maintained their expectation of three interest-rate increases in 2018.

Actually if financial markets are any guide that may be it as the US Treasury Bond market looks as though it is looking for US short-term interest-rates rising to around 2%. For example the yield on the five-year Treasury Note is 2.14% and the ten-year is 2.38%.

But the underlying theme here is that the US is leaving the UK behind and if we look back in time we see that such a situation is unusual as we generally move if not in unison along the same path. What was particularly unusual was the August 2016 UK Bank Rate cut.

Inflation Targeting

What is especially unusual is that the Fed and the Bank of England are taking completely different views on inflation trends and indeed targeting. From the Fed.

 Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In spite of the fact that consumer inflation is below target they are raising interest-rates based on an expectation ( incorrect so far) that it will rise to their target and in truth because of the improved employment and economic growth situation. A bit of old fashioned taking away the punch bowl monetary policy if you like.

The Bank of England faces a different inflation scenario as we learnt on Tuesday. From Bloomberg.

The latest data mean Carney has to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

If you were a Martian who found a text book on monetary policy floating around you might reasonably expect the Bank of England to be in the middle of a series of interest-rates. Our gender neutral Martian would therefore be confused to note that as inflation expectations rose in the summer of 2016 it cut rather than raised Bank Rate. This was based on a different strategy highlighted by a Twitter exchange I had with former Bank of England policymaker David ( Danny) Blanchflower who assured me there was a “collapse in confidence”. To my point that in reality the economy carried on as before ( in fact the second part of 2016 was better than the first) he seemed to be claiming that the Bank Rate cut was both the fastest acting and most effective 0.25% interest-rate reduction in history. If only the previous 4% +  of Bank Rate cuts had been like that…….

 

Even Norway gets in on the act

For Norges bank earlier today.

On the whole, the changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the September Report.

China is on the move as well as this from its central bank indicates.

On December 14, the People’s Bank of China launched the reverse repo and MLF operation rates slightly up 5 basis points.

I am slightly bemused that anyone thinks that a 0.05% change in official interest-rates will have any effect apart from imposing costs and signalling. Supposedly it is a response to the move from the US but it is some 0.2% short.

The UK economic situation

This continues to what we might call bumble along. In fact if the NIESR is any guide ( and it has been in good form) then we may see a nudge forwards.

Our monthly estimates of GDP suggest that output expanded by 0.5 per cent in the three months to November, similar to our estimate from last month.

The international outlook looks solid which should help too. This morning’s retail sales data suggested that the many reports of the demise of the UK consumer continue to be premature,

When compared with October 2017, the quantity bought in November 2017 increased by 1.1%, with household goods stores showing strong growth at 2.9%……..The year-on-year growth rate shows the quantity bought increased by 1.6%.

As ever care is needed especially as Black Friday was included in the November series but Cyber Monday was not. Although I note that there was yet another signal of the Bank of England’s inflation problem.

Total average store prices increased by 3.1% in November 2017 when compared with the same period last year, with price increases across all store types, in particular food stores had the largest price increase of 3.6% since September 2013.

Comment

The Bank of England finds itself in a similar position to the US Federal Reserve in one respect which is that it had two dissenters to its last interest-rate increase. The clear difference is that the Fed is in the middle of a series of rises whereas the Bank of England has so far not convinced on this front in spite of saying things like this. From the Daily Telegraph.

“We’ve said, given all the things we assume in our forecast, many of which will be misses – there are always unknown things and unpredictable things happening – but given our outlook currently, we anticipate we will need maybe a couple more rate rises, to get inflation back on track, while at the same time supporting the economy,” Ben Broadbent told the BBC’s Today programme.

I wonder if he even convinced himself. Also it is disappointing that we will not get the formal letter explaining the rise in inflation until February as it is not as if Governor Carney has been short of time.

So it seems we will only see action from the Bank of England next year if its hand is forced and on that basis I am pleased to see that Governor Carney plans to get about.

Me on Core Finance

http://www.corelondon.tv/inflation-employment-uk/

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Why does the Bank of England lack credibility these days?

As it is open season at the Bank of England in terms of media appearances and speeches even the absent-minded professor has been spotted. Actually these days he seems to be performing the role of Governor Carney’s messenger boy and as you can see below this was in evidence yesterday,

The effects of Brexit on inflation, and ultimately on the appropriate level of interest rates, are altogether more
uncertain and more complex. They’re certainly too complex to justify the simple assertion that Brexit necessarily implies low interest rates.

I am not sure what world Ben Broadbent lives in as of all the things Brexit might effect I would imagine low interest-rates was a long way down most people’s lists. Also as to the direction of travel well we were told before the referendum by Governor Carney that interest-rates were likely to rise should the vote be to leave.  Of course he then cut them!

But if we continue with what was supposed to be the theme of yesterday’s speech there was also this.

The MPC explained over a year ago that
there were “limits to the extent to which above-target inflation [could] be tolerated” and that those limits
depended on the degree of spare capacity in the economy. In March, eight months ago, it said in its
Monetary Policy Summary that, if demand growth remained resilient, “monetary policy may need to be
tightened sooner” than the market expected. Similar points were made in the intervening months.
Yet, even as inflation rose, and the rate of unemployment fell further, interest-rate markets continued to
under-weight the possibility that Bank Rate might actually go up this year.

This bit is significant because interest-rate markets are again saying “we don’t believe you” to the Bank of England. The clearest example of that is the two-year Gilt yield which at 0.48% is below the current Bank Rate let alone any possible increases. Even the five-year Gilt yield at 0.75% is only pricing in maybe one increase. Thus the message that further Bank Rate increases are on the cards has not convinced.

Mixed Messages

The problem with sending out an absent-minded professor to deliver a message is that they are likely to be, well, absent-minded!

I’m certainly not going to argue here that interest rates will inevitably rise as Brexit proceeds.

If we skip his apparent Brexit obsession that rather contradicts the message he was sent out to put over and later there was more.

However, my main point is that, given all the moving parts, even the marginal impact of EU withdrawal on the
appropriate level of UK interest rates is ambiguous

And more.

These pull in different directions: holding fixed the other two, weaker demand tends to
depress inflation and interest rates, declines in productivity and the exchange rate do the opposite. There
are feasible combinations of the three that might require looser policy, others that lead to tighter policy.

This is classic two handed economics as in one the one hand interest-rates might rise but on the other they might fall.

And more.

Predicting others’ predictions isn’t easy, and I don’t think the balance of risks to inflationary pressure, and
therefore future interest rates, is obvious.

The essential problem faced here is back to the credibility issue that Sir Jon Cunliffe was boasting about in his speech on Tuesday. You see markets have problems but are usually not stupid and they will see through this.

It won’t have escaped your attention that the MPC raised interest rates earlier this month. It did so, in part,
because of the referendum-related decline in sterling’s exchange rate. That has pushed up CPI inflation and
will continue to do for some time yet, as the rise in import costs is passed through to retail prices.

When the Bank of England raised Bank Rate the effective or trade-weighted index for the UK Pound £ was 78 but it had cut Bank Rate in August 2016 when it was 79! So if it raised Bank Rate in response to a one point fall why did it cut it in the face of the 9 point fall that has followed the EU leave vote? Best to leave our absent-minded professor in his land of confusion I think. The statement also ignores that fact that to defeat an inflationary push you need to get ahead of events not be some form of tail end charlie chasing them.

Back in August 2016 Ben Broadbent and his colleagues gambled and we lost.

The MPC eased policy in August 2016 not because of the referendum result but because of the steep fall in measures of business and consumer confidence that followed it.

So in terms of credibility I would say that in modern language they are in fact uncredible.

Retail Sales

These numbers remind us of why Ben Broadbent is so uncredible. You see after the EU Leave vote he decided to ignore signals that the Bank of England previously used and concentrate on business surveys. Markit reported this in July.

UK economy contracts at steepest pace since early-2009

Both they and Ben are probably desperately hoping that people will be absent minded about this as of course the UK economy in fact continued to grow. In particular we saw this happen towards the end of the year as we focus in on Retail Sales.

In October 2016, the quantity of goods bought (volume) in the retail industry was estimated to have increased by 7.4% compared with October 2015; all store types showed growth with the largest contribution coming from non-store retailing. This is the highest rate of growth since April 2002.

That is one of the biggest booms we have ever had and thank you ladies as it your enthusiasm for clothes and shoes shopping that helped give the numbers a push.

That perspective brings us to today’s numbers which reflected the boom last year.

The longer-term picture as shown by the year-on-year growth rate shows the quantity bought fell by 0.3% in comparison with a strong October 2016;

At this point a cursory glance might make you think that the numbers are badly and are in line with some of the surveys we have seen. Except if we look closer maybe not.

The underlying pattern in the retail industry in October 2017, as suggested by the three-month on three-month measure is one of growth, with the quantity bought increasing by 0.9%………The quantity bought in October 2017 increased by 0.3% compared with September 2017;

If you look at the series it was in fact September which was the weak month as was the opening of 2017 and October was a little better. Also we saw another possible confirmation of my argument that higher inflation leads to weaker volumes.

The main contribution to the overall year-on-year decrease of 0.3% in the quantity bought in retail sales came from food stores, providing a negative contribution of 0.9 percentage points;

The inflation data on Tuesday signalled higher food inflation ( 4.2%) and it may well be more than a coincidence that we are seeing lower volumes. Rather curiously the strong point in October was this.

in particular second-hand goods stores (charity shops, auction houses, antiques and fine art dealers) provided the largest contribution to this growth.

Comment

A theme of my work over the past year and a half or so is to be sanguine about the impact of an EU Leave vote. Yes there are impacts due to higher inflation reducing real wage growth but the economy has in fact grown fairly steadily albeit at no great pace. Regular readers will recall that I pointed out that UK economic history showed that a lower Pound £ has a powerful impact. Ironically that is only partly shown by the trade figures where you might expect to see it first but we do seem to have seen it elsewhere. As to the statistics we receive well they can be solved by a stroke of the pen apparently.

Having carried out an assessment on the additional information, ONS has determined that if the
proposed regulations come into force as proposed then local authority and central government influence
in combination with the existence of nomination agreements would not constitute public sector control,
and English PRPs would be reclassified as Private Non-Financial Corporations (S.11002).

About £60 billion I think and it looks a little like a merry-go-round as they put the national debt up and then change their minds.

Meanwhile I expect the speeches from the Bank of England to get ever more complex so that they paper over the issue that they have got the basic wrong. Let me add one more problem to the list by pointing out something it tries to look away from, here are some wealth effects from what is a fair bit of the QE era.

 

 

A solid day for the UK economy or another trade disaster?

Today has opened with some positive news for the UK economy. The opening salvo was fired just after midnight by the British Retail Consortium.

In September, UK retail sales increased by 1.9% on a like-for-like basis from September 2016, when they had increased 0.4% from the preceding year……..On a total basis, sales rose 2.3% in September, against a growth of 1.3% in September 2016. This is above the 3-month and 12-month averages of 2.1% and 1.7% respectively.

So we have had 2 months now of better news on this indicator although it is a far from perfect guide to the official data series mostly because it combines both volumes and prices as hinted below.

September saw a second consecutive month of relatively good sales growth which should indicate welcome news for retailers and the economy alike. Looking beneath the surface though, we see that much of this growth is being driven by price increases filtering through, particularly in food and clothing, which were the highest performing product categories for the month.

Anyway for all the talk of price increases if you look at the figures they cannot have been that high and we have also got a small bit of good news on that front. From the BBC.

Car insurance premiums have dipped for the first time in more than three years, but the respite for drivers will be short-lived, analysis suggests.

Prices fell by 1%, or £9, in the third quarter of the year compared with the previous three months, according to price comparison website Confused.com.

Tourism

The lower value of the UK Pound £ seems to have given the UK economy something of a boost as well.

Tourism is booming in the UK with nearly 40 million overseas people expected to have visited the country during 2017 – a record figure.

Tourist promotion agency VisitBritain forecasts overseas trips to the UK will increase 6% to 39.7 million with spending up 14% to £25.7bn this year.

Also we seem to be holidaying more at home ourselves.

Britons are also holidaying at home in record numbers.

British Tourist Authority chairman Steve Ridgway said tourism was worth £127bn annually to the economy……From January to June this year, domestic overnight holidays in England rose 7% to a record 20.4 million with visitors spending £4.6bn – a rise of 17% and another record.

Over time this should give a boost to the UK trade figures which feel like they have been in deficit since time began! Especially if numbers like the one below continue.

Spending on UK debit cards overseas was down nearly 13% in August compared with the same month in 2016.

Production

If we move to this morning’s official data series we see that production is in fact positive.

In August 2017, total production was estimated to have increased by 0.2% compared with July 2017………In the three months to August 2017, the Index of Production was estimated to have increased by 0.9%……Total production output for August 2017 compared with August 2016 increased by 1.6%.

It is being held back by North Sea Oil & Gas output.

The fall of 2.0% in mining and quarrying was due mainly to oil and gas extraction, which fell by 2.1%. This was largely due to maintenance during August 2017.

The maintenance season is complex is we had a good June followed by weaker months so we do not know if this is part of the long-term decline in the area or simply the ebb and flow of the summer maintenance schedule.

Tucked away in the revisions was some good news as new data sources raised the index for the second quarter of 2017 from 101.6 to 102.1. We also saw a continuing of the trend towards services as production’s weighting in the UK economy fell from 14.65% to 13.95% or another example of the trend is your friend.

Manufacturing

This was the bright spot in the production data set with it rising by 0.4% on a monthly basis and by the amount below on an annual one.

with manufacturing providing the largest upward contribution, increasing by 2.8%

We actually beat France (2.7%) on a year on year and monthly basis which poses food for thought for the surveys telling us it was doing “far,far better ” as David Byrne would say. A driver of this is shown below and the numbers are on a three-monthly basis.

other manufacturing and repair provided the largest contribution, rising by 3.8%, due mainly to an increase of 13.1% in repair and maintenance of aircraft and spacecraft.

We are repairing spacecraft, who knew? If we look at the pattern we see that the official data seems to be catching up with what had previously been much more optimistic survey data from the CBI and the Markit business surveys.

Here is the overall credit crunch era situation which is now a little better than we thought before due to revisions and the recent manufacturing growth.

both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.9% and 3.0% respectively in the three months to August 2017.

Construction

There were even some better numbers from this sector.

Construction output grew 0.6% month-on-month in August 2017, predominantly driven by a 1.7% rise in all new work……Compared with August 2016, construction output grew 3.5%

However I have warned time and time again about this data set and tucked away in the detail was a clear vindication of my scepticism.

The annual growth rate for 2016 has been revised from 2.4% to 3.8% and the leading contribution to this increase is infrastructure, which itself has been revised from negative 9.2% to negative 3.2%.

The ch-ch-changes are far too high for this series to be taken that seriously and this is far from the first time that this has happened.

Trade

This invariably brings bad news as here we go again.

Between the three months to May 2017 and the three months to August 2017, the total UK trade (goods and services) excluding erratic commodities deficit widened by £2.9 billion to £10.8 billion.

The bit that has me bothered about this series apart from its “not a national statistic” basis is this when we have reports from elsewhere that exporting is doing well as we have seen earlier today from the manufacturing and tourism news.

total trade (goods and services) exports decreased by 1.4% (£2.1 billion) ( in the latest 3 months).

Also it is hard to have much faith in primary income and investment position data which has been revised enormously especially in the latter case. I know we have got used to large numbers but a change of £500 billion?

The trade figures themselves have been less affected but surely the tuition fees change was known and should have been anticipated?

The biggest revision is in 2012 (£4.0 billion), with the inclusion of tuition fees having the greatest impact, followed by the inclusion of drugs data into the estimates of illegal activities.

Comment

Let us start with the good news which is that the data in the last 24 hours for the UK economy has been broadly positive. This is especially true if we compare it with the REM style “end of the world as we know it” which manifests itself in so much of the media. Also it is good that the UK Office for National Statistics has a policy of reviewing and trying to improve its data.

The bad news is that some of the large revisions lately bring into question the whole procedure. I mentioned last week the large upwards revision in UK savings which changed the picture substantially there which was followed by unit on labour costs being estimated as growing annually by 1.6% and then 2.4%. We now look at the construction sector which has given good news today and the balance of payments bad news. Both however have seen such large revisions that the true picture could be very different.

It is hard to believe that even those in the highest Ivory Towers could have any faith in nominal GDP targeting after the revisions but it pops up with regularity.

 

The pensions dilemma for millennials and UK Retail Sales

The credit crunch era has been essentially one where central banks have tried to borrow spending and resources from the future. In essence this is a Keynesian idea although their actual methods have had Friedmanite style themes. We were supposed to recover economically meaning that the future would be bright and we would not even notice that poor battered can on the side of the road as we cruised past it. Some measures have achieved this.

Indeed some central banks are involved in directly buying stock markets as these quotes from the Bank of Japan this morning indicate.

BOJ’s Kuroda: ETF buys are aimed at risk premiums, not stock prices. Overall ETF holdnig small proportion of overall equity ( DailyFX).

Some think it has had an impact.

Nikkei avg receiving an agg boost of c.1,700 points after curr ETF policy was adopted. The Nikkei average added 2,150 points in fiscal 2016 ( @moved_average )

Such moves were supposed to bring wealth effects and in a link to the retail sales numbers higher consumption. This would be added to by the surge in bond markets which is the flip side of the low and in many cases negative yields we have and indeed still are seeing. This is why central bankers follow financial markets these days so that they can keep in touch with something they claim is a strong economic boost. In reality it is one of the few things they can point to that have been affected and on that list we can add in house prices.

Millennials

I am using that word broadly to consider younger people in general and they have much to mull. After all they are unlikely to own a house – unless the bank of mum and dad is in play – so do not benefit here. In fact the situation is exactly the reverse as prices must look even more unaffordable of which one sign this week has been the news that more mortgages are now of a 35 year term as opposed to 25 years.

They also face a rather troubling picture on the pension front. From the Financial Times.

 

People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK said in a report published on Thursday. According to the report, young workers in the UK will need to put away 18 per cent of their earnings each year in order to have an “adequate retirement income” — a higher proportion of their earnings than their counterparts in any other OECD country. Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.

To my mind the shock is not in the number which is not far off what it has always been. Rather it comes from finding that after student loan repayments and perhaps saving for a house which comes after feeding yourself, getting some shelter ( rent presumably) and so on. Of course some will feel that their taxes are financing the triple-lock for the basic state pension which is something which for them is getting ever further away. From the BBC.

UK state pension age increase from 67 to 68 to be brought forward by seven years to 2037, government says.

There were two clear issues with this. The first is the irony that this came out as the same time as a report suggested that gains in lifespan are fading. The other is the theme of a good day to bury bad news as the summer lull and the revelations about BBC pay combined.

Oh and tucked away in the Financial Times report was something that will require a “look away now” for central bankers.

A combination of low investment returns

You see those owning equities and government bonds have had a party but where are the potential future gains for the young in buying stock and bond markets at all time highs?

UK Retail Sales

This has not been one of the areas which has disappointed in the credit crunch era. If we look at today’s release we see that in 2010.11 and 12 not much happened as they were 98-99% of 2013’s numbers. Then something of a lift-off occurred as they went 104% (2014), 108.5% (2015), and 113.8% (2016). This fits neatly with my views on the Bank of England Funding for Lending Scheme as we see that a boost to the housing market and house prices yet again feeds into consumer demand. Actually to my mind that overplays the economic effect of FLS as it may have provided a kick-start but the low inflation levels as 2015 moved into 2016 provided the main boost via higher real wages in my opinion.

What happened next?

The first quarter of 2017 saw the weakest period for UK retail sales for a while with several drivers. One was the nudge higher in inflation provided by the lower value for the UK Pound £. Another was that the numbers could not keep rising like they were forever! Let us now look at today’s release.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

As to what caused this well as summer last time I checked happens every year it seems the weather has been looked at favourably for once.

Feedback from retailers suggests that warmer weather in addition to the introduction of summer clothing helped boost clothing sales.

If you recall last autumn we got a boost from ladies and women purchasing more clothes, is their demand inexhaustible and do we own them another vote of thanks?

Also I note that better numbers have yet again coincided with weaker inflation data.

Average store prices (including petrol stations) increased by 2.7% on the year following a rise of 3.2% in May 2017; the fall is a consequence of slowing fuel prices.

Or to be more specific less high inflation.

Comment

If we look at the retail sales data we have Dr. Who style returned to the end of 2016.

The growth for Quarter 2 (Apr to June) 2017 follows a decline of 1.4% in Quarter 1 (Jan Mar) 2017, meaning we are broadly at the same level as at the start of 2017.

Unlike many other sectors it has seen a recovery and growth in the credit crunch era. In addition to the factors already discussed no doubt the rise in unsecured credit has also been at play. For the moment we see that it will provide a boost to the GDP numbers in the second quarter as opposed to a contraction in the first.

But there are issues here as we look ahead. With economic growth being slow we look for any sort of silver lining. But of course the UK’s reliance on consumption comes with various kickers such as reliance on an ever more affordable housing market and poor balance of payments figures.

Also from the perspective of millennials there is the question of what they will be able to consume with all the burdens bearing down on them? Mankind has seen plenty of period where economic growth has stagnated as for example the Dark Ages were not only called that because of the weather. But we have come to expect ever more growth which currently looks like quite a hangover for them. They need the equivalent of what is called “something wonderful” in the film 2001 A Space Odyssey like cold nuclear fusion or an enormous jump in battery technology. Otherwise they seem set to turn on the central bankers and all their promises.

 

 

Problems mount for Mark Carney at Mansion House

The UK’s central bank announces its policy decision today and it faces challenges on several fronts. The first was highlighted yesterday evening by the US Federal Reserve.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

UK monetary policy is normally similar to that in the US as our economies often follow the same cycles. This time around however the Bank of England has cut to 0.25% whilst the Federal Reserve has been raising interest-rates creating a gap of 0.75% to 1% now. In terms of the past maybe not a large gap but of course these days the gap is large in a world of zero and indeed negative interest-rates. Also we can expect the gap to grow in the future.

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate;

There was also more as the Federal Reserve made another change which headed in the opposite direction to Bank of England policy.

The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

So the Federal Reserve is planning to start the long journey to what used to be regarded as normal for a central bank balance sheet. Of course only last August the Bank of England set out on expanding its balance sheet by another £70 billion if we include the Corporate Bond purchases in what its Chief Economist Andy Haldane called a “Sledgehammer”. So again the two central banks have been heading in opposite directions. Also on that subject Mr.Haldane was reappointed for another three years this week. Does anybody know on what grounds? After all the wages data from yesterday suggested yet another fail on the forecasting front in an ever-growing series.

Andrew Haldane, Executive Director, Monetary Analysis and Statistics, and Chief Economist at the
Bank of England, has been reappointed for a further three-year term as a member of the Monetary Policy
Committee with effect from 12 June 2017.

For those interested in what Andy would presumably call an anti-Sledgehammer here it is.

( For Treasury Bonds) the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month…… ( for Mortgage Securities) the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Whilst these really are baby steps compared to a balance sheet of US $4.46 trillion they do at least represent a welcome move in the right direction.

The Inflation Conundrum

This has several facets for the Bank of England. The most obvious is that it eased policy last August as inflation was expected to rise and this month we see that the inflation measure it is supposed to keep around 2% per annum ( CPI ) has risen to 2.9% with more rises expected. It of course badged the “Sledgehammer” move as being expansionary for the economy but I have argued all along that it is more complex than that and may even be contractionary.

Today’s Retail Sales numbers give an example of my thinking so let me use them to explain. Here they are.

In May 2017, the quantity bought in the retail industry was estimated to have increased by 0.9% compared with May 2016; the annual growth rate was last lower in April 2013…..Month-on-month, the quantity bought was estimated to have fallen by 1.2% following strong growth in April 2017.

So after a strong 2016 UK retail sales have weakened in 2017 but my argument is that the main driver here has been this.

Average store prices (excluding fuel) increased by 2.8% on the year; the largest growth since March 2012.

It has been the rise in prices or higher inflation which has been the main driver of the weakness in retail sales. A factor in this has been the lower value of the Pound which if you use the US inflation numbers as a control has so far raised UK inflation by around 1%. This weakness in the currency was added to by expectations of Bank of England monetary easing which of course were fulfilled. You may note I say expectations because as some of us have been discussing in the comments section the main impact of QE on a currency happens in the expectations/anticipation phase.

On the other side of the coin you have to believe that a 0.25% cut in interest-rates has a material impact after cuts of over 4% did not! Also that increasing the Bank of England’s balance sheet will do more than adding to house prices and easing the fiscal deficit. A ten-year Gilt yield of 0.96% does not go well with inflation at 2.9% ( CPI) and of course even worse with RPI ( 3.7%).

House Prices

I spotted this earlier in the Financial Times which poses a serious question to Bank of England policy.

Since 1980, the compounded inflation-adjusted gain for a UK homeowner has been 212 per cent. Before 1980 house price gains were much tamer over the various cycles either side of the second world war. Indeed, in aggregate, prices were largely unchanged over the previous 100 years, once inflation is accounted for.

A change in policy? Of course much of that was before Mark Carney’s time but we know from his time in Canada and here that house price surges and bubbles do happen on his watch. The article then looks at debt availability.

The one factor that did change, though, and marked the start of that step change in 1980, is the supply of mortgage debt……….has resulted in a sevenfold increase in inflation-adjusted mortgage debt levels since then.

This leads to something that I would like Mark Carney to address in his Mansion House speech tonight.

Second an inflation-targeting central bank, which has delivered a more aggressive monetary response to each of the recent downturns, because of that high debt burden.

On that road we in the UK will see negative interest-rates in the next downturn which of course may be on the horizon.

Comment

There is much to consider for the Governor of the Bank of England tonight. If he continues on the current path of cutting interest-rates and adding to QE on any prospect of an economic slow down then neither he nor his 8 fellow policy setting colleagues are required. We could replace them with an AI ( Artificially Intelligent ) Robot although I guess the danger is that it becomes sentient Skynet style ( from The Terminator films ) and starts to question what it is doing?

However moving on from knee-jerk junkie culture monetary policy has plenty of problems. It first requires both acknowledgement and admittal that monetary policy can do some things but cannot do others. Also that international influences are often at play which includes foreign monetary policy. I have looked at the Federal Reserve today well via the Far East other monetary policy applies. Let me hand you over to some research from Neal Hudson of Residential Analysts on buyers of property in London from the Far East.

However, anecdotal evidence suggests that many of these buyers have been using local mortgages to fund their purchases.  The limited evidence I have suggests that around half of Hong Kong and Singaporean buyers use a local mortgage while the majority of mainland Chinese buyers use one.

Okay on what terms?

The main difference is that the mortgage rate tends to be slightly higher (London Home Loan comparison) and local lenders allow borrowers to have far higher debt multiples.

These people are not as rich as might previously have been assumed and we need to throw in changes in the value of the UK Pound £ which are good for new buyers but bad for existing ones. Complicated now isn’t it?

On a personal level I was intrigued by this.

Last year I visited a development in Nine Elms and the lobby felt more like a hotel than a residential block. There were significant numbers of people appearing to pick up and drop off keys with suitcases in tow.

You see I live in another part of Battersea ( the other side of the park) and where i live feels like that as well.

 

 

 

UK consumers leap out of their supposed grave yet again

Today we advance on the UK Retail Sales data which has various factors at play. Firstly the general theme is one of a fading of the growth we saw in 2016 as the growth in real wages also fades. On the subject of real wages I note that Sky News last night was comparing growth in March regular pay ( 2.1%) with April CPI inflation (2.7%) to presumably reinforce its point although of course there is a clear flaw there. Actually in March total pay growth (2.4%) was slightly higher than inflation ( 2.3%) as I pointed out yesterday but for some reason our official statistician’s use regular pay for real wages. I do wonder if they think Pound’s earned as bonuses are somehow marked in people’s pockets and bank accounts and treated differently.

Secondly there is the influence of the timing of Easter which was later this year and whether the seasonal adjustment allowed for that properly. The Confederation of British Industry or CBI certainly thinks that growth picked up.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)……37% of respondents expect sales volumes to increase next month, with 21% expecting a decrease, giving a balance of +16%

Indeed there was something rather familiar from last year so if it is the same let me say thank you ladies one more time. Your devotion to this area of the economy is hugely impressive.

Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%).

The details of this particular survey are as follows.

The survey of 112 firms, of which 57 were retailers, showed that the volume of sales grew at the fastest pace since September 2015 in the year to April, with orders placed on suppliers rising at the strongest rate for a year-and-a-half.

Today’s data

It would appear that my argument about problems with the seasonal adjustment concerning Easter gets another tick in its box.

In April 2017, the quantity bought in the retail industry increased by 2.3% compared with March 2017 and by 4.0% compared with April 2016.

This was a strong monthly performance and even got a little support in a way from my argument about the effect of inflation.

Average prices slowed slightly in April 2017, falling from 3.3% in March to 3.1% in April.

Slightly lower prices helping the performance? Maybe a bit and I also note that the measure of inflation in the retail sector seems to provide more backing for RPI data than CPI or CPIH.

If we look into the detail we see that they have a completely different view to the CBI.

Compared with March 2017, April 2017 has shown increases in the quantity bought and amount spent across all store types except department stores and textile, clothing and footwear stores.

I am not sure how a 97% rise for the CBI goes with an official data fall but there you have it! Meanwhile the march towards consuming online continues.

average weekly spending online was £1.0 billion; an increase of 19% compared with April 2016…….the amount spent online accounted for 15.6% of all retail spending, excluding automotive fuel, compared with 14% in April 2016.

Taking a perspective

If we look back we see that the figures for March which were so troubling at the time were revised from monthly growth of 1.7% to 2%. So they were not quite as bad, however even this month’s better performance is not so impressive on a quarterly basis.

The underlying pattern, as measured by the 3 month on 3 month estimate, showed a slight increase in April 2017 following a short period of contraction, increasing by 0.3%.

Thus it would be realistic to say that the surge of 2016 has gone and we are in a period  of little or marginal growth.

Looking Ahead

One area that is not going to be boosting Retail Sales is the buy to let industry if yesterday’s data from the Council of Mortgage Lenders is any guide.

Gross buy-to-let saw quarter-on-quarter decreases, down 2% by value and 1% by volume. Compared to the first quarter 2016, the number of loans decreased 39% and the amount borrowed decreased by 40%.

Of course that is comparing to the pre Stamp Duty increase peak but even the CML does not look especially optimistic.

The number of loans for buy-to-let house purchase advanced in March remained low compared to activity seen before the change on stamp duty on second properties introduced in April last year.

Also more general housing activity seems to have faded somewhat.

On a quarterly basis, house purchase activity was at its weakest for two years since the first quarter of 2015.

Although ever cheaper mortgage interest-rates did have an impact on existing borrowers.

By contrast, the number of remortgage loans advanced to borrowers was at its highest since the first quarter of 2009.

The only growth was seen in first time buyers which I have to say is not easy to explain.

Moving onto other factors I note that Markit’s latest survey has a two-way pull.

Higher living costs resulted in one of the sharpest falls in cash available to spend for two-and-a-half years in May. Survey respondents also indicated that their need for extra unsecured borrowing continued to rebound from the lows seen in 2016.

Of course regular readers of my work will realise that the UK has been on a bit of an unsecured borrowing binge recently. So perhaps more of the same is on its way. Somewhat oddly the surge in unsecured borrowing seems to have passed Markit’s economists by.

The survey measure which tracks people’s need to take on additional unsecured borrowing has rebounded so far this year, which marks an end to the steadily improved trend seen since late-2011

For newer readers the growth in UK unsecured credit has been of the order of 10% per annum for around a year now according to the Bank of England.

Car Finance

This seems to be continuing its rise and rise.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 13% by value and 5% by volume in March, compared with the same month in 2016. In Q1 2017, new business was up 10% by value and 3% by volume, compared with the same quarter in 2016.

Whilst we do not know that the cars bought were the same as last year there is a clear hint of higher inflation there than in the official figures if we look at the gap between value and volume. Also the word “bought” needs some review as these days we essentially lease or rent them.

The percentage of private new car sales financed by FLA members through the POS was 86.5% in the twelve months to March, unchanged compared with the same period to February.

The demand does however suggest that Gary Numan may have been prescient all those years ago.

Here in my car
I feel safest of all
I can lock all my doors
It’s the only way to live
In cars

Comment

Economics is a very contrary science if it is a science at all. We should welcome today’s better numbers for the UK and indeed they go with the business surveys which suggested an economic pick-up in April. Let us hope that continues. However we see yet more problems for our official statisticians as the seasonal adjustment for the timing of Easter misfires yet again. I am afraid that blaming that old staple the weather simply does not cut it. From the BBC.

Warmer weather helped retail sales to rise by more than expected last month, according to official data.

The actual picture is complex as growth fades and frankly after last year’s surge it had to at some point. The rise in inflation has reduced real wage growth although the situation is as ever in flux as in response to today’s numbers the UK Pound £ has pushed above US $1.30 which would help trim future inflation rises if we stay there. The ying to the upbeat yang is however that as so often in the past we look like we are borrowing on tick to spend.

If we move to financial markets this week has taught us one more time that crowded trades are the worst place to be as @NicTrades reminds us.

Reuters said this week biggest trade in the world was shorting VIX via leveraged ETFs millions selling vol at 7.8% VIX is now 16%

ETF stands for Exchange Traded fund.

 

 

 

 

What is it about GDP in the first quarter these days?

The behaviour of the UK economy so far in 2017 has been something of a hot potato in debate as the numbers swing one way and then the other. Let me give you an example of a ying and yang situation . The downbeat ying was provided last week by the official data on UK retail sales.

The 3 months to March shows a decrease of 1.4%; the third consecutive decrease for the underlying 3 month on 3 month pattern……Looking at the quarterly movement, the 3 months to March 2017 (Quarter 1) is the first quarterly decline since 2013 (Quarter 4).

That was ominous for today’s GDP release as the consumer sector had been part of the growth in the UK economy. Our official statisticians crunched the numbers as to the likely effect.

The 3-month period ending March 2017 coincides with Quarter 1 (Jan to Mar) 2017 of the quarterly gross domestic product (GDP) output estimate. It marks the first negative contribution of retail sales to quarterly GDP growth since Quarter 4 (Oct to Dec) 2013, contributing negative 0.08 percentage points (to 2 decimal places).

However only yesterday there was a yang to the ying from the Confederation of British Industry or CBI.

Retail sales growth accelerated in the year to April, with volumes rising faster than expected, according to the latest monthly CBI Distributive Trades Survey.

Here is some more detail.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)…….Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%). Meanwhile sales volumes decreased in specialist food & drink (-43%) and furniture & carpets (-30%).

If we stay with the specifics of the CBI report its is fascinating to see clothing leading the charge again. Regular readers will recall that this was the state of play last autumn and at that time it was female clothing in particular. So ladies if you have rescued us yet again we owe you another round of thanks. In such a situation you would be the consumer of last resort as well as often the first!

But the issue here is how does this fit with the official data? There is one way it might work and it comes down to the timing of Easter which was later this year than last. Whilst the official data does make seasonal adjustments I have seen this miss fire before. Perhaps the clearest generic example of this is first quarter GDP in the United States which year after year has been lower than the trend for the other quarters hinting at a systematic issue.

House prices

If these have been leading the charge for UK economic growth then this morning’s news will disappoint.

House prices recorded their second consecutive monthly fall in April, while the annual rate of growth slowed to 2.6%, the weakest since June 2013.

The date is significant as it was the summer of 2013 when the Bank of England lit the blue touch-paper for UK house prices with a new bank subsidy programme. The latest version of this called the Term Funding Scheme has risen in size to £57.5 billion.since its inception last August. Looking forwards if we allow for the obvious moral hazard this is hardly especially optimistic.

As a result, we continue to believe that a small increase in house prices of around 2% is likely over the course of 2017 as a whole.

The GDP data

UK gross domestic product (GDP) was estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2017, the slowest rate of growth since Quarter 1 2016.

This was driven by the retail sales slow down and this.

Slower growth in Quarter 1 2017 was mainly due to services, which grew by 0.3% compared with growth of 0.8% in Quarter 4 (Oct to Dec) 2016……The services aggregate was the main driver to the slower growth in GDP, contributing 0.23 percentage points…….The main contributor to the slowdown in services was the distribution, hotels and restaurants sector, which decreased by 0.5%, contributing negative 0.07 percentage points to quarter-on-quarter GDP growth.

The services slow down will have had a big effect because it must be pretty much 80% of our economy by now. Officially it is 78.8%.

Actually much of the economy grew at this sort of rate.

Production, construction and agriculture grew by 0.3%, 0.2% and 0.3% respectively in Quarter 1 2017.

So a slowing on the end of 2016 but here is something to think about. UK GDP growth was 0.2% in the first quarter of 2016 so ironically it is better this year but also was 0.3% in 2015. Are we developing a similar problem to the US where it seems to be something of a hardy perennial situation and if so why?

Looking Forwards

As well as the more optimistic CBI retail sales report there was this from Monday.

The survey of 397 manufacturers found that domestic orders had improved at the fastest pace since July 2014 in the three months to April. Meanwhile export orders recorded the strongest growth in six years, supported by strong rises in competitiveness, particularly in non-EU markets which improved at a record pace.

It is not the only body which is looking forwards with some optimism.

The UK economy slowed sharply in Q1, as signalled by PMI. March rise in PMI suggests Q1 GDP could be revised up from 0.3% to 0.4%………Note that Q1 GDP was based on a forecast of no service sector growth in March. PMI showed strengthening ( Chris Williamson of Markit ).

What about the individual experience?

We have settled on GDP per capita as a better guide and this was frankly poor this time around.

GDP per head was estimated to have increased by 0.1% during Quarter 1 2017.

This adds to an issue which the chart below highlights, guess which of the lines is our more recent experience?

For the people who think that their individual experience has not backed up the claims of improvement there is food for thought in that chart.

Is GDP underecorded?

Tim Worstall wrote a piece for CapX this week telling us this.

For it’s obvious to our own eyes, and when properly adjusted GDP shows it once again, that we’ve all got much richer these recent decades.

Okay why?

The CPI overstates inflation – and thus understates how quickly real incomes are rising……Of course the ONS and others do the best they can but the current estimate is that inflation is overstated by 1 per cent a year. Or real income rises understated by it of course.

There are some interesting points on goods which are free ( WhatsApp for example) and ignored by GDP.  However it completely misses out the cost of housing which in recent times has been a major inflationary force in my mind. Would you rather have housing or the latest I-Pad?

Care is needed as of course there were substantial gains in the past but on this logic we are all much better off than we realise. Really?

Comment

The issue with first quarter growth was also true across the channel as the expectation and then the reality show below.

with 0.6% growth signalled for both Germany and France ( Markit )…….In Q1 2017, GDP in volume terms* slowed down: +0.3%, after +0.5% in Q4 2016 ( France Insee ).

So as we note the Bank of France was correct we await the US figures wondering what it is about first quarter GDP? For France this is not yet a sequence as last year was better but the UK and US seem trapped in a mire that appears to have a seasonal reappearance.

Looking ahead we were expecting higher inflation to bite on real incomes as 2017 progressed. As we stand a little of the edge of that has been taken off that impact. What I mean by that is the rise of the UK Pound £ to above US $1.29 helps with inflation prospects as does the fall in the price of a barrel of Brent Crude Oil to below US $52 per barrel. Of course they would need to remain there for this to play out.

Some posted some Blood Sweat & Tears lyrics a while back and they seem appropriate again.

What goes up, must come down
Spinning wheel got to go round
Talkin’ ’bout your troubles, it’s a cryin’ sin
Ride a painted pony, let the spinning wheel spin