Sweden has a growing unemployment problem

Today is one for some humility and no I am not referring to the UK election. It relates to Sweden and developments there in economic policy and its measurement which have turned out to be extraordinary even for these times. Let me start by taking you back to the 22nd of August when I noted this.

I am less concerned by the contraction than the annual rate. There had been a good first quarter so the best perspective was shown by an annual rate of 1.4%. You see in recent years Sweden has seen annual economic growth peak at 4.5% and at the opening of 2018 it was 3.6%.

We now know that this broad trend continued into the third quarter.

Calendar adjusted and compared with the third quarter of 2018, GDP grew by 1.6 percent.

What was really odd about the situation is that after years of negative interest-rates the Riksbank raised interest-rates at the end of last year to -0.25% and plans this month to get back to 0%. So it has kept interest-rates negative in a boom and waited for a slow down to raise them. But there is more.

The Unemployment Debacle

If we step forwards to October 24th there was another development.

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

Actually it looked a bit more than slightly if we switch to Sweden Statistics.

In September 2019, there were 391 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 62 000 compared with September 2018.

The Riksbank at this point was suggesting it would raise to 0% but gave Forward Guidance which was lower! Make of that what you will.

But in late October Sweden Statistics dropped something of a bombshell.

STOCKHOLM (Reuters) – Recent Swedish jobless figures – which that have shown a sharp rise in unemployment and led to calls for the central bank to postpone planned interest rate hikes – are suspect, the country’s Statistics Office said on Thursday………….The problems also led to the unemployment rate being underestimated at the start of the year and then overestimated in more recent months.

The smoothed unemployment rate was lowered from 7.3% to 6.8% in response to this and changed the narrative, assuming of course that they had got it right this time. The headline rate went from 7.1% to 6%.

This morning we got the latest update and here it is.

In November 2019, there were 378 000 unemployed persons aged 15─74, not seasonally adjusted, which is an increase of 63 000 persons compared with the same period a year ago. The unemployment rate increased by 1.0 percentage points and amounted to 6.8 percent.

As you can see eyes will have turned to the headline rate having gone from 6% to 6.8% making us wonder if the new methodology has now started to give similar results to the old one. It had been expected to rise but to say 6.3% not 6.8%. We get some more insight from this.

Among persons aged 15–74, smoothed and seasonally adjusted data shows an increase in both the number of unemployed persons and the unemployment rate, compared with nearby months. There were 384 000 unemployed persons in November 2019, which corresponds to an unemployment rate of 6.9 percent.

A much smaller move but again higher and because it is smoothed we also start to think we are back to where we were as this from Danske Bank makes clear.

Ooops! The very unreliable revised new #LFS data showed a significant bounce back up to 7.3 % seasonally adjusted! This is very close to what our model suggested. Ironically, this is just as bad as the old figures suggested. But perhaps these are wrong too? ( Michael Grahn )

So the new supposedly better data is now giving a similar answer to the old. Just for clarity they are taking out the smoothing or averaging effect and looking to give us a spot answer for November unemployment.

The Wider Economy

One way of looking at the work situation is to look at hours worked.

On average, the number of hours worked amounted to 154.3 million per week in November 2019.

But that is lower than under the old system.

On average, the number of hours worked amounted to 156.5 million per week in September 2019…..On average, the number of hours worked amounted to 156.2 million per week in August 2019.

This is really awkward as under the new system Sweden has just under an extra half a million employees but the total number of house worked has fallen. Make of that what you will.

If switch to production we saw a by now familiar beat hammered out earlier this month.

Production in the industry sector decreased by 3.0 percent in October in calendar adjusted figures compared with the same period of the previous year. The industry for machinery and equipment n.e.c. decreased by 6.8 percent in fixed prices and accounted for the largest contribution, -0.2* percentage points, to the development in total private sector production.

Monthly output was up by 0.2% seasonally adjusted but as you can see was well below last year’s. This means Sweden is relying on services for any growth.

Production in the service sector increased by 1.1 percent in October in calendar adjusted figures compared with the same period of the previous year. Trade activities increased by 3.6 percent in fixed prices and contributed the most, 0.5 percentage points, to the development in total private sector production.

So Sweden has maybe some growth which will get a boost from construction.

Production in the construction sector increased by 2.1 percent in October in calendar adjusted figures compared with the same period of the previous year. This sector increased by 2.1 percent in fixed prices, not calendar-adjusted.

If we switch to private-sector surveys then Swedbank tells us this.

The purchasing managers’ index for the private service sector (Services PMI) dropped in November for the third month in a row to 47.9 from 49.4 in October. The
decrease in the index means that service sector activity is continuing to decline in the fourth quarter to levels that have not been seen in six years and that are
contributing to lower hiring needs in service companies,

So maybe the service sector growth has gone as well. The overall measure speaks for itself.

Silf/Swedbank’s PMI Composite index dropped for the third straight month to 47.2 in November from 48.5 in October, reinforcing the view that private sector activity is
slowing in the fourth quarter. Since November of last year the composite index has fallen 7.6 points

Comment

There are two clear issues in this. Of which the first is the insane way in which the Riksbank kept interest-rates negative in a boom and now is raising them in a slowing.

Updated GDP tracker after Nov LFS dropped to a new low since 2012, just 0.26% yoy. ( Michael Grahn of Danske )

Some signals suggest that this may now be a decline or contraction. But whatever the detail the Swedish economy has slowed and will not be helped much by the slower Euro area and UK economies. An interest-rate rise could be at the worst moment and fail the Bananarama critique.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

Next is the issue of lies, damned lies and statistics. I am sure Sweden’s statisticians are doing their best but making mistakes like they have about unemployment is a pretty basic fail. It reminds us that these are surveys and not actual counts and adds to the mess Japan made of wages growth. So we know a lot less than we think we do and this poses yet another problem for the central bankers who seem to want to control everything these days.

Let me end with the thought that UK readers should vote and Rest In Peace to Marie Fredriksson of Roxette.

She’s got the look (She’s got the look) She’s got the look (She’s got the look)
What in the world can make a brown-eyed girl turn blue
When everything I’ll ever do I’ll do for you
And I go la la la la la she’s got the look

 

 

 

 

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

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

Neverending story
Ah
Neverending story
Ah
Neverending story
Ah

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

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

US Repo Problems

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Riksbank of Sweden

It has made this announcement today.

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

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

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

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

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

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

QE

Well that never seems to go away does it?

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

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

The Economy

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

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

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

Next comes this.

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

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

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

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

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

Comment

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

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

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

The Investing Channel

How has the Riksbank misjudged the economy of Sweden so badly?

Today is the day that central bankers gather for the annual symposium at Jackson Hole in Wyoming. This has produced quite a few changes in central banking policy in recent times such as the introduction of Forward Guidance for interest-rates. Of course that has been a complete failure as the hosting US Federal Reserve is now cutting interest-rates after “guiding” people towards rises.But the title of this year’s symposium does lead into my subject to today. So here is the Kansas City Fed.

Challenges for Monetary Policy

Actually somewhat typically they then lose the plot.

Different rates of recovery have led central banks to chart different courses for the normalization of monetary policy following a period in which most central banks used both conventional and unconventional monetary policy tools in response to the Great Recession. Whereas some central banks are approaching a neutral policy setting, others have yet to begin the process of removing policy accommodation.

Meanwhile back in the real world the one central bank (itself) which had tried to engage neutral has in fact engaged reverse. I suppose they get to some by the central banks which follow the Fed. But rather than thinking about “removing policy accommodation” other central banks such as the ECB are now looking for a gear box with more reverse gears.

Let me now move to a specific example which in a way is symbolised by a symposium starting later for which we do not have a schedule yet! The only thing we do know is that Fed Chair Jerome Powell speaks tomorrow afternoon.

Riksbank

This whole procedure reminds me of the Riksbank which decided it would be amongst the shock troops of the monetary accommodation era. It cut interest-rates into negative territory ( -0.5%) and engaged in some QE bond buying. Then after years of promising a change it did this last December.

The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent. The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019. With a repo rate of −0.25 per cent, monetary policy is still expansionary and will thereby continue to support economic activity.

This was one of the challenges for monetary policy or today;s theme as I pointed out at the time. From the 20th of December.

Actually there is quite a bit that is odd about this as indeed there has been, in my opinion, about the monetary policy of the world’s oldest central bank for some time. Let me give you two clear reasons to be doubtful. Firstly GDP growth plummeted from the 1% of the second quarter of this year to -0.2% in the third…….Moving onto inflation the outlook has also changed as we have moved towards the end of 2018.

Actually there was another problem as how did this work out for the Riksbank?

this can partly be explained by temporarily weak car sales.

So as you can see I was pointing out at the time that this was odd as the Riksbank had ignored the good times for the Swedish economy and then as I put it panicked fearing it would approach the next slow down with interest-rates already negative.

Ch-ch-changes

If we move forwards to the July policy meeting the minutes tell us this.

Similarly for Sweden, expectations of further monetary policy stimulation have increased. Pricing on the
financial markets now indicates a higher probability of a rate cut than of a rate rise while bank economists in general expect a postponement of the repo rate increases.

As you can see they were facing up to a situation where even they must have realised they had lost credibility on the subject of interest-rate rises. If we now move forwards to the end of July Sweden Statistics produced more bad news.

Sweden’s GDP decreased 0,1 percent in the second quarter of 2019, seasonally adjusted and compared to the first quarter of 2019. GDP increased by 1,4 percent, working-day adjusted and compared to the second quarter of 2018.

I am less concerned by the contraction than the annual rate. There had been a good first quarter so the best perspective was shown by an annual rate of 1.4%. You see in recent years Sweden has seen annual economic growth peak at 4.5% and at the opening of 2018 it was 3.6%. So it is quite clear that the timing of the interest-rate rise was something of a shocker or in football parlance an own goal.

Today

Sweden Statistics has produced some concerning news.

In July 2019 there were 5 239 000 employed persons. The unemployment rate was 6.9 percent, a decrease of 0.9 percentage points compared with July 2018.

What’s concerning about that? Well they have confused the concepts of up and down as the rate increased rather than decreased.

In July 2019, there were 390 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 50 000 compared with July 2018. The number of unemployed men increased by 29 000 to 202 000. There were 188 000 unemployed women. The unemployment rate was 6.9 percent, an increase of 0.9 percentage points compared with July 2018.

This poses a real problem for the Riksbank because if we look at the accompanying chart they have raised interest-rates into a downwards turn in the unemployment situation. We know that employment can be a leading indicator so let us look at that.

In July 2019, there were 5 239 000 employed persons aged 15─74, not seasonally adjusted. The number of employed men was 2 739 000, a decrease of 39 000 compared with July 2018. The number of employed women was 2 500 000. This was the third consecutive month in which the employment rate did not increase compared with the same month a year earlier. Prior to that, the number of employed persons had increased every month since September 2016. The employment rate was 69.8 percent, a decrease of 1.0 percentage point compared with the same month a year earlier.

As you can see the picture is not pretty there either. As an aside the labour market switch is sexist as it is mostly men, I guess it must be traditional male jobs being affected.

But the picture here is not only troubling for the Riksbank as we see another statistics agency with troubles.

Last time my model said recession, as it also does now, was ahead of 2012. But the statistics agency all through 2012 posted GDP at +1.5-2% y/y – happy times! Now when all revisions are done GDP was actually below 0% y/y most of 2012. ( Mikael Sarwe of Nordea )

There is more here from Michael Grahn of Danske Bank

Adding July LFS data to our GDP tracker model a very preliminary take on Q3 GDP say growth slowed to 0.9 % yoy.

Comment

The Governor of the Riksbank will have been a relieved man as he boarded his flight from Sweden to the Mid-West. He will escape the economic bad news by being elsewhere and may even find some suggestions from his central banking colleagues about what to do. But the reality is a cruel one in that he and his colleagues are in a pickle of their own making as their timing was so bad they have endulged in some pro-cyclical monetary policy in a downturn. Even worse their previous dithering means they start it with negative interest-rates (-0.25%).

Perhaps that is something they could discuss at Jackson Hole. How the Riksbank got things so wrong?

Let me open the discussion with a talking point.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 6.8 percent in June, a decrease of 0.5 percentage point compared with May. M1 amounted to SEK 3 053 billion in June.

Me on The Investing Channel

 

 

 

Problems are mounting again for the Riksbank of Sweden

Today is one which will concentrate the minds of the Riksbank of Sweden. One way or another they will find themselves affected by what action the European Central Bank takes. Conceptually this is really rather awkward for them as they took this action just before Christmas.

The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent.

Even worse they gave Forward Guidance like this.

The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019.

Many central banks have a poor record with their Forward Guidance but the Riksbank competes with the Bank of England for the worst effort. Of course they could decide to support the Krona by raising interest-rates as the ECB eases but that would be a road to Damascus style change. But that does give us the opening influence on their policy which is the large influence of the Euro/Krona exchange rate on Swedish economic policy.

As to the Krona the Riksbank has produced a report suggesting this.

The overall conclusion is that the krona is unexpectedly weak and that a certain appreciation is to be
expected, but that there is considerable uncertainty as to both when and by how much the krona
will strengthen.

Perhaps the appreciation will be due to a new hard Krona policy or perhaps I am jesting. But how can they say their currency is “unexpectedly weak” after applying negative interest-rates and QE bond buying? Of course they do expect people to believe the new version of Forward Guidance.

More precisely, the rate path means that an initial rate rise may occur in October, December or February. After that, the repo rate will be raised by just under 0.5 percentage points a year.

So we can note that the Riksbank is playing the same old song ignoring the fact that over the past 5/6 years it has been full of bum notes. Also as I regularly point out timing is nearly as important as what you do or as Bananarama put it.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

On that score the Riksbank took so long to try to get interest-rates out of negative territory that it has done so into a world downturn.

Labour Market

Riksbank policymakers will have been spluttering into their morning espresso as they read this earlier.

In June 2019, there were 427 000 unemployed persons aged 15–74, not seasonally adjusted. This corresponds to an unemployment rate of 7.6 percent. ( Sweden Statistics )

This caught expectations of 6.5% out and yes I did type that correctly. Firstly we should be clear that the monthly unadjusted number is an erratic series But last October and November it was 5.5% and ( with fluctuations) has been rising since. Or if we look at the latest 3 readings we see 6.2%,6.8% and now 7.6%.

If we move to the adjusted series we see this.

Smoothed and seasonally adjusted data indicates a decrease in the employment rate and an increase of the unemployment rate. The unemployment rate was 6.3 percent.

The problem here is use of the word “Smoothed” or if you prefer averaging because it reduces the use of the number as an economic indicator as you will only learn of changes after a delay. The more the numbers are smoothed the more the delay. Danske Bank calculate their own seasonally adjusted series and put the number at 6.6% compared to a couple of occasions where it has dipped below 6%.

If we switch to employment which has worked as a leading indicator at times in the credit crunch era we see another hint of trouble.

 It was the second month in a row that employment did not increase, compared with the same month previous year. Before that, the number of employed persons has increased every month since September 2016……..Smoothed and seasonally adjusted data indicates a minor change in the number of employed persons and a decrease in the employment rate compared with recent months.

Money Supply

We have learnt over the past year or two that narrow measures of the money supply are the best economic leading indicator we have and here is this morning’s release.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 6.8 percent in June, a decrease of 0.5 percentage point compared with May. M1 amounted to SEK 3 053 billion in June.

If we look back we see that the number has been falling since 13.8% was recorded in 2015. That followed the introduction of a negative official interest-rate ( repo rate) and the commencement of QE bond buying. Last year the growth rate had fallen to 7.3% and the latest data raises concerns about further falls as 2019 develops.

Another interesting development is that the stock of note and coins in Sweden rose last year. I note this because Sweden is famous for switching towards electronic forms of payment and cash and has previously seen some ten years of falls in the amount of physical cash. But whilst last year’s rise was small at 1.9% there was one.

Another possible guide is that credit to business seems to be slowing.

In June, the annual growth rate on loans to non-financial corporations was 5.2 percent, which is a decrease of 0.9 percentage points compared with May.

Household credit

This can be viewed through two windows of the Riksbank. A bit like in the BBC childrens TV series Blue Peter. Through the round window the number below is good because Sweden’s households are over indebted. Through the square window it is bad because they may consequently consume less and weaken GDP growth.

In June 2019, the annual growth rate of households’ loans from monetary financial institutions (MFIs) was 4.9 percent, which means that the growth rate decreased by 0.1 percentage point compared with May.

As to interest-rates you may be wondering what a mortgage typically costs in Sweden.

Households’ average housing loan rate for new agreements was 1.52 percent in June, unchanged compared with May. The floating housing loan rate amounted to 1.54 percent in June, which is unchanged compared with May.

That is a bit over a half a percent lower than the UK so the delta from reducing interest-rates seems to be around 0.5 at these levels or mortgage rates fall by around half off the official rate change.

Comment

We have looked at the domestic situation in Sweden and now let us widen our scope. We started the week by looking at signs of economic weakness in the Pacific and that has continued this morning with the news that Nissan is looking to shed around 9% of its workforce. These days Nissan also has strong links to Europe and the mood here will not be helped by this.

German business morale plunged in July to its lowest level in more than six years, a survey showed on Thursday, in a further sign that a manufacturing crisis is pulling Europe’s largest economy toward recession……..The Ifo institute said its business climate index fell to 95.7 from an upwardly revised 97.5 in June. The July reading undershot a consensus forecast for 97.1. It was the fourth monthly decline in a row and the lowest level since April 2013. ( Reuters)

For Sweden this means that the outlook for its major trading partner is poor. Thus the reality is that the Riksbank looks more likely to cut interest-rates again than raise them.

Meanwhile we get yet more evidence that banks take the “Be afraid, Be very afraid” strap line from the film The Fly about inflicting negative interest-rates on the ordinary depositor.

The average interest rate for new deposits by households in bank accounts was 0.07 percent in June, a decrease of 0.01 percentage points compared with May. The interest rate on accounts with fixed periods or a limited number of free withdrawals amounted to 0.17 percent in June, an increase of 0.01 percentage point compared with May.

The Investing Channel

 

Central Banks have a big problem with the future

A feature of 2019 so far has been a succession of U-Turns by central banks and by two of the world’s major central banks in particular. This has been most marked at the US Federal Reserve where it was not so long ago that some were suggesting we would see four interest-rate increases ( of 0.25%) this year on the road to what was called normalisation. Regular readers will recall that we were one of the few places that were troubled by the fact that we simply do not know what and where normal is anymore. But for our purposes today the main issue is that the US Federal Reserve looks set to cut later this month and perhaps one more time in 2019. Should that scenario come to pass then the previous concensus will have been wrong by a net 6 interest-rate changes. Seeing as interest-rates are so low these days that is quite an achievement.

This is on my mind because if we take the advice of Kylie Minogue and step back in time just under 7 years central banks were heavily influenced by this from Micheal Woodford and Jackson Hole.

The first of these is forward guidance — explicit statements by a central bank about the outlook for future policy, in addition to its announcements about the immediate policy actions that it is undertaking.

This was always going to be adopted as it flattered central banking egos and provided an alternative at a time when central bankers were afraid of being “maxxed out”. But as my opening paragraph pointed out it has been a complete failure in recent times in the United States where it began.

Europe

This has been something of a two stage failure process for Forward Guidance. The opening part got some intellectual backing last September from Benoit Coeure of the ECB.

Communicating our expectation that the ECB key interest rates would remain at their present levels at least through the summer of 2019 was therefore consistent with the “risk management” approach to monetary policy that the Governing Council has repeatedly applied in recent years,

This had two steps as it was perceived like this.

Yet, on my next slide you can see that, at some point in early 2018, markets expected the ECB to hike its deposit facility rate one month after the expected end of net asset purchases.

So that was a bit of a fail and it continued long after this speech. It was something I found hard to believe but the idea that the ECB would raise interest-rates in 2019 was like these lyrics from Hotel California.

And in the master’s chambers
They gathered for the feast
They stab it with their steely knives
But they just can’t kill the beast.

It seemed to exist in an evidence-free zone but somehow survived. But events recently took a dreadful turn for it and by implication ECB Forward Guidance.

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required……..This applies to all instruments of our monetary policy stance. Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.

So the interest-rate rises had not only morphed into unchanged but now we were being forward guided to a cut. Could that be any worse? Apparently it can as the incoming ECB President switches to downplaying the size of the interest-rate cuts on the horizon.

*IMF SAYS THERE MAY ONLY BE LIMITED ROOM FOR ECB RATE CUTS ( @lemasabachthani )

But apparently forward guidance is another beast that our steely knives cannot kill.

We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation.

Bank of England

Gertjan Vlieghe has given a speech on this subject and he is in the mood for change and I do not blame him but sadly it does not start well.

In particular, communicating more about the Monetary Policy Committee’s preferred future path of interest rates
would be easier to understand than our current approach.

Preferred? I would prefer England to win the cricket world cup final on Sunday but a balanced reality involves looking at the strengths of New Zealand. Also it is not often central bankers do humour and when they do it is mostly unintentional.

Global central banks have changed their outlook for policy significantly in recent months.

He has a go at placing a smokescreen over events as well.

and the UK outlook for monetary policy continues to be materially affected by Brexit uncertainty.

This is misleading in my view mostly because none of us know what will happen so we cannot allow for it. Even if you think there is an effect right now then it is too late to do anything about it because an interest-rate move takes around 18 months to fully impact.

It feels for a while that we are getting some honesty.

Before diving into the details of the argument I want to stress that a far bigger challenge to monetary policy is
that the future is uncertain, and my suggested communications improvement will not change that. Today’s
preferred path of interest rates will change tomorrow, if the economy turns out differently from what we
expected.

But sadly as so often with Gertjan he drops the ball at the crucial point.

But I am arguing that we can achieve a modest improvement in the understanding that
businesses, households and financial markets have of what our objectives are, and what we think we need
to do to meet those objectives.

Most people only vaguely know who they are at best, so they idea they will be hanging on their every word is laughable. Financial markets do, of course, but how much of the real economy gets missed out?

The next bit reminds me of this from Queen.

Is this the real life?
Is this just fantasy?

Here is Gertjan pedalling hard.

Moreover, the Swedish central bank reported that the quality of its own internal deliberations and discussions
with staff had improved, and that discussion of monetary policy by external observers had become “less
speculative”

Meanwhile if we go back to real life.

The Riksbank has become pretty much a laughing-stock.

Comment

As you can see Forward Guidance has been one of the failures of our times. On an internal level down keeps being the new up but also it is part of a framework where the environment keeps getting worse. What I mean by that is after all the policy accommodation economic growth now has a “speed limit” of 1.5% and 2019 is proving to be a difficult year for the world economy. It flatters central banking egos, gives markets a hare to chase and journalists something to copy and paste, but not so much for the real economy.

The piece de resistance to all this is provided by Gertjan who you may recall has been Forward Guiding us to interest-rate increases for a while now. He has another go.

This would justify further limited and gradual rate increases, such that we might reach 1.00% in a year’s time,
1.25% in two years’ time, and 1.75% in three years’ time, with large uncertainty bands around this central
path.

You may notice the use of the word “might” here. Whereas he seems a lot more sure about this road.

On balance I think it is more likely that I would move to cut Bank Rate towards the effective lower bound of close to 0% in the event of a no deal scenario.

Just for clarity the Bank of England now thinks this is at 0.1% after assuring us for quite a long period ( Governor Carney repeated it more than once) that it was 0.5%.

So if we just look at Gertjan’s career at the Bank of England he looks ro be pointing us towards a situation where he has twice “Forward Guided” us to interest-rate increases and then cut them! I await your thoughts on how useful you think he will have been in such a scenario?

Did the Riksbank of Sweden just panic?

This morning has brought news of an event that had been promised so many times but turned out to be a false dawn. Indeed on their way to apparently making sense of this world Rosa & Roubini Associates told us this.

Riksbank Likely to Wait Longer Before Lift-Off

I guess you are now all expecting this.

Economic activity is strong and the conditions are good for inflation to remain close to the inflation target in the period ahead. As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly. The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent.

Actually there is quite a bit that is odd about this as indeed there has been, in my opinion, about the monetary policy of the world’s oldest central bank for some time. Let me give you two clear reasons to be doubtful. Firstly GDP growth plummeted from the 1% of the second quarter of this year to -0.2% in the third. Or as the Riksbank puts it.

As expected, Swedish GDP growth has slowed down during
the second half of this year. However, the downturn in the third  quarter was greater than expected.

So if we step back we immediately wonder why you raise rates when economic growth is slowing when you could have done so when it was rising? The excuse provided looks weak especially as we note the automobile industry has continued to struggle.

One contributory cause of  this was that household consumption fell by a surprisingly large  degree, but this can partly be explained by temporarily weak car sales.

Also inconvenient numbers are regularly described as temporary even when they are nothing of the sort.

Moving onto inflation the outlook has also changed as we have moved towards the end of 2018.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.1 percent in November 2018 (2.4 percent in October). The CPIF decreased by 0.1 percent from October to November.  ( Sweden Statistics)

Here is FXStreet from last week when these numbers came out.

Nordea Markets 1/2: : CPIF inflation stood at 2.1% in November, below consensus and 0.3% point below the ’s forecast. Core inflation, i.e. CPIF ex energy, came out at 1.4%, as much as 0.3% point below the Riksbank’s call.

To be fair to Nordea they were expecting a hike so perhaps they had received an official nod because there is now another factor at play. That is of course the lower trajectory of the oil price which looks set to depress headline inflation numbers in the weeks and months ahead. If we take a broad sweep the price of a barrel of Brent Crude Oil has fallen some US $30 since the Riksbank balked at raising Swedish interest-rates. I think you can spot the problem here. Apparently the wages fairy will turn up which of course is yet another central banking standard view in spite of reality not being that helpful.

Wage growth has certainly become a little lower than
the Riksbank’s forecast over recent months and the forecast has been revised downwards slightly.

The Riksbank’s own view

Let me know switch to some sections of their monetary report which frankly would fit better with an interest-rate cut.

The global economy, which has grown rapidly in recent years, is now entering a phase of more subdued GDP growth, which is in line with the Riksbank’s earlier forecasts.

So Sweden is swimming against the trend?

Economic activity in Sweden is still strong, although GDP growth and inflation have been weaker than expected.

So definitely maybe. What about inflation prospects?

Even though inflation has been lower than expected, the conditions remain good for inflation to stay close to the inflation target going forward.

Then we get quite a swerve because you might think that with the claimed view of the Riksbank more interest-rate hikes will be on the way. It would be logical assuming there is anyone who believes the growth path remains strong and inflation will be ~2% per annum. But apparently not.

The forecast for the repo rate has therefore been revised downwards to indicate that the next repo rate rise will probably occur during the second half of 2019 . After this, the forecast indicates approximately two rate rises per year by 0.25 percentage points each time.

If we skip the last sentence on the grounds that this has been not far off the promised pattern since the Riksbank last raised back in 2011 we see that what is now called a “dovish hike” has just taken place. What that means is that whilst there has been a rise the future expected path falls. Thus if you follow central banking forward guidance interest-rates as 2019 develops may now be lower than you were expecting.

Operation Twist and QE

The other factors in Sweden’s monetary policy are described below.

At the end of November, the Riksbank’s government bond
holdings amounted to just under SEK 350 billion, expressed as a nominal amount.

But they are giving Operation Twist an extra squeeze.

In December 2017, the Executive Board also decided that reinvestments of the large principal payments due in the first six months of 2019 should be allocated evenly across the period from January 2018 to June 2019 . This means that the Riksbank’s holdings of government bonds will increase temporarily in 2018 and the beginning of 2019.

If you wished to tighten monetary policy then you could simply let these bonds mature and not replace them.

US Federal Reserve

As we were expecting it did this last night.

Today, we raised our target range for short-term interest
rates by another quarter of a percentage point. ( Chair Powell)

Not everyone was on board however as there was a nearly 800 point swing in the Dow Jones Industrial Average in response to it. This also meant it ignored the advice from President Trump not to do so and to cut the amount of Quantitative Tightening. The issue was summed up by the Wall Street Journal but not in the way the author thought it meant.

The data says the economy is doing great; the markets say it could be headed for a recession.

At turning points the data is always too late by definition which means that some sort of judgement call is required. Central banks have about a 0% success rate in predicting recessions.

Comment

There is a fair bit to consider in the latest central banking moves but the major point is one of timing. Monetary policy is supposed to lead events and not to lag them which is why “data dependency” is not only flawed it is illogical. To be fair to the US Federal Reserve it has at least tried to get ahead of events whereas the Riksbank has not.

Meanwhile there is a country with a central bank meeting today which has just had some strong economic news.

The quantity bought in November 2018 when compared with October 2018 increased by 1.4%, with a strong monthly growth of 5.3% in household goods stores….The strongest growth can be seen in comparison with the same period a year earlier where the amount spent increased by 5.0% and the quantity bought increased by 3.6%.

Is anybody expecting Mark Carney and the Bankof England to have raised interest-rates in response to the strong retail sales data? I am using the past tense as the vote was last night.

Number Crunching

 

 

 

 

How easily could the promises of an interest-rate rise from the Riksbank turn into another cut?

Today brings us to the country which on one measure has dipped into the world of negative interest-rates more than anyone else. This is the world of the Riksbank of Sweden which has this interest-rate on deposits with it.

The standing deposit facility means that the counterparty may have a positive balance on its account in RIX at the end of the day. The counterparty then receives interest calculated as the repo rate minus 0.75 percentage points. If this entails a negative interest rate, the counterparty pays interest to the Riksbank.

This is because the headline Repo rate is -0.5% meaning that the standing deposit facility is currently -1.25%.

For some time now, partly because as we will come to in a minute negative interest-rates have proved to be much longer lasting than promised or in official language been temporary, we have looked at the impact of this in cash and its availability. That has been in the news this week.

As cash use is declining rapidly, it is important that the Riksdag adopt a position on the issue of what constitutes legal tender in Sweden and its connection to the Swedish krona as a currency. Any legislation should be as technology-neutral as possible in order to also be applicable to any future means of payment issued by the Riksbank. ( Riksbank)

Sweden is a country which is in the van of those using electronic means of payment and if we look at the official figures the amount of money ( notes & coins) in circulation has been falling, at times sharply. The amount was 88 billion Kronor in 2013 and in subsequent years then has gone 80 billion, 77 billion, 65 billion and then 57 billion. The trend gets even clearer if we look back to 2008 the table suggests that the amount was around 107 billion. So we are left wondering if this year the amount will be half what it was in 2008.

However you spin it the situation is such that cash needs protection according to the Riksbank.

The Committee proposes a requirement that companies shall be able to deposit their daily cash takings in their bank accounts. The Riksbank wishes to go a step further even in this regard. Banks should also be obliged to ensure that private individuals can make deposits.

Of course some will think to quote Hamlet “”The lady doth protest too much, methinks”

The State of Play

According to the Riksbank things are going really rather well.

Economic activity in Sweden is strong and inflation is at the target of 2 per cent. Since the monetary policy decision in September, developments have for the most
part been as expected and the forecasts remain largely unchanged.

It hammers home the point even more later.

In Sweden, too, economic developments have been largely as expected and economic activity has been good for a long period of time……….. Inflation increased to
2.5 per cent in September, partly as a result of rapidly rising energy prices. Different measures of underlying inflation are lower and inflationary pressures are still assessed to be moderate. However, there are signs that inflationary pressures are rising and the conditions are good for inflation to remain close to the target of 2 per cent in the coming years.

I have given the full detail on the inflation situation because it highlights the mess that the Riksbank has put itself in. Inflation has gone above target and like so many central banks it is then keen to find any measure which gives a different but then trips over its own feet by telling us “inflationary pressures are rising”. So we have a tick in the box for an interest-rate rise.

Let us now look at the economic performance.

The labour market situation is expected to remain strong, even if GDP growth slows down going forward.

This is based on this from Sweden Statistics.

Sweden’s GDP increased by 0.8 percent in the second quarter of 2018, seasonally adjusted and compared with the first quarter of 2018. GDP increased by 2.5 percent, working-day adjusted and compared to the second quarter of 2017.

If we look back we see that GDP growth was 2.6% in 2014 then 4.5% in 2015 and then 2.7% in 2016. So the position has been strong for a while although the per capita (person) situation is not as strong as the population has risen by 2.3% over the same period.

Monetary Policy

If we note that the economy has been doing well and inflation is above target you would not expect this.

 the Executive Board has decided to hold the repo rate unchanged at -0.50 per cent.

There are two issues here the first is how it has arrived at a strong economy and inflation above target with interest-rates negative and the next is how doing something about this remains just around the corner.

the Executive Board assesses that it will soon be appropriate to start raising the repo rate at a slow pace. The forecast for the repo rate is unchanged since the monetary policy meeting in September and indicates that the repo rate will be raised by 0.25 percentage points either in December or February.

As an aside it used to be the case that central banks used to think that what is now called Forward Guidance was a bad idea. The Bundesbank of Germany was particularly enthusiastic about trying to act in an unexpected fashion. There is however a catch.

As you can see it has a 0% success rate with its interest-rate forecasts so whilst in theory it has a policy opposite to that of the Bundesbank in practice it has turned out to have even more surprises. Well unless you possess enough brains to figure out the game. Even more than the Bank of England it has attempted to get the changes provided by an interest-rate rise from promising it rather than delivering it. If there is a clearer case of the central banking boy (girl) who cried wold I do not know it.

Money Supply

You may not be surprised to read that money supply growth soared in response to  the negative interest-rates and QE of the Riksbank. In fact narrow money growth rate 15% at the opening of 2016 and broad money just failed to make double digit growth as it peaked at 9.9%. You might think if you look at the GDP growth data for the year that it was time to raise interest-rates but like the Bank of England when it had the chance the Riksbank apparently knew better.

Now we find something awkward for the recycled promise of an interest-rate rise. This is that in 2018 narrow money growth has fallen from 8.4% to 6.8% and broad money growth has fallen from 5.4% to 4.5% and as the 5.4% was a freak number if you look at the series as we had 6.4% through the spring. So looking at them in isolation you might be thinking of an easing. Oh hang on…..

Comment

The Riksbank changed course around 5 years ago and since then has mostly run a pro-cyclical monetary policy and reversed the conventional view on how to operate it. Regular readers will recall that was partly driven by Paul Krugman calling them “sado-monetarists” and they may also note that mentions of Mr. Krugman have noticeably faded. But they will also be aware that I have argued that negative interest-rates were described pretty accurately by Elvis Presley.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

But as even supporters of the guidance are suggesting that there may only be one interest-rate rise I see trouble ahead. Monetary growth is plainly slowing and this week has brought news that such slowing in the Euro area is having an effect. The Bundesbank is worried about economic growth in Germany and this morning’s Markit business survey told us this.

The pace of Eurozone economic growth slipped
markedly lower in October, with the PMI setting the
scene for a disappointing end to the year.

So whilst two members of the Riksbank did vote for an interest-rate increase today I can see two scenarios increasing in probability. One is that they eventually do raise but then reverse quite quickly. Or more darkly that the next move is either another cut or easing in another form such as QE which would be the final confession that they are in as Coldplay put it.

And I lost my head
And thought of all the stupid things I said
Oh no what’s this
A spider web and I’m caught in the middle