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

 

 

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Sweden is a curious mixture of monetary expansionism and fiscal contraction

This morning has brought us a new adventure in the world of central bank Forward Guidance.

The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent. If the economy develops as expected, there will soon be scope to slowly reduce the support from monetary policy. The forecast for the repo rate indicates that it will also be held unchanged at the monetary policy meeting in October and then raised by 0.25 percentage points either in December or February.

You may already have realised that this is from the Riksbank of Sweden and that there is something awfully familiar about this as Martin Enlund highlights below.

There are a multitude of issues here. Let us start with the fact that the Riksbank was ahead of the game in offering Forward Guidance before the concept was formally devised. I guess that sits well with being the world’s oldest central bank. But the catch so typical of the way that Forward Guidance has developed is that it has proven spectacularly wrong! Indeed I cannot think of any central bank that has such a malfunctioning crystal ball. Ever since 2012 an interest-rate rise and indeed succession of rises has been just around the corner on a road that has been so straight even the Roman Empire would be proud of it.

One of the features of Forward Guidance is that it is supposed to allow businesses and households to plan with certainty. The reality here is that they have been consistently pointed in the wrong direction. Indeed their promises of interest-rate rises morphed into interest-rate cuts in the period from 2012 to 2016. Such that their forecasts if we try to average them, suggested the repo rate now would be of the order of 3-4%, rather than the actual -0.5%. If we look at the period when the repo rate has been negative they have consistently suggested it is temporary but it has been permanent so far, or if you prefer has been temporary as defined in my financial lexicon for these times.I think that there are two major possibilities here. The first is that they are collectively incapable of seeing beyond the end of their noses. The other is that it has been a deliberate policy to maintain negative interest-rates whilst promising to end them.

A more subtle suggestion might be that this is all for the foreign exchanges who do take a least some notice rather than the average Swede. After all if he or she did take notice of the Forward Guidance they have probably long since given up.

The Krona

We get the picture here from this from Bloomberg.

Sweden’s elections this weekend could spell more pain for an already floundering currency.

As ever I will skip past the politics and look at the currency. One cannot do so without first noting the role of the Euro here which is like a big brother or sister to its neighbouring nations. When it cut interest-rates it put pressure on them to cut as well. So let us look at the Krona versus the Euro.

What we see is a clear pattern. Essentially the monetary easing of the Riksbank has taken the Krona from 8.4 versus the Euro in the late summer of 2012 to 10.57 as I type this. So a gentle depreciation to add to the negative interest-rates in terms of monetary policy as we rack up the stimulus count.

We can take that wider by looking at the trade-weighted or Kix Index. If we do so we get a similar result as the 102 of late summer 2012 has been replaced by 121 now. Just for clarity this index operates in the reverse direction to the usual method as a higher number indicates a weaker currency.

If we switch to inflation prospects then some should be coming through as the Wall Street Journal reported yesterday.

Down 10% against the dollar, the krona has fallen more than any other developed-market currency. Among the 10 most heavily traded currencies in the world, it has undershot even China’s Yuan—itself under pressure from the trade conflict with the U.S.—and the U.K.’s Brexit-bruised pound.

So commodity prices will have risen in Krona terms from this effect.

QE

This has been another feature of the expansionary toolkit of the Riksbank

At the end of August, the Riksbank’s government bond
holdings amounted to just over SEK 330 billion, expressed as a  nominal amount .Net purchases of government
bonds will be concluded at the turn of the year, but principal  payments and coupon payments will be reinvested in the government bond portfolio until further notice.

So what has become regarded as a pretty regular QE programme which politicians love as it reduces borrowing costs for them. One generic point I would note is that these Operation Twist style reinvestments are only happening because QE has proven rather permanent rather than the extraordinary and temporary originally claimed. So far only the US Federal Reserve is attempting any unwind. Many argue this does not matter, but when you have redistributed both wealth and income towards the already wealthy I think that it does.

Money Supply

This has been an issue across more than a few countries recently, as we have been observing slow downs. This is also true of Sweden because if we look at the narrow measure or M1 we see that an annual rate of growth of 10.5% in July 2017 was replaced with 6.3% this July. If we look back we see that a major player in this has been the QE purchases because when the Riksbank charged into the bond market in 2015 the annual rate of growth in M1 went over 15% in the latter part of that year. Now we see as QE slows down so has M1 growth.

A similar but less volatile pattern can be seen from the broad money measure M3. That was growing at an annual rate of 8.3% in July 2015 as opposed to the 5.1% of this July. So we see clearly looking at these why the Riksbank has just balked on a promise to raise interest-rates at today’s meeting. Taken in isolation that is sensible and in fact much more sensible than the Bank of England for example which has just raised Bank Rate into monetary weakness.

House Prices

I would like to present this in a new way. We have a conventional opening as according to Sweden Statistics house prices fell by 1.2% in 2012 ( they measure one or two dwelling buildings) which explains the about turn in monetary policy seen then. But if we switch to narrow money growth we see that it looks like there is a link. It peaked in 2015 as did house price growth (10.8%). It remained strong in 2016 and 17 as did house price growth ( 8.4% and 8.3% respectively). Okay so with money supply growth fading what has happened to house prices more recently?

In the last three-month period, from June to August 2018, prices rose by almost 1 percent on an annual basis compared with the same period last year.

Boom to bust? As ever we need to be careful about exact links as for example the latest couple of months have been stronger. But what if monetary growth continues to slow?

Comment

Readers will be pleased to discover that the Riksbank has investigated its own policies and given itself a clean bill of health.

The Riksbank’s overall assessment is that the side‐effects
of a negative policy rate and government bond purchases
have so far been manageable.

Where there is a clear question is a policy involving negative interest-rates, QE and a currency depreciation when the economy is doing this.

Activity in the Swedish economy remains high. GDP growth in the second quarter was surprisingly rapid and together with strong indicators, this suggests that economic activity is still not slowing down.

Inflation is also on target. So why is policy so expansionary? Perhaps Fleetwood Mac are correct.

I never change
I never will
I’m so afraid the way I feel

Should they reverse course and find the economy and house prices heading south thoughts will be a lot harsher than the “Oh Well” of Fleetwood Mac.

Oddly we find that fiscal policy is operating in the opposite direction as this from the Swedish Debt Office shows.

For the twelve-month period up to the end of July 2018, central government payments resulted in a surplus of SEK 109.6 billion. Central government debt amounted to SEK 1,196 billion at the end of July. This corresponds to 2.3 and 25.3 percent, respectively, of GDP.

We are in a rare situation where they could genuinely argue they have a plan to pay it all off. The catch comes with the fact that with a ten-year bond yield of 0.54% and a low national debt they have no real need to. So a joined up policy would involve ending negative interest-rates and some fiscal expansionism wouldn’t it?

 

 

Rising inflation trends are putting a squeeze on central banks

Sometimes events have their own natural flow and after noting yesterday that the winds of change in UK inflation are reversing we have been reminded twice already today that the heat is on. First from a land down under where inflation expectations have done this according to Trading Economics.

Inflation Expectations in Australia increased to 4.20 percent in June from 3.70 percent in May of 2018.

This is significant in several respects. Firstly the message is expect higher inflation and if we look at the Reserve Bank of Australia this is the highest number in the series ( since March 2013). Next  if we stay with the RBA it poses clear questions as inflation at 1.9% is below target ( 2.5%) but f these expectations are any guide then an interest-rate of 1.5% seems well behind the curve.

Indeed the RBA is between a rock and a hard place as we observe this from Reuters.

Australia’s central bank governor said on Wednesday the current slowdown in the housing market isn’t a cause for concern but flagged the need for policy to remain at record lows for the foreseeable future with wage growth and inflation still weak.

Home prices across Australia’s major cities have fallen for successive months since late last year as tighter lending standards at banks cooled demand in Sydney and Melbourne – the two biggest markets.

You know something is bad when we are told it is not a concern!

If we move to much cooler Sweden I note this from its statistics authority.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.1 percent in May 2018, up from 1.9 percent in April 2018. The CPIF increased by 0.3 percent from April to May.

So Mission Accomplished!

The Riksbank’s target is to hold inflation in terms of the CPIF around 2 per cent a year.

Yet we find that having hit it and via higher oil prices the pressure being upwards it is doing this.

The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent and assesses that the rate will begin to be raised towards the end of the year, which is somewhat later than previously forecast.

Care is needed here as you see the Riksbank has been forecasting an interest-rate rise for some years now but like the Unreliable Boyfriend somehow it keeps forgetting to actually do it.

I keep forgettin’ things will never be the same again
I keep forgettin’ how you made that so clear
I keep forgettin’ ( Michael McDonald )

Anyway it is a case of watch this space as even they have real food for thought right now as they face the situation below with negative interest-rates.

Economic activity in Sweden is still strong and inflation has been close to the target for the past year.

US Inflation

The situation here is part of an increasingly familiar trend.

The all items index rose 2.8 percent for the 12 months ending May, continuing its upward trend since the beginning of the year. The index for all items less food and
energy rose 2.2 percent for the 12 months ending May. The food index increased 1.2 percent, and the energy index rose 11.7 percent.

This was repeated at an earlier stage in the inflation cycle as we found out yesterday.

On an unadjusted basis, the final demand index moved up
3.1 percent for the 12 months ended in May, the largest 12-month increase since climbing 3.1 percent in January 2012.

In May, 60 percent of the rise in the index for final demand is attributable to a 1.0-percent advance in prices for final demand goods.

A little care is needed as the US Federal Reserve targets inflation based on PCE or Personal Consumption Expenditures which you may not be surprised to read is usually lower ( circa 0.4%) than CPI. We do not know what it was for May yet but using my rule of thumb it will be on its way from the 2% in April to maybe 2.4%.

What does the Federal Reserve make of this?

Well this best from yesterday evening is clear.

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 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

If we start with that let me give you a different definition of accommodative which is an interest-rate below the expected inflation rate. Of course that is off the scale in Sweden and perhaps Australia. Next we see a reference to “strong labo(u)r market conditions” which only adds to this. Putting it another way “strong” replaced “moderate” as its view on economic activity.

This is how the New York Times viewed matters.

The Federal Reserve raised interest rates on Wednesday and signaled that two additional increases were on the way this year, as officials expressed confidence that the United States economy was strong enough for borrowing costs to rise without choking off economic growth.

Care is needed about borrowing costs as bond yields ignored the move but of course some may pay more. Also we have seen a sort of lost decade in interest-rate terms.

The last time the rate topped 2 percent was in late summer 2008, when the economy was contracting and the Fed was cutting rates toward zero, where they would remain for years after the financial crisis.

Yet there is a clear gap between rhetoric and reality on one area at least as here is the Fed Chair.

The decision you see today is another sign that the U.S. economy is in great shape,” Mr. Powell said after the Fed’s two-day policy meeting. “Most people who want to find jobs are finding them.”

Yet I note this too.

At a comparable time of low unemployment, in 2000, “wages were growing at near 4 percent year over year and the Fed’s preferred measure of inflation was 2.5 percent,” both above today’s levels, Tara Sinclair, a senior fellow at the Indeed Hiring Lab, said in a research note.

So inflation is either there or near but can anyone realistically say that about wages?

Mr. Powell played down concerns about slow wage growth, acknowledging it is “a bit of a puzzle” but suggesting that it would normalize as the economy continued to strengthen.

What is normal now please Mr.Powell?

Comment

One of my earliest themes was that central banks would struggle when it comes to reducing all the stimulus because they would be terrified if it caused a slow down. A bit like the ECB moved around 2011 then did a U-Turn. What I did not know then was that the scale of their operations would increase dramatically exacerbating the problem. To be fair to the US Federal Reserve it is attempting the move albeit it would be better to take larger earlier steps in my opinion as opposed to this drip-feed of minor ones.

In some ways the US Federal Reserve is the worlds central bank ( via the role of the US Dollar as the reserve currency) and takes the world with it. But there have been changes here as for example the Bank of England used to move in concert with it in terms of trends if not exact amounts. But these days the Unreliable Boyfriend who is Governor of the Bank of England thinks he knows better than that and continues to dangle future rises like a carrot in front of the reality of a 0.5% Bank Rate.

This afternoon will maybe tell us a little more about Euro area monetary policy. Mario Draghi and the ECB have given Forward Guidance about the end of monthly QE via various hints. But that now faces the reality of a Euro area fading of economic growth. So Mario may be yet another central bank Governor who cannot wait for his term of office to end.

 

 

The Swedish monetary experiment faces the decline of both cash and house prices

It is time to take a look again at the policies of the world’s oldest central bank as we remain in the Baltic region. From the Riksbank of Sweden.

In 1668, the Riksdag, Sweden’s parliament, decided to found Riksens Ständers Bank (the Estates of the Realm Bank), which in 1867 received the name Sveriges Riksbank. The Riksbank is thus the world’s oldest central bank. In 2018, the Riksbank will celebrate its 350th anniversary.

Yesterday brought news which will cheer the Swedish government as it received something of a windfall from this creation mostly due to a revaluation of its gold reserves. It has some 125.7 tonnes much of which is in London ( or not if you believe the conspiracy theories).

The General Council proposes that SEK 2.3 billion be transferred to the Treasury.

However the last bit of the 350 years has seen the Riksbank break new ground proving that you can teach an old dog new tricks.

In light of this, the Executive Board has decided to hold the repo rate unchanged at −0.50 per cent.

This was announced last week and technically applies from tomorrow although of course it is a case of what might be called masterly inaction. We see that the world of negative interest-rates not only arrived in Sweden but continues and in fact if we look deeper we see that it has an interest-rate of -1.25% on bank reserves which is the lowest to be found anywhere.

Also we see that the Riksbank surged into the world of Quantitative Easing bond buying.

The Riksbank’s net purchases of government bonds amount to just over SEK 310 billion, expressed as a nominal amount. Until further notice, redemptions and coupon
payments will be reinvested in the bond portfolio.

As you can see policy is now set to maintain the stock of QE with any maturing bonds reinvested. So our old dog learnt two new tricks which does provide food for thought when we note a 350 year history after all why was it not necessary before. Also as we look ahead we see signs of a third new trick.

Economic outlook

This seems set fair.

Indicators for the fourth quarter suggest that GDP growth
picked up at the end of last year………Monthly indicators for demand and output also indicate that GDP growth at the end of last year was stronger 
than normal. Both industrial and services production have increased………. 
The model forecasts indicate GDP growth of 3.9 per cent during the fourth quarter, compared with the previous quarter and
calculated at an annual rate.

So economic growth has been good as this would be added to this.

 GDP increased 2.9 percent, working-day adjusted and compared to the third quarter of 2016.

If we look back we see that GDP is around 16% larger than at the pre credit crunch peak of the last quarter of 2007. Looking ahead the Riksbank expects economic growth of the order of 3% annualised at the opening of 2018 with growth slowing a little in subsequent years.

Employment

As you might expect with strong economic growth seen the situation here has been positive too.

Last year, the number of redundancy notices reported to
Arbetsförmedlingen (the Swedish public employment agency) was at the lowest level since 2007 and the level of 
newly reported vacant positions was very high . The strong demand meant that both the employment 
rate and the labour force participation rate reached historically high levels.

Yet in spite of other signs of what has been in the past come under the category of overheating ( resource allocation is at its highest ever) we seem something very familiar.

 Estimates indicate that the definitive outcome for short‐term wages in the economy as a whole for the full year 2017 will, on average, increase by 2.5 per cent, 
which entails a downward revision compared with the forecast in December.

These days wage growth nearly everywhere we look in what we consider to be the first world is around 2% and seems to have completely disconnected itself from many factors which used to drive it. Is this another side effect of the QE era? In Sweden we see that businesses seem reluctant to pay more.

the preliminary rate of wage increase is significantly higher in the public sector than in the business sector. 
recent outcomes indicate that wage increases at the start of 2018 will also be lower than in the Riksbank’s 
assessment from December.

Unemployment

The overall rate of unemployment has fallen less than you might think due to this.

The large increase in the labour force led to
unemployment.

Which is further explained here as we wonder what “weaker connection to the labour market” means.

 Unemployment has not fallen further among those born abroad 
partly because the inflow of labour in this group has been large, 
but also primarily because people born outside Europe, on average,
 have a lower education and a weaker connection to the labour market.

So in reality there are two labour markets here where the Swedish born one is at what was considered to be full employment. Bringing them both together gives us this for January.

Smoothed and seasonally adjusted data shows an increase in the employment rate and a decrease in the unemployment rate, which was 6.5 percent.

Inflation

This morning’s update from Sweden Statistics told us this.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.6 percent in January 2018, down from 1.7 percent in December 2017. The HICP decreased by 0.9 percent from December to January.

The inflation number above is using the same methodology as in Europe and the UK and as you can see there is not a lot of inflation for an “overheating” economy. The Swedish measure called CPIF fell from 1.9% to 1.7% leading some to seemingly lose contact with reality.

Is Sweden’s inflation shortfall – short-term core trend below 1% versus 2% target – a serious concern? ( SRSV )

Not for Swedish consumers nor for workers as we note that in the past at least Sweden can have inflation.

The CPI for January 2018 was 322.51 (1980=100).

Those who follow my specialist interest in inflation measurement may have a wry smile at the cause of the fall.

 In January 2018, the basket effect contributed -0.2 percentage point to the monthly change in the CPI, which is close to the historical average.

Comment

There is a lot to consider here and the first is a familiar one of how will the Riksbank exit from its negative interest-rates and QE? It was promising interest-rate rises later this year but we have seen those before and the dip in the inflation rate puts it between a rock and a hard place which is before we get to this. From Bloomberg last month

Data released on Monday showed that home prices continued to slide in December, dropping 2 percent in the month, according to the Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden. The three-month drop was 7.8 percent, the steepest decline since late 2008. Prices were down 2.5 percent from a year earlier, the biggest drop since March 2012.

This may be a response to new rules that have been imposed in recent times on interest-only mortgages in response to this reported by Reuters.

Currently, around 70 percent of Swedish home owners have interest-only mortgages, meaning they do not pay off any of the principal of the loan they have borrowed.

Care is needed with the house price data as the official numbers show rises continuing but as 2018 progresses it too should be picking up ch-ch-changes. This leaves the Riksbank in something of a pickle of its own making as many of its members from the last 350 years would recognise but not apparently those in charge now. Especially as the economic growth in the credit crunch era does not look quite so good when we note the population has increased by around 9%.

Meanwhile we have yet another fail for economics 101 as I note this from Bloomberg earlier.

Last year, the amount of cash in circulation in Sweden dropped to the lowest level since 1990 and is more than 40 percent below its 2007 peak. The declines in 2016 and 2017 were the biggest on record.

With negative interest-rates one might have expected cash demand to rise but it has not returning me to me theme as yet untested that around 1.5% will be the crucial level. Still if nothing else Kenneth Rogoff will be delighted at the sight of Swedes waging their own war on cash. What could go wrong?

Can the central banks wean themselves off their monetary addictions?

As 2017 comes to a close and we start to look forwards into 2018 many central banks are finding themselves at something of a crossroad and maybe a nexus. This is driven by two factors of which the first is welcome in that 2017 has been a good year for the world economy overall. The second is that central banking policy has been pro rather than anti-cyclical. What I mean by this is that policy has continued to be expansionary into better times rather than following the philosophy of “taking away the punch bowl as the party gets started”. The danger on this road is the “irrational exuberance” warned about by former US Federal Reserve Chair Alan Greenspan although the more modern development is to question what is irrational about front-running central banks?

Riksbank

According to the Riksbank of Sweden things are going rather well.

 Economic activity is strong and the employment rate is high.

Putting that another way the economy expanded by 0.8% in the third quarter of this year making it 3.1% larger than a year before and according to the Riksbank.

Although inflation has now been close to 2 per cent for some time, prior to this it was below the target for a long time.

There is an implication here of catching up “lost inflation” which appears every now and then from central bankers on this side of the debate whereas you do not hear them wanting to rebalance an inflation excess. If we look at the next bit we see that the central planners have become addicted to their own policies.

 It has required a great deal of support from monetary policy to bring up inflation and inflation expectations. Economic activity needs to remain strong for inflation to continue to be close to the target. It is also important that the krona does not appreciate too quickly.

This returns me to my subjects of Monday and Tuesday where I looked at economic statistics as the Riksbank here will be looking to tell people that “economic activity” is “strong” whilst in fact operating to make them poorer via higher inflation!

As to monetary policy well strong economic growth and inflation on target means that negative interest-rates seem to be from a universe far,far away.

The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.50 per cent and is expecting, as before, to begin slowly raising the repo rate in the middle of 2018

As you can see the response to talk of a change is, definitely maybe. What about QE? Here we see a fascinating development with a serve that ends up with more top-spin than even Rafa Nadal can manage. You see QE ( Quantitative Easing) officially ends with 2017. Except.

In essence, will RAISE the pace of bond buying slightly over the next six quarters (front-load) vs recent quarters. ( h/t Danske Bank)

We have got used to up being the new down but now we see that the end is not zero but more. Here is how it works in practice.

Redemptions and coupon payments in the government bond portfolio will be reinvested until further notice. Large redemptions, amounting to around SEK 50 billion, will occur during the first half of 2019. In addition, there are coupon payments totalling around SEK 15 billion from January 2018 to June 2019. To retain the Riksbank’s presence on the market and attain a relatively even rate of purchase going forward, the reinvestments of these redemptions and coupon payments will begin as early as January 2018 and continue until the middle of 2019. This means that the Riksbank’s holdings of government bonds will increase temporarily in 2018 and the beginning of 2019.

I have highlighted the bit which looks like it might have been written by an addict as possible bond redemption buying in 2019 is brought forward to next year. That is a first I think. We have also learnt how to treat the word “temporarily” when it involves monetary expansion haven’t we? Five Star QE.

System addict
I never can get enough
System addict
Never can give it up

Inflation Targets

Regular readers will have noted over time that central banks have switched between inflation targets and economic prospects to justify easy monetary policies. The Riksbank is currently justifying its policy by saying that future inflation looks weak. But there is a catch here in that old relationships do not hold as this from Eurostat yesterday implies.

In the euro area, wages & salaries per hour worked grew by 1.6% and the non-wage component by 1.5%, in the third quarter of 2017 compared with the same quarter of the previous year.

The Euro area boom has seen wage growth slow ( it was 2.1% in the second quarter) so pushing inflation higher runs a high risk of making people poorer. The old relationship(s) between wages and inflation have broken down.

The Bank of France has at least considered something I argue for. From a working paper published yesterday.

Some commentators contend that the Eurosystem should adjust to the “lowflation” environment and lower its inflation target. 

However after a consideration of the situation up is yet again the new down.

As discussed in a current US policy debate, this situation would call for an increase rather than a decrease in the inflation target.

Whilst I have sympathy for the future careers of the three economists concerned it seems that they are in an alternative universe as their response to not being able to reach the current target is to move it further away.

House Prices

Also more than a few may think that the real concern of the Riksbank is this.

the decline in housing prices……..After several years of rapidly rising housing prices, there has been a downswing in recent months.

Bank of Japan

This meets overnight UK time and it too has a fair bit to consider. After all 2017 has been a relatively good year for the Japanese economy. The third quarter saw GDP (Gross Domestic Product) growth of 0.6% making the annual rate of growth 2.1% which is faster than the Bank of Japan thinks it can grow on a sustained basis.If you add in the -0.1% interest-rate and the QE highlighted below by Japan Macro Advisers you might be expecting inflation as a result.

As of December 10 2017, the Bank of Japan held a total of 524.5 trillion yen in assets. Its JGB holding was 420.7 trillion yen, up by 59.1 trillion yen from a year ago.

Yet CPI  inflation was only 0.2% in October and the leading indicator for November ( Tokyo inflation) was only 0.3%.

Some boundaries are being tested here as Nasdaq implies.

The central bank held 40.9 percent of all government debt at the end of September, also the highest on record.

It now also owns around 2.5% of the equity market.

Comment

We find ourselves observing new events as central bankers have not had this sort of economic influence before. Except we need to be careful about our definition of this as whilst it is true in numerical terms as we note negative interest-rates and yields in abundance and ever more purchases of assets in QE programmes. But if we look at inflation rates they remain in so many places below target.  Thus we find central banks clinging to their policies in the hope that this time they will work. The catch is that even the word work may need a redefinition as if they raise inflation but wages do not follow they will have made us worse and not better off. This is before we get to a discussion of all the bubbles they have created.

The one main central bank which is trying to at least steer a new course is the US Federal Reserve and it deserves some credit for that. As to the rest of us the fear is that one day we will have to go cold turkey as a solution to the junkie culture style monetary expansion we see in what we are also told are good economic times.

 

 

 

 

Where next for house prices in Sweden and hence monetary policy?

Today has seen several strands of economic analysis come together so let us stay with yesterday’s topic of housing but move geographically from the UK to Sweden. There is food for thought in the issue that in the UK Sweden is often held up as an example in areas such as education, However there is more food for thought as I note that we are beginning to see denials that “something is going on” in the Swedish housing market as Todd Terry might put it. From the Financial Times.

There is no reason to anticipate a sharp fall in the Swedish housing market despite a housing boom that has seen prices more than double in the past 12 years, according to the chief executive of Stockholm-based Swedbank. The Swedish residential market will slow somewhat, Reuters reported Birgitte Bonnesen saying on a conference call after the bank’s quarterly results on Tuesday, but the chief executive does not see a risk of a sharp fall.

As Swedbank is the largest provider of mortgage credit in Sweden that is pretty close to an official denial that house prices are going to fall and we have learnt what to do with them! Even it had to admit that it does appear that ch-ch-changes are afoot.

Although she acknowledged the Swedish housing market “showed signs of further slowdown” in the latest quarter and the rise in house prices had “dampened”, Ms Bonnesen said the softening — accompanied by a slowdown in the build-up of household debt — was “positive, as it contributes to more sustainable economic development”.

Ah so a bank claiming that lower lending is “positive” so it would have presented its own higher lending in the boom as negative then would it? Of course as you can see below the Financial Times seems to be more concerned about “The Precious” than the effect on the real economy.

Concerns have grown that house prices — which have reached record levels — and mounting household debts somewhat echo the 1990s Swedish banking crisis. If there is a housing market slump and loan losses rise, that could damage the Scandinavian banking sector.

What is going on?

Sweden Statistics tells us that the credit taps seem pretty fully open for housing purposes.

In August, households’ housing loans amounted to SEK 3 035 billion, which is an increase of SEK 17 billion compared with the previous month and SEK 203 billion compared with the corresponding month last year. This means that the annual growth rate of housing loans was 7.2 percent in August, an increase of 0.1 percentage point compared with July.

In addition to the quantity or flow of loans the price or if you prefer mortgage rate is very low.

The average housing loan rate for households for new agreements was 1.58 percent in August, which is unchanged compared with July. The floating interest rate for housing loans was also unchanged compared with the previous month.

Ordinarily lots of cheap money would lead to surging house prices but maybe we have already seen that.

That gives us a longer=term perspective for Stockholm and if we look wider I note that Aviva investors have just tweeted a chart on asset bubbles which has Swedish property price growth at the top just pipping Canada and New Zealand. If you want a wry smile the surge in house prices began as the inflation targeting era began! But with thanks to Finwire and Google Translate this emerged earlier this month.

The prices of condominiums were unchanged in September. This has risen marginally last month. The villa prices, which remained unchanged in August, rose by 1 per cent. This is evidenced by figures produced by Statistics Sweden on behalf of Swedish Mäklarstatistik

Compared to three months ago, prices for both condominiums and villas have risen by 1 per cent. At year-end, price development is +6 percent for condominiums and +9 percent for villas.

So there seems to be something of a fading and maybe a lull if we add in the bit below.

Generally, we have a somewhat cautious market where we see that an increased supply is not matched by
same increase in sales volume……. we also see a gradual increase in the average time it takes between that
The ads are being put out and the property is then being sold.

So there is more supply and a longer time is required to sell neither of which look bullish.

Is Stockholm the canary in the coalmine?

It is hard not to think of London and in my case Nine Elms in particular when you see something like this.

There is not much optimism to be seen there to say the least. Also are such share price falls even legal these days? Perhaps the Riksbank of Sweden should take a trip to Tokyo to see how the Bank of Japan would deal with such a matter. Or they could simply assume that the official data series is more accurate.

Real estate prices for one- or two-dwelling buildings rose by almost 3 percent in the third quarter of 2017 compared with the second quarter. Prices rose by nearly 9 percent on an annual basis in the third quarter, compared with the same period last year.

Comment

There is a lot to consider here so let us bring in the policy of the Swedish central bank the Riksbank.

The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.50 per cent and is expecting, as before, not to raise it until the middle of 2018. The purchases of government bonds will continue during the second half of 2017,

As you can see it is full steam ahead for monetary policy with it being very rare amongst major central banks at hinting of continuing very easy policies. We will find out more later this week as its hand may be forced by what the European Central Bank decides and in particular how the Euro exchange rate responds. If the Riksbank had a choice I am sure it would rather be voting on Friday after the ECB rather than tomorrow. Perhaps it can watch the film Bad Timing to fill in the gap.

Also there is something to mull about the state of the real economy summarised here a month ago by the Riksbank itself.

Economic activity in Sweden is strong; GDP grew rapidly in the second quarter and the employment rate is at a historically high level. Inflation has continued to rise and in recent months been higher than expected.

Some would regard that as grounds for a tightening of monetary policy. Of course should it decide to prioritise a weakening housing market with obvious implications for the banks then this would make it easier.

Between 2007 and 2015, cash in circulation decreased by nearly 15 per cent. Cash withdrawals have declined by around a half, both in number of withdrawals and volume of cash withdrawn, over the past ten years…..By far the most common way of paying for goods in shops is by debit or credit card. Around 97 per cent of the population has access to a card…..Sweden is one of the countries in the world where the most card payments are made. The average Swedish citizen made 290 card payments in 2015. The average for the European Union is 104 card payments per year. ( Riksbank in June)

Central banks face an ongoing exit strategy problem

Today features one of the earliest themes of this blog. It can be summarised around the line never get yourself into something without a plan to get out of it. Back in my early days on this website I suggested that when the time came to roll back the interest-rate cuts and Quantitative Easing ( QE) that central banks would dither and delay and thereby act too late. We now know that in generic terms what was happening then wasn’t the half of it as more and more QE was to follow around the world as well as more interest-rate cuts taking some negative. So the problem became ever larger as central banks had more skin in the game and would be even more afraid of any setbacks should they withdraw policy stimulus.

Also there was another feature likely to lead to a delay. You see by the 18th of January 2011 I was pointing out this.

Even worse than this if we go back to the Bank of England’s forecasts for 2010 we can see that they underestimated inflation in 2010 by a considerable amount. This continues the Bank of England’s forecasting record which is now so poor in this area it is abject.

The nuance that has developed over time is that central banks seem to be most woeful at forecasting the most important factor at the time. For example the Bank of England has more recently kept getting wage growth wrong and the ECB raised the issue of 5 year inflation swaps and then led itself down the garden path. Whilst there will be official denials this fact of course is likely to add to the existing penchant to dilly and dally on any policy tightening.

Sweden

This morning has seen this announcement from the Riksbank.

Given this, the Executive Board of the Riksbank has decided to hold the repo rate unchanged at -0.50 per cent and does not expect to raise it until the middle of 2018. Purchases of government bonds will continue during the second half of 2017, as decided in April. At the end of the year, the purchases of government bonds will thus amount to a total of SEK 290 billion, excluding reinvestments.

So it remains very expansionary and here is the apparent justification.

Economic activity is strong and inflation is close to the target of 2 per cent.

Even odder is the enthusiasm for making Swedes better off by making them poorer.

Monetary policy needs to remain expansionary for inflation to continue to be close to 2 per cent……..However, it has taken time and a great deal of support from monetary policy to bring up inflation and inflation expectations

As you can see the view here is that without the policy of the Riksbank the economy of Sweden would somehow disappear off a cliff. But its problem is highlighted in its report.

The Swedish economy is strong. The upturn in inflation has continued and been faster than expected. In   July, inflation was 2.4 per cent in CPIF terms, and 2.1 per cent in terms of the CPIF excluding energy  prices. GDP growth was unexpectedly high in the second quarter. Monthly indicators point to the strong  developments continuing through the second half of the year. Although the inflation outcome for July is  primarily explained mainly by temporarily higher prices for foreign travel, the underlying development  appears stronger than expected. Inflation is therefore expected to be somewhat higher during the  remainder of the year than was forecast in July.

There is something familiar in their inability to forecast either GDP or inflation as we note inflation is above target! Now perhaps they did forecast Del Potro stunning Roger Federer this morning in the US Open tennis but in terms of the day job this continues the poor record of the Riksbank. This matters when you are undertaking what is an extreme monetary policy experiment as for example first-time buyers are unlikely to see this as a triumph.

The rate of increase of housing prices has gradually risen  throughout 2017. In July, housing prices rose by an annual rate of  9 .6 per cent. Surveys show that the general public and estate  agents continue to expect rising housing prices in the period  ahead.

Apologies for the formatting issue but there is a clear problem for Sweden via this issue. There are other issues as we look into the detail of corporate borrowing.

 has increased  in significance in recent years for real estate companies in  particular ( they are talking about securities issuance here)

and personal borrowing.

. Lending to households in the form of pure consumer  loans without collateral has increased at an ever‐higher pace and,  in July, the annual rate of growth amounted to 8 per cent.

Oh and the suggestion that interest-rates could rise next year is an example of Swedish recycling of the Forward Guidance of Mark Carney as this from September last year proves.

Not until the second half of 2017 does the Executive Board consider it appropriate to begin slowly increasing the repo rate.

ECB

By the time you read this you may already know the policy announcement from Mario Draghi but the Riksbank has undertaken a form of trolling.

This could happen if, for example, the Riksbank’s monetary policy deviates too far from that of other countries.

They mean the Euro of course and this morning’s announcement implies they expect little from the ECB today.

Oh Canada

Yesterday’s announcement from the Bank of Canada may have provoked a stream of letters signed Mark of Threadneedle Street mentioning destruction of legacy and questioning whether they understand the true purpose of Forward Guidance.

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The rationale really rather reminds us of the situation in Sweden.

Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted.

Of course if we look at house price developments in parts of Canada ( Toronto and Vancouver) there is another similarity and you could argue that the response is far too late as well as being too small.

Comment

There is a fair bit to consider here. As I pointed out earlier the monetary expansionism moved on in both scale and concept ( including corporate bonds in several places and even equities in Japan). It also moved on in time as depending on how you count it we are approaching a decade of this. Thus makes me have a wry smile when central bankers use the buzzword “normalisation” when what must seem normal to millennials for example is where we are now!

But if we stay with the normalisation theme then 1% or so in Canada and the US does not take us far does it? The real issue is shown by economic growth in Sweden and indeed today from the Euro area which has been shown to have been stronger than first thought.

 

But in both places we still have negative interest-rates and ongoing QE bond buying programmes leaving us mulling the words of Coldplay.

Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,

Me on CoreTV Finance

http://www.corelondon.tv/bond-bubble-fiction-reality-not-yes-man-economics/