Today is central bank day in Europe but I expect the actions of the Bank of England and the European Central Bank to be the equivalent of Sideshow Bob in the Simpsons. If we look at the Monetary Policy Committee it raised its targeted level of UK Gilt purchases by £50 billion last month and at its current rate of purchases of £4.5 billion a week there is no pressing need to change. Recent economic surveys have shown some growth and there is also the matter of the Budget this month which is another reason to delay any extra move. The only element of doubt is that a number of UK economic figures are due tomorrow which the MPC will be made aware of, but that excepted it is likely to be time for “masterly inaction” as Sir Humphrey Appleby put it.
The European Central Bank finds itself in a rather familiar position. The weaker peripheral countries would welcome an interest-rate cut but the stronger ones would not particularly as the price of Brent crude is above US $124 per barrel again. I expect it to bathe in the perceived success of its recent two three-year liquidity providing operations and to make no significant changes.
The Greek bond swap
This is still due at 8pm UK time although there are rumours of a delay, and according to Bloomberg only 60% of yes votes can be counted so far which means it is not going particularly well. Care is needed with the media as on BBC News 24 last night the business presenter Juliet told us that we would find out the result “this afternoon” and that the bond swap was going really well when in fact neither are true.
May I suggest an alternative which is a play-list for today where I suggest
Rumour has it by Adele
Rumours by Fleetwood Mac
I heard it through the grapevine by Marvyn Gaye
I heard a rumour by Bananarama
And from the #eurosongs the inspired
PSI Love You
The US Federal Reserve springs a surprise
I wish to head to the Pacific today but first I wish to stop off in the United States where the equivalent of the Chinese official news agency whcih is Jon Hilsenrath in the Wall Street Journal or ”Fed-wire” released this yesterday.
Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.
Those who recall that the Federal Reserve has an existing policy called Operation Twist, extending the maturity or term of its holdings, will immediately have thought that they will now not get the chance to sing these songs again.
Let’s Twist again
If we put to one-side the issue that I have never regarded such operations as full sterilisation there are several issues with such a proposed plan.
1. If it is a good idea why have they not done it before? This is a serious issue as what have become called QE1 and QE2 were enormous expansions of the Federal Reserve’s balance sheet and it is a little late now to come up with “a cunning plan”. You might have been expected to think of such a thing before you expanded your balance sheet from US $900 billion to US $2,900 billion.
2. Rather ironically the sale of short-term assets for the “sterilisation” has been seen as a type of “exit strategy” from QE type operations by some (Bank of England Governor Mervyn King said so only last week). This only goes to confirm my long held view that very little thought has been given to exit strategies and I suspect Mervyn King may not now welcome questions on this subject!
3. Central banks have put an enormous effort into lowering short-term interest-rates and this will have the effect of raising them. As a minimum they need to explain this as it questions the very strategy. Indeed I would argue that there is an element of switching policy, to longer-term interest-rate reductions, but by making things complicated trying to hide it.
4. A fundamental problem with QE type policies is that they distort markets via their direct effects and via the indirect effects suggested by Goodhart’s Law and the Lucas Critique. This move will add another layer of distortions and is likely to make everything worse. One example of this may turn out to be some money market players who right now face negative interest-rates but may in such a scenario face positive ones and return to boost the money supply! Put simply the ”sterilisation” may be very weak.
I have remained of the view that we are likely to see some form for further expansionary policies from the US Federal Reserve this year and this news release only confirms me in that view. For those convinced of the US recovery ( I noticed Paul Mason on BBC’s Newsnight implying last night that the US recovery was a given …) there is food for thought in the fact that it appears that the US Federal Reserve does not appear to agree.
It is even more revealing that we get such news with the price of a barrel of Brent crude oil above US $124 again. Indeed on the day we got this from the Bureau of Labor Statistics.
Unit labor costs in non-farm businesses increased 2.8 percent in the fourth quarter of 2011, as productivity grew at a slower rate (+0.9 percent) than hourly compensation (+3.7 percent). Unit labor costs rose 3.1 percent over the last four quarters.
A revision from 1.2% to 2.8% is not to be sniffed at and we see that inflation is not dead and we are reminded one more time to take care with even official statistics as they can be very unreliable. Indeed if we look back to the third quarter of last year we see this now.
However, unit labor costs increased 3.9 percent rather than falling 2.1 percent as reported February 2, due to a 6.0 percentage point upward revision to hourly
compensation and the slight downward revision to productivity.
This is so bad let me leave it to the Kaiser Chiefs to comment.
Oh my god I can’t believe it
I’ve never been this far away from home
Critics of my argument that there are inflationary pressures in the system have often made the argument that there cannot be sustained inflation without wage pressure. Well it would appear that there has been some wage pressure in the US economy and unless there has been an enormous boom we have all missed then the “output gap” theory has taken yet another knock to its remaining limited credibility.
The only real catch here is that one other message is that I am happy to point out whilst these numbers suit my argument, and I continue my policy of taking official numbers as they are, such revisions do knock another bit off their credibility too.
Some good news from Japan?
Let me start with the good news. Last night Japan’s economic growth in the last quarter of 2011 was revised upwards from -0.6% to-0.2% giving us a counter-point to Australia’s move in the reverse direction yesterday. Indeed the improvement came from the private demand sector which as Japan has struggled in this area is hopeful too.
Sadly the next bit is not so good as we see that according to the growth in money or nominal GDP we see that disinflation tightened its grip on Japan. This only improved by 0.3% from -0.8% to -0.5%. So part of the improvement in economic growth is due to a faster rate of fall in prices.
The mainstream media has got very concerned about the trade deficit that Japan reported in January. 437.3 billion Yen sounds a lot but if we convert it US $5.4 billion is not a lot for a country which has had years of being in surplus. Also the effects of last year’s tsunami and indeed the floods in Thailand (which affected Japan’s exporters) mean that we will need a lot more such data before we can confirm a real change. Also I discussed the recent weakness of the Yen on Monday, which after a brief rally seems to be continuing and it is now at 81.37 versus the US dollar and 107.5 aganst the Euro. So Japan’s exporters are receiving the beginnings of some relief although it will again be quite a while before this trend can be confirmed.
As ever any suggestions for a Greek bond exchange day playlist will be welcomed…