24th December 2013 by The Harried House Hunter
Firstly as we reach Christmas Eve let me wish all readers and commenters out there a very Merry Christmas wherever you are. Much has happened so far in 2013 and there have been various factors at play but first let me show you a quirk in a series which is poured over and analysed every Thursday afternoon, US initial jobless claims. After all the level of unemployment in the United States is a driver of US monetary policy now under its Forward Guidance. Let me start with this year’s latest number.
In the week ending December 14, the advance figure for seasonally adjusted initial claims was 379,000, an increase of 10,000 from the previous week’s figure of 369,000.
And now the numbers for 2012 and 2011 in that order.
In the week ending December 15, the advance figure for seasonally adjusted initial claims was 361,000, an increase of 17,000 from the previous week’s revised figure of 344,000
In the week ending December 17, the advance figure for seasonally adjusted initial claims was 364,000, a decrease of 4,000 from the previous week’s revised figure of 368,000.
An odd quirk is it not? The numbers barely improved in 2012 and this year have got worse. Ooops! This is not a triumph for the reliability of this series with the musical accompaniment perhaps being Another One Bites the Dust by Queen. Fortunately the four-week average is (hopefully) more reliable and it has improved from 380,250 (2011) to 367,750 (2012) and now 343,500.
An oddity of forecasting
If we take the advice of Kylie Minogue and step back in time we see that we have a familiar friend as the forecasts of the US Federal Reserve (Fed) have so far been over optimistic. That may surprise after news agencies have plugged a quarter on quarter growth rate of 4.1% for at it is worth. However in spite of a strong latest quarter the US economy has been recorded as growing by 2% on a year before which is below the 2.3% to 3% central range it gave us in December 2012.
However there was an oddity underlying this as both unemployment and inflation undershot the forecasts of the Fed too. An unusual mix which conventional economic theory would tell us cannot happen at a time like this as we tear up another text book chapter to use as kindling for a Christmas fire. The PCE inflation measure used by the Fed was rising at an annual rate of 0.9% in November we learnt yesterday and the US unemployment rate of 7% meaning that the Fed was completely wrong on these too. If HAL from the film 2001 A Space Odessey was running their computer programmes he would be thinking that he had been lied too again!
Also we have food for thought in the large upward revisions to the latest growth numbers for the United States from 2.8% to 3.6% to 4.1%. If we remove the annualisation it looks and feels better but it does indicate their unreliability.
This was something which spread like wildfire at one point in 2013 as both the Bank of England and the European Central Bank rushed to join the game on the same day. This meant that three major central banks were applying it. Or at least they would be if they knew what it was! As the individual members of the Monetary Policy Committee give speeches it becomes ever plainer that it means whatever they want it too. Perhaps one day we will get an explanation of how eight of them had a Road to Damascus moment at the same time on August 7th 2013 and voted for this new policy. In the Bible there was only one St.Paul.
As we observed three groups of myopic individual’s peering into a future there is plenty of evidence they cannot see there was also another problem. This was the use of the unemployment rate as a “threshold”. As I pointed out at the time it was none too bright and the Fed and the Bank of England have now converted their “thresholds” to way stations. Just in case you think that the ECB was being brighter in avoiding this I suspect it was afraid of setting an unemployment target and not getting anywhere near it.
For those who read the David Smith column in the Sunday Times at the weekend let me answer the questions posed at the end. Firstly we will wake up one day and discover the UK unemployment rate target is now 6.5% probably with some assurance that 6.5% is the new 7% and that they had meant this all along etc! Also to improve the system it would be better to set an employment target (which I have argued from the beginning) and looking at the UK’s particular circumstances I would add a secondary figure for wage growth too.
Please do not misunderstand me I am offering improvements to the system rather than becoming a believer in it. To my mind it is proof that monetary policy if not “maxed out” it is not far from that destination.
This has been operating in full force in two of the major economies of the world. Whilst the United States plans a small reduction in January in 2013 it has pumped some US $1020 billion of it into its monetary system. There was a time when that seemed a lot of money now it is often treated as commonplace. It is when we compare it to this number which is Japan’s monetary base as of the end of last week 1,992,700,000 million Yen which is up around 50% on a year ago. Governor Shirakawa kind of fell on his samurai sword and was replaced by Governor Kuroda who has been more than happy to drink his saki and take off on a Shinzo Abe kamikaze mission.
Lest we forget at the start of 2013 the UK was in the QE game but stopped at £375 billion. A critique of some of their Forward Guidance abilities is provided by this from June.
Three members of the Committee (the Governor, Paul Fisher and David Miles) voted against the proposition, preferring to increase the size of the asset purchase programme by a further £25 billion to a total of £400 billion.
Yes their “Forward Guidance” would have expanded QE into the UK’s current boom.
Bond markets (and QE)
This has been a year for bond markets that fits the “damned hard pounding” phrase of the Duke of Wellington. Or to be more specific it saw further gains which went into hard reverse in the late spring and let bond holders nursing losses. This is moving into a zone which is awkward for central banks like the Federal Reserve and the Bank of England as they move close to capital losses. If we look at the UK my rule of thumb is that its break-even is just over 3% on the ten-year Gilt yield which as I type this is 2.97%.
Good job we have not taken the interest-rate gains as profits! Oh wait a minute…..
2013 has been a year which has exhibited disinflationary trends,although some care is needed as a lot of it is simply that for once oil prices have barely risen. Commodity prices has drifted lower too. So we await the next move in 2014 and here is a bizarre thought for you which is that at least one central bank -ahem the ECB- might be wishing for a rise in oil prices for Christmas! Who would have thought that?
Some of the troubled peripheral Euro nations such as Greece and Cyprus now have falling prices on a consistent and sustained basis whereas most others have seen a reduction in inflation.
The mach (wo)man of the major currencies in 2013 has been the Euro which has been following a Germanic model. Intriguingly for once this has followed theory as with its balance sheet shrinking (another 20.7 billion Euros on Friday) the ECB has been running a much tighter policy strategy than its recent interest-rate cut might make you think.
Meanwhile the Japanese Yen has been plunging like a kamikaze from the skies with Governor Kuroda at the controls. At 104 Yen to the US Dollar we see that the US Dollar has risen by 23% over the past year. If we look at its trade weighted number we see that as of the latest monthly report at November’s end it had fallen from 105.04 a year before to 85.03 this year.
For those wondering about the UK pound sterling’s performance it is not far off unchanged being 0.6% higher. Or to be more specific it fell earlier in the year -booby prize here to HSBC who published a “sterling crisis” forecast at the bottom!- and then regained ground post Forward Guidance via my “dark side” theory.
Gold and Bitcoin
If bonds thought that they were having a damned hard pounding then there is gold which is down some 28% or around US $460 as it struggles to hold the US $1200 per ounce level. It looked for a while that the rise and rise of Bitcoin was a factor in this but its recent fall makes the picture more complex as we try to look forwards. Although if you had bought at US $13 earlier this year I guess the current US $659 would look none too shabby to say the least.
Something very familiar happened. The British Bankers Association published its update on UK bank lending. In spite of all the promises and assurances by the Bank of England their Funding for (Mortgage) Lending policy was in full force in November as mortgage lending surged and lending to businesses at minus £2 billion fell even faster.
That was (most of) 2013 but I am not yet finished as before the year turns I will provide some suggestions as to what the economic world will deliver in 2014 and beyond. Let me end as I began by wishing you all a very Merry Christmas.