tony's blog

Monday, February 26, 2018

Things are better than expected. Time to put up rates!

So we have accelerating wage growth and productivity was up in the second half of last year. Luckily productivity is currently ahead of wage growth which is a good thing, but Bank of England forecasts are predicting wage growth to rise to 3% this year and to get ahead of productivity growth which is not so good. The path seems set for rates to hit 0.75% and the City is betting on this happening by May. So as the year moves closer to Brexit we start to crank up the risk factors.
We still don’t know what the Treasury model of the UK is making of all of the conflicting inputs including a forecast of QE withdrawal. Once this happens it should have its own impact on reducing inflation. But as Dame Minouche Shafik, previously Deputy Governor of the Bank of England reminded us on Desert island disks at the weekend, Economics isn’t a precise science given that we have to consider the behaviour of people. Wise words and a timely reminder that no matter how much the economic boffins tell us that they know how things work… the really don’t with any degree of accuracy. So when the Bank decides to increase rates let’s just hope that it considers the human factor.
Elsewhere in Europe we have the Italian elections next Sunday March 4th. The rise of the right and anti-immigration parties are moving the elections towards a flash point with an engaged and angry electorate. We also have the German SDP postal vote on their coalition with Merkel’s CDU … and that might prove to be more important. Markets seem to be of the view that the Merkel leadership is unassailable and that things will carry on much as before. But that seems at best wildly optimistic. Voters are becoming increasingly disillusioned with the increases in immigration: since 2015 Germany has received 1.38mn ‘initial asylum applications’ and in the short term there has been a significant increase in crime according to a controversial government-commissioned study published by the Zurich University of Applied Sciences. So, as we continue to focus on domestic issues and the latest state of play of Brexit negotiations, it would be easy to miss the significant issues in Europe right now which just could have some major impacts on us. Whether we are in the EU or not.

Monday, February 12, 2018

What an interesting week!

What an interesting week we’ve just had and what does it mean going forward?
As a professional Treasurer and market pundit I’m supposed to be an expert on all market moves and with a coherent theory of what’s happening, why and what happens next.
Well I’m going to let you into a secret – reading the markets right now is pretty tough.
There are so many conflicting risks and issues in the market and the Global experiment with loose monetary policy and economic stimulus means that no one really knows what the consequences of all this is going to be. Don’t let anyone fool you into thinking differently.
We’ve had close to zero interest rates for some time – so long that many in market don’t realise that this isn’t normal. It isn’t! And in the UK alone we have had £435bn of QE which many feared would stoke up asset values and create rampant inflation. And by and large that hasn’t happened either.
Global investors have been chasing yield and this has not been possible through Gilts or deposits and so has helped fuel the spiralling price of equities. In the US, regardless of the political scene (some would say because of – I’ll let you decide), the economy is now growing well and, with almost full employment inflation, now beckons. This means rates will have to rise more quickly. At the same time the Fed is looking to reverse out QE which is giving fears that this will be bad for the economy and that Bull run on equities should end. Who knows if that’s true? And all this at a time when a new and economically inexperienced Chairman of the Fed has barely got his feet under the desk
But what of the UK? Last week the vote was to leave rates on hold but for Mark Carney to signal that rates will have to rise sooner rather than later. This is the Governor’s forward guidance that he is so keen on.  At the same time we have a possible withdrawal of both QE and the remaining asset purchase schemes such as TFS and all with the backdrop of the Brexit ‘fog’. Piling on risk and uncertainty is not good for consumer confidence or businesses trying to plan.
At an international level we will have to see if the Bull run has well and truly ended or whether this is just a temporary volatile period. Was it just the price correction driven by market fundamentals of an overpriced equity market or something deeper? What about the influence of High Frequency traders using AI for algorithm based trades? No one knows! Many will argue that fundamentals are still good and that this is just a market wobble that will soon pass. I’m not so sure. One to watch because despite our tendency to look inwards in the UK, we can’t escape the wider panics in Global Financial markets…as we saw in 2007.

Monday, February 5, 2018

TFS - End of an era?

It’s still so early in the New Year but already we have seen the end of the Funding for Lending Scheme – a cheap source of funding to banks and building societies.
Soon, by the end of this month, we will probably see the end of new borrowings under the ‘Funding for Lending on speed’ otherwise known as the Term Funding Scheme (TFS). This was put in place in August 2016 at the same time that Base Rates fell to ¼% and it was the Bank of England’s mechanism to ensure that the rate cut was passed onto borrowers. In essence, lenders could borrow under this scheme at Base Rate flat. Right now there’s nearly £107mn drawn under this scheme and it was increased in size as recently as November last year.
The effect of the TFS has been to fuel mortgage lending at subsidised rates and dampen the requirement  for more conventional funding such as retail deposits, securitisation and covered bonds.
So, assuming that TFS is not extended – there’s always room for a last minute reprieve – then what will this mean? Well for a start we will begin to see more competitive retail deposits. Good for savers but expensive for lenders. If a price war starts for deposits then not only will they get more expensive as a funding source but they may well start to become more volatile as deposits move from one bank to another chasing the best rate. That’s not good. Expensive and unstable. Definitely not ‘strong and stable’.
Securitisation and covered bonds should make a come-back. Since the credit crisis these funding mechanisms have been decidedly muted and we really need the large historical issuers such as Santander, Lloyds, Barclays and Nationwide to re-start their programmes in earnest. Although this could have the short term effect of increasing securitisation costs for everyone as the supply and demand dynamics cut in, medium to long-term this can only be good news as we finally get these markets back on track and focus investors on buying them. On the whole – I can’t wait for these distorting schemes to go. They were very important at the time and have done their job. Now we need to get back to business as usual. Finally!

And mortgage rates? Well they will have to rise to reflect the increased funding costs. Standby for some last minute cheap deals as lenders take their fill of remaining TFS availability. Make hay while the sun shines!