This past seven days has seen the European Central Bank and the Bank of England adopt a clear ‘hawkish’ tone in regards to ‘normalising’ monetary policy. Mark Carney stated on Wednesday that rates may need to rise soon. Mario Draghi also said that the process of unwinding stimulus measures is getting closer.
In the meantime, the economic backdrop to their comments grows more severe. Consuming spending in America remains stagnant, with people opting to save rather than spend. When the flow of money in the world economy is reliant on the issuance of credit through fractional reserve banking, choosing to save rather than buy will inevitably mean the system coming under increasing stress.
In the UK, however, consumer credit and credit card debt continues to rise (for the time being at least). World debt has now surpassed $200 trillion – 327% of global GDP. Claudio Borio at the Bank for International Settlements has warned of the possibility of the next global crash coming “with a vengeance”, in light of rapidly increasing debt levels.
An increasing factor in terms of negative data is how inflation in both America and the EU remains well below the central bank ‘target’ of in and around 2%. Yet despite this, the narrative of monetary ‘normalisation’ remains on a set course throughout the Western world.
As global debt reaches record levels, the costs of servicing that debt is gradually becoming more expensive as interest rates rise. The damage this will do should be clear. Debt is unaffordable at current levels of interest. Central banks raising them in coordination with one another will eventually fracture both the consumer and the markets.
- Euro zone inflation eased in June because of more moderate energy price rises, but the slowdown was less than expected by markets and the core measure of price growth the ECB keenly watches increased by more than anticipated.
- The European Union’s statistics office Eurostat estimated that consumer prices in the 19 countries sharing the euro rose 1.3 percent year-on-year in June, decelerating form 1.4 percent in May and 1.9 percent in April.
- The European Central Bank wants to keep headline inflation below, but close to 2 percent over the medium term and has been buying billions of euros worth of government bonds on the secondary market to inject cash into the economy and spur faster rice growth.
- The aggregate real disposable income of UK households has fallen for three quarters in a row for the first time since the 1970s, according to the Office for National Statistics.
- It was the biggest decline since the first quarter of 2013 and followed a 0.4 per cent fall in Q4 2016 and a 0.3 per cent slip in Q3 2016.
- Three consecutive quarters of contraction is the worst run for the series since 1976-77.
- “With consumer confidence declining and banks reporting that they intend to restrict the supply of secured credit, the saving rate is more likely to rise than fall ahead,” said Samuel Tombs of Pantheon.
- Americans barely increased spending in May and choose to save more money instead even as decelerating inflation gave them more bang for the buck.
- Consumer spending rose 0.1% last month after back-to-back 0.4% gains in April and March
- The PCE index, the Federal Reserve’s preferred inflation gauge, fell 0.1% to mark the second decline in three months.
- What’s more, the 12-month rate of inflation tapered off to 1.4% in May from 1.7% in the prior month and a five-year high of 2.1% as recently as four months ago.
- The slowdown in inflation could give the Fed more to chew over as it considers how fast to raise U.S. interest rates. The central bank would like to see inflation hew close to 2%, but the sudden deceleration appears to have confounded them.
- Britain’s hard-pressed consumers are increasingly turning to credit cards, overdrafts and loans to support their spending, according to the Bank of England.
- Threadneedle Street’s monthly report on money and credit found that the outstanding amount of unsecured consumer credit rose by 10.3% in the year to May, five times as fast as the growth rate of earnings.
- Unsecured consumer credit continued to grow strongly and rose by £1.7bn during May alone, faster than its average of £1.5bn in the previous six months.
- Credit card borrowing is growing at an annual rate of 9.1% while other loans and advances rose by 10.9%.
- Global debt levels have surged to a record $217 trillion in the first quarter of the year. This is 327 percent of the world’s annual economic output (GDP), reports the Institute of International Finance (IIF).
- The surging debt was driven by emerging economies, which have increased borrowing by $3 trillion to $56 trillion. This amounts to 218 percent of their combined economic output, five percentage points greater year on year.
- China and other developing economies such as Thailand are beginning to show the same signs of tensions seen in the US and UK before the global financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS).
- “Leading indicators of financial distress point to financial booms that in a number of economies look qualitatively similar to those that preceded the global financial crisis,” said Claudio Borio, head of the BIS monetary and economic department.
- Major central banks may be forced to raise interest rates to combat inflation, “smothering” growth, while debt build-ups and the rising tide of protectionism threaten to bring the current global expansion to an end.
- Borio said: “That end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance.”
- Mark Carney said the Bank of England’s Monetary Policy Committee may need to begin raising interest rates and will debate a move in the next few months.
- “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional,” Carney said in prepared introductory remarks for a panel at the European Central Bank Forum on Wednesday in Sintra, Portugal. The pound rose after his remarks.
- The comments mark a shift in emphasis after the governor signaled last week that now was not yet the time to start that process. In his speech on Wednesday, he clarified that that was his position as of when the MPC last met on June 15. Lifting rates hinges on whether spare capacity in the economy erodes and the balance between supporting growth and tolerating faster inflation becomes less stark, he said.
- There were hopes that the slowdown in buybacks that began last year would pick up with the prospect of a tax overhaul in 2017.
- However, it appears that a pickup in share repurchases by large U.S. corporations hasn’t materialized, possibly because executives lost faith in the prospect for significant tax measures being pushed through Congress in 2017.
- Companies in the S&P 500 spent $133.1 billion repurchasing their own shares during the first quarter of 2017, according to S&P Dow Jones Indices.
- That is a 1.6% decrease from the $135.3 billion spent in the fourth quarter of 2016 and a 17.5% decline from the $161.4 billion spent in the same quarter of last year.
- After modest bounces in existing and new home sales (despite weakness in starts and permits and mortgage application declines), pending home sales in May tumbled 0.8% MoM and were revised even lower (-1.7%) in April. This dismal print was below all economists’ expectations, missing by 4 standard deviations.
- This is the 3rd straight monthly drop and 2nd straight annual decline in pending home sales.