I thought that I would look at things today from a slightly different perspective or to quote the French man in The Matrix series we shall investigate some cause and effect. Let me give you the latest news on the effect.
In Q3 2020, the rise in prices of second-hand dwellings in France (excluding Mayotte) weakened: +0.5% compared to Q2 2020 (provisional seasonally adjusted results), after +1.4% in Q2 and +1.9% in Q1 2019.
Over a year, the rise in prices continued: +5.2%, after +5.6% and +4.9%. As observed since the end of 2016, this increase was more important for flats (+6.5% over the year) than for houses (+4.2%). ( Insee)
The reality of the situation arrives when you look at the overall pattern. We saw negative interest-rates introduced by the ECB in June 2014 and large-scale QE begin in March 2015. After several years of falling house prices we then saw French annual house price growth move into positive territory towards the end of 2015. Since then the rate of growth has tended to rise and is now above 5%. The ECB and Bank of France will of course be noting this down as Wealth Effects a plan which is aided and abetted by the Euro area measure of inflation which conveniently omits owner-occupied housing completely. Apparently the twenty odd years they have had to do something about this is not long enough or something like that.
If we bring this right up to date I am nit especially bothered by the decline in quarterly growth in house prices. After all the background environment is for house price falls and the monetary easing we are about to look at has prevented them so far. Or in an amusing irony we can quote the word “counterfactual” back at the central bankers.
Money Supply
The growth here remains stellar as we look at the measure most affected by all the easing.
Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 13.8% in October, unchanged from previous month.
This is a consequence of buying some 25.5 billion Euros of bonds under the original QE programme ( PSPP) and some 62 billion under the new emergency pandemic one or PEPP. Just to mark you cards looking ahead the latter seems to have accelerated recently from around 15 billion per week to around 20 billion in a possible harbinger of the ECB December decision.
This is a game the ECB has been playing since 2015 when it got M1 growth as high as 11.7% which was part of the push on house prices we looked at above. Annual growth had fallen to around 7% before the last act of Mario Draghi last autumn pushed it back above 8% and now the pandemic response pushed it into double-figures. There is another issue here which was described by Kate Bush.
Be running up that road
Be running up that hill
Be running up that building
The 13.8% growth in October is on a much larger amount. Indeed M1 passed 10 trillion Euros in size in October.
Broad Money
If we go wider in monetary terms we see a similar picture.
Annual growth rate of broad monetary aggregate M3 stood at 10.5% in October 2020, after 10.4% in September 2020
The pattern here is different as the previous moves had struggled to get annual growth much above 5% and now well you can see for yourself.Something of a wall of broad money going somewhere but not into the real economy. As you might expect some of this is the tsunami of narrow money.
Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 9.4 percentage points (as in the previous month), short-term deposits other than overnight deposits (M2-M1) contributed 0.4 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed 0.7 percentage point (up from 0.6 percentage point).
The ECB will be pleased with the last component of marketable instruments on two counts. Firstly it can point to it as a response to its actions. Secondly growth in such markets will no doubt lead to a growth in sinecures for past central bankers.
Things then get more awkward because it was only the day before yesterday we noted a savings ratio of 13.5% in Germany on the third quarter. Well from the numbers below it looks as though businesses are saving too and doing it via their bank accounts.
From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 7.9% in October from 7.7% in September, while the annual growth rate of deposits placed by non-financial corporations decreased to 20.5% in October from 21.1% in September. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 7.3% in October from 8.2% in September.
It might be more accurate to say they have received money they cannot spend yet as we see a shift in monetary transmission. This is one of the clearest examples of what in economics is called excess money balances I have ever seen. Except right now neither supposed consequence of growth and inflation can happen much.
Credit
With the various support schemes in place it is hard to know what these numbers are really telling us. We do get a pointer to something we know is happening.
The annual growth rate of credit to general government increased to 20.3% in October from 18.9% in September, while the annual growth rate of credit to the private sector stood at 4.9% in October, unchanged from the previous month.
Credit is flowing to governments and some of it is being passed on.
Comment
We can now look more internationally and see examples of monetary policy affecting asset prices. The United States has given us two examples this week alone.
US home prices climbed the most on record in the third quarter as historically low mortgage rates drove outsized demand, the Federal Housing Finance Agency said in a Tuesday report.
Prices gained 3.1% from their prior-quarter levels, according to the report. The jump also places prices 7.8% higher than their year-ago levels. A seasonally adjusted monthly index of prices gained 1.7% in September. ( Business Insider)
And this.
The Dow Jones Industrial Average hit 30000 for the first time on Tuesday, after a rally of more than 60% from its March lows. ( WSJ)
We can also look to Japan where this morning’s Nikkei 225 close at 26,537 compares with more like 8,000 when the Abenomics experiment began.
The catch is that in terms of money supply there are lots of leads and lags in the system. So we can see some things clearly such as the rise in French house price growth but in other areas the rain has not yet gone. For example the CAC-40 has surged in response to the monetary easing but like the UK FTSE 100 is well below past peaks. Of course another asset market which is French sovereign bonds has gone through the roof such that France is being paid to borrow ( ten-year yield -0.34%) in an example of a direct impact.
Switching to the real economy there will be greater lags right now as the Covid-19 restrictions and lockdowns crunch economies regardless of monetary growth. But if you think about it that only raises the inflationary risks and it is not only the Euro area that puts a Nelsonian blind eye to likely developments.
“The government’s plan to replace RPI with CPIH is a clear case of using the wrong tool for the job…” Our CEO @stianwestlake on the news that the RPI will be aligned to the CPIH in 2030 ( Royal Statistical Society)
Happy Thanksgiving.