US longer-term interest-rates rise again whilst UK mortgage and business lending drops and retail sales stagnate

21st January 2011 by Shaun Richards

We received yesterday some new information on the state of the US economy as we begin to get some suggestions as to the shape it will be in over the early months of 2011. There was the regular weekly figures for jobless claims from the Department of Labor which came in as follows.

In the week ending Jan. 15, the advance figure for seasonally adjusted initial claims was 404,000, a decrease of 37,000 from the previous week’s revised figure of 441,000. The 4-week moving average was 411,750, a decrease of 4,000 from the previous week’s revised average of 415,750.

This leaves me with several thoughts. The first is that the Department of Labor may have trouble with its seasonality as the way last weeks and this weeks numbers have varied looks strange. The second is that if we concentrate on the more reliable four-week average we now have a trend which with some ebbs and flows has now been declining for the last few months. This is good news for the US economy although the silver lining does come with a cloud. As we stand if we continue to get such numbers they are of a level which should stop unemployment increasing but are not yet enough to contribute to a sustained fall.

The Philadelphia Fed Survey

This is a business outlook survey which is conducted in the region of the Philadelphia Federal Reserve and it reported this on a scale where anything above zero represents growth.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down slightly from a revised reading of 20.8 in December to 19.3 in January………………….The new orders index increased 13 points this month, the fourth consecutive monthly increase……..The current employment index increased 13 points, and for the fifth consecutive month, the percentage of firms reporting an increase in employment (25 percent) is higher than the percentage reporting a decline (7 percent).

So we can see that a positive initial claims report was followed by a Philly Fed survey which was positive too and the Philly Fed survey often correlates well with other figures to come for the US economy. However before I move on there were signs of inflation rising in the report although as raising it is a target of the US central banks policy you can argue that this is both good (the policy is working)  and bad ( part of the general world trend to higher prices).

Price increases for inputs as well as firms’ own manufactured goods are more widespread this month. Fifty-four percent of the firms reported higher prices for inputs, compared with 52 percent in the previous month. … More firms reported increases in prices (26 percent) than reported decreases (9 percent),

The US Housing Market

On the same day as we were receiving figures which showed signs of an improvement in the US economy the National Association of Realtors released figures for existing home sales and for the overhang of homes on the market. These can be a little confusing as some figures are seasonally adjusted and some are not! However whilst sales picked up on the previous month to 5.28 million they were 3% down on December last year and whilst the inventory of unsold homes fell to 3.56 million it in fact was up 8.4% on December 2009.

So if we take out the seasonal effects on the housing market by comparing the figures to last years we can see that the situation has worsened. If we add to this the fact that rising bond yields are likely to push mortgage rates higher then we find that overall we are in a familiar situation. That is of signs of improvement in the US economy but a continuing decline in her housing market.

Impact on the Markets: US Government Bond prices fall and yields rise

The better news for the US economy contributed to substantial falls in US Treasury Bond prices and rises in their yields. The 30 year or long bond fell by around 1.5 points and closed with a yield of 4.61%. There were falls in shorter maturities too as yields on the 10 year rose to 3.45% and even the 2 year saw its yield rise to 2.05%. So a trend on which I have reported frequently continued and if it is sustained it will feed into higher mortgage rates which will have their impact on the US housing market.

Another measure used is to compare the two-year bond with the 30 year bond to give an idea of what investors think of the long- term prospects for the US economy. Here there are concerns as the yield spread is now 2.56%. However some care is needed as the easy assumption is to blame inflation expectations except that there was an auction of inflation linked bonds yesterday and it struggled a little. I think that whilst investors are unsure of the longer-term implications of the implications of the asset purchases of the US central bank they are not yet fully convinced of the inflationary implications. However they are worried enough to want higher yields on longer maturities as compensation for the increased potential dangers.

On the day there was a slight irony as part of its so-called QE2 programme of asset purchases the US Federal Reserve bought some US $2.2 billion of 17 to 30 year bonds, but as you can see from the price action it didn’t help much. In the background some may be wondering a little more about the position of the Federal Reserve itself as it is the biggest holder of US Treasury Bonds due to all its purchases and falling prices must mean an increasing build up of losses. There has been concern expressed over the way that it has recently changed its accounting procedures whereby it now reports and adjusts its position daily with the US Treasury. Now whilst this does represent a change it is more presentational rather than functional. What I mean by that is that the US Treasury and thereby the US taxpayer stood behind the Federal Reserve before so it was never going to be declared insolvent. However the changes do add to a feeling of unease over US policy and may have contributed accordingly to the rise in yields.

UK Retail Sales stagnate

The Office of National Statistics has produced some concerning figures on this subject today. This give a different picture to the recent trend in the UK economy of figures which have generally been favourable.

The volume of retail sales in December 2010 was unchanged compared to the same month a year earlier.

Interestingly the main fall was in food sales which fell by 3.4% whilst non-food rose by 3.1%. If you think about it various strands are involved here as if you blame the snow and bad weather then why did food sales fall as presumably the colder weather would ordinarily support more food consumption? Perhaps we are seeing the impact of higher food prices and a possible increase in consumption of cheaper foods. The report does show that food prices are estimated to have increased by 5% over the past year.

So an intriguing report which goes against the recent trend. However one should not place too much weight on one month’s retail sales figures as the series can be erratic we will have to see what future months tell us.

UK Housing Market problems continue and business lending drops too

Just to add to the uncertainty created by the retail sales figures the Bank of England has produced more worrying statistics on the UK housing market. This is a sector which has been showing signs of struggling for quite some time unlike the overall UK economy which has been performing more strongly. There is an obvious similarity with the state of the US economy I have reported on above.

The figures showed that the 6 main UK mortgage lenders who represent approximately 75% of the UK mortgage market approved 40,000 mortgages in December which is down considerably from November’s 45,000. Just to give an idea of the drop off in this market in 2007 we were seeing consistently over 100,000 approvals per month and even in the summer of 2009 we saw figures heading towards 60,000 per month. Now again the weather may have been a factor but these figures continue a disappointing trend.

Whilst reading the report I spotted something else too.

The stock of lending to UK businesses fell in the three months to November. The stock of lending to small and medium-sized businesses continued to contract, but syndicated lending facilities to UK businesses increased.

This is troubling on several counts.Firstly we keep being told that conditions in the bank lending area are improving and that targets are being met.Secondly we can see that bank provided finance for small businesses is particularly weak. When Japan hit trouble her government ordered her banks to lend (sound familiar?) but what actually happened was that they hit the targets by giving the money to companies which did not actually need it. These figures may well be pointing in the same direction if bank lending is going in the main to larger companies as many of them are relatively cash rich. There are many problems with the target culture which has taken over the world and this highlights one of them. I gather that the world of advanced physics has a not dissimilar problem whereby actually observing some particles appears to change them. This problem in economics has been highlighted by Goodhart’s Law.


These latest lending figures do have concerns in them and highlight in my view that our banking system has a long way to go before we can say it has recovered. We do have elements of the so-called zombie bank culture and it remains my view that it would be better to reform them completely. The originator of this report does not escape blame either because in its rush to withdraw the Special Liquidity Scheme the Bank of England is withdrawing around £9 billion a month from the system and this is likely to have contributed to the lack of finance available.

6 thoughts on “US longer-term interest-rates rise again whilst UK mortgage and business lending drops and retail sales stagnate”

  1. andy of yarm says:

    The paucity of mortgage lending is rational so long as both the banks and informed potential borrowers spot that real estate asset prices are overvalued.

    Let the market find the equilibrium price of property and we can move on. Of course it may destroy the current raft of banks. Suits me.

    1. Hi Andy
      It will be an interesting year for the mortgage and housing market in 2011. I think the most hopeful scenario for it would be for a relatively gentle year on year fall of say 5%. This in real terms if you allow for likely inflation would be 10%. However as I have written before my fear is that at some point sellers whether due to mortgage deals ending ( for overseas readers newer mortgages in the UK are on average on worse terms than before and also qualifying for one at all is harder) or personal circumstances being tougher that sellers have to hit bids. Then we could see a much harsher year of double-digit price falls.

      Disinflation in our housing market and inflation in many other parts of the UK economy will make for a troubled year…..

  2. Mr.Kowalski says:

    Hi Shaun– what do you make of Brian Cowan’s fall ?
    As I understand it, the IMF package has not passed, but the budget
    part of it has.. can they go back on it now ?

    1. Hi Mr.K
      As I understand it he hasn’t fallen yet although over the last week Brian Cowan has managed both tragedy and farce. I keep out of politics so will simply observe that he has made an even bigger fool of himself over the past week. The way he feels he can still lead the country whislt not leading his party shows a man completely out of touch with reality. He doesn’t realise that he has been one of the main players in Ireland’s economic problems.

      However Ireland’s political class as a whole have failed her and they collectively still do not seem to realise the mess she is in. They have yet to pass the the Memorandum of Understanding with the IMF.This needs to doing to give some form of stability….. On the economic front there are still many problems with her banks that remain to be sorted for example deposit flight and capital raising by Bank of Ireland (which is a commercial bank with a confusing name). The economic problems are hardly going to be helped by the political mess she is in.

      As a fan of democracy I feel that the quicker an election is held the better. It would allow Ireland’s electors to debate alternatives to the IMF/EU/ECB plan which frankly looks less and less like a rescue and more like a millstone. Perhaps someone will explain how money vailable from the IMF at just over 3% was actually borrowed at a fixed-rate of 5.8%! I still have the feeling that something is very wrong with what happened there. I am left with the view that I hope that someone will emerge with an alternative plan so that Ireland’s people get a choice rather than a fait accompli.

  3. Mr.Kowalski says:

    “Perhaps someone will explain how money vailable from the IMF at just over 3% was actually borrowed at a fixed-rate of 5.8%”

    Worse was that the IMF first demanded what was it.. half of the Irish pension guarantee money up front ? All of this why.. to save some Irish, German and English bankers from their deserved fate ? If I was in Ireland, I’d be one of the ones out there marching and protesting.

  4. Mr.Kowalski says:

    Apparently the Green Party in Ireland has pulled out of the ruling coalition and this might lead to earlier elections:

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