In the City
Trade and money figures
NIcholas Davenport
The moaners and groaners in the gilt-edged Market finally got what they wanted — a 9 Per cent Bank rate. The MLR (minimum lending rate) went up by per cent last. Friday. And a new 'short' tap stock of £800 Million was announced — another tranche of the Exchequer 91 per cent 1982 at 90 to Yield nearly 9.8 per cent and 10.8 per cent In redemption. The result was almost a welcoming cheer. The sense of-relief and satisfaction actually brought buyers into the Market and into the 'longs' where generous Yields of near 13 per cent can still be secured.
The monetarists were somewhat upset by this cheerfulness — particularly as the banking figures of eligible liabilities had been Worse than expected and particularly as the Bank of England had announced that their Money supply calculations had been understating the amount of money growth. There had been errors in their 'seasonal adjustments' which are always sheer guess work. The 'actual' figures of the money supply estimates for April will be published this week. The monetarists expect a rise of between £800 and £1000 million—or 1to 2 Per cent — and consider that the gilt-edged Market had no right to become so bullish. But has not the stage been reached when the market must ignore these faintly ridiculous money supply guesses? It will be three months or more before the Bank of England finally establishes the correct figurf .;id reveals into whose hands the extra
aey has gone — whether they are good !lands, such as businessmen expanding or Investing, or bad hands, such as property Speculators or extra civil servants or (in some eyes) the British National Oil CorPcoration.
The important question is the additional sum which must be put on the PSBR (public sector borrowing requirement) as a result of the tax-saving amendments to the Finance Bill. This could be as much as £350 million (the Treasury estimate) or nil — that is if other tax revenues are up or the public sector spending is down as a result of cash limits or hold-ups or bungling. The IMF watchdogs are at the moment looking into this point and, according to my information, are likely to say nothing at all if the money supply figures this week are exceeding the new target of 8 to 12 per cent for 1978-79. They are concerned with the DCE (the domestic credit expansion) which has to be below £6000 million as set out in the Letter of Intent which Mr Healey wrote to the IMF in 1976.
Although the Bank of England has now adopted a monetarist stance because the Chancellor has mentioned a `target range' for sterling M3 in his budget speech I wonder whether there is any legality behind it. A target does not come into the Finance Bill. A 'target' is presumably a target, not a fixed legal obligation. In his budget speech Mr Healey said: 'I intend to continue using monetary targets with certain changes. . . by making a target range for sterling M3 the focus of our monetary policy. I also intend to adopt a system of rolling targets in which the target is rolled forward once every six months. This will enable me. . . either to continue with the existing target range or to modify it' One expected at this point to hear Mr Healey break into song about 'old man river rolling along'. The working of the monetary system in an advanced capitalist society is of such complexity that the money aggregate can
never really be controlled unless the government dictates the uses of money, which is what you can only get in a centralised communist state. Mr Healey's attempt to control the economy through the use of a single number indicator (sterling M3) is really a pretence which he finds useful to employ for the sake of impressing the TUC and others who demand more money.
The cheerfulness in the gilt-edged market, which began last Friday and was extended on Monday, had apparently a solid base — a leak. It became known in the City three days ago that the trade figures which were published at the beginning of this week were going to be exceptionally good. How this leak could have occurred it is not my business to discuss but it was the cause of an upsurge in the gilt-edged market on Monday hours before the trade figures were released. And what extraordinary figures they were. Exports for April as compared with March were up from £2,830 million to £3,004 million (a record) while imports were down from £3,100 million to £2,768 million. The result was a visible trade surplus of £236 million against a March deficit of £270 million.
When we add about f100 million a month to the visible trade figures for the 'invisible' credits we get some confirmation of the Government's estimate of a surplus of £250 million on current trade account for the first half of the year. The rising oil credits should ensure that the surplus on the balance of payments for the year — assuming no worsening on visible trade — will be near to £1,000 million. This gives us hope that the Government will be able to stabilise the sterling exchange at around $1.82 for the dollar (the close on Monday) and around 62 per cent of the 1971 weighted exchange rate. This is important because it improves the chance of holding the drop in our rate of inflation. The only snag is that the Americans are pushing up their interest rates in the misguided idea that this helps them in their own fight against inflation. To stabilise the dollar exchange rate for sterling we cannot have diverging rates of interest.
To summarise the market prospects in the light of these heartening trade figures we can first expect a continuing improvement in the gilt-edged market which will allow the Bank to carry on its normal funding policy. To finance the PSBR the Bank needs to sell about £400 to £500 million Of 'tap' stocks to the non-bank public every month. It will now be able to activate its 'long' tap — £800 million of Exchequer 12 per cent — which has been hanging fire at 63i (65 per cent paid) yielding 12.7 per cent. With the clock ticking over in the gilt-edged market the equity share market should be able to resume its recovery which has been based, in my opinion, on the realisation that labour on the shop-floor is in a more co-operative , mood. But we now have the possibility of an autumn election to take into account and whether Mrs Thatcher is a market bull or bear counter is anybody's guess.
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