Yesterday I used a Lord of the Rings analogy to help describe the state of play of the Swiss Franc and in particular the phrase “And so it begins” used by Theoden King. Today my intention is to look at what in such terms one would call the tower of Isenguard where Saruman resides as my view of the new shiny Frankfurt Towers of the European Central Bank. No doubt it was burning the midnight oil last night as it tries to figure out what to do on the 22nd of January when it makes its next set of policy announcements. Also there were some developments last night which pose a question about the banking system in Greece into which somewhere around 30 billion Euros has been poured.
Let us open with a positive for the ECB and that is the way that the Euro plunged against the Swiss Franc. The ECB website has a price of 1.028 for the exchange rate yesterday which is very different to the 1.2010 of the day before. As a chart it is amusing to see a virtually straight line downwards replacing a flat level one as we see a definition of what I was taught is a serially uncorrelated error term which in modern language is called a Black Swan event.
If we look for an overall impact the Euro depreciated by 1.6% yesterday as its effective exchange rate fell to 95.76. This was not entirely a Swiss Franc issue as for example the UK Pound pushed above 1.30 versus the Euro and in fact is edging towards 1.31 as I type this. It is a while since we have seen such a level for it.
If we look wider then there will be an economic boost from falling prices for oil and other resources. Whilst the price of oil has rebounded a little this week at US $49 for a barrel of Brent Crude Oil it is down some 54% on a year ago. I expect this to provide a boost from late spring/summer.
Lastly there is the issue of bond yields which apparently can plummet as well as fall! The ten-year yield of Germany is now at a record low of 0.39% so congratulations to anyone who has been holding bunds as these are extraordinary returns for a bond market. We are also seeing negative yields for bonds as for example even the recently downgraded France has a negative two year bond yield -meaning you pay to own it- and Germany even has one of -0.05% at the five-year maturity. I think we should take a moment to consider this as it implies a strong safe haven currency just as it is weakening. Also there is the issue that the Swiss National Bank had been parking much of the Euros it purchased into such bonds as we wonder if it drove prices higher and yields lower. If so we may see a weakening over time.
On that subject we may be nearing something which I have been mulling in recent times. Let me pose it as a question. Will a benchmark ten-year bond yield go negative? Well the Swiss benchmark is very near as it trades (h/t @ReutersJamie ) at 0.04%. With the stock market down another 6% today anyone who had switched out of equities into bonds in Switzerland can probably be spotted doing a tap dance right now.
An awkward issue
This is a rod that the ECB has to a large extent made for its own back. Not only has it consistently over-estimated inflation in the Euro area but it has also keep repeating the same mantra as illustrated by this from the October 2014 press conference.
the firm anchoring of medium to long-term inflation expectations.
If you got that phrase in a bingo style drinking game you would be tipsy every month!So not only have their forecasts been wrong-footed but their attempt to further calm matters has backfired too. After all inflationary expectations have plummeted since the oil price fall began and in truth they never really backed the claims of the ECB.
Negative inflation to match negative interest-rates
This morning has seen the news that must have been dreaded at ECB towers. From Eurostat.
Euro area annual inflation was -0.2% in December 20142
, down from 0.3% in November. This was the lowest rate
recorded since September 2009.
In December 2014, negative annual rates were observed in sixteen Member States. The lowest annual rates were
registered in Greece (-2.5%), Bulgaria (-2.0%), Spain (-1.1%) and Cyprus (-1.0%).
By member states they mean European Union ones and I have just made a quick count of Euro area ones which comes to 12 in negative territory. At this point then the words of Paul Simon being sung by Art Garfunkel may have come over the loudspeakers.
Hello darkness, my old friend,
I’ve come to talk with you again,
Because a vision softly creeping,
Left its seeds while I was sleeping,
And the vision that was planted in my brain
Within the sound of silence.
If we look into the detail of the numbers then I doubt you will be surprised to read what was the main cause and driver of this.
The biggest downward impacts on euro area annual inflation came from fuels for transport (-0.53 percentage
points), heating oil (-0.17 pp) and telecommunications (-0.08 pp),
Thus you can see that the ECB has as Oliver Hardy put it done this.
Well , here’s another nice mess you’ve gotten me into!
I like to be careful about this word as it is bandied about much too readily but we can see that it has applied in Greece and at the moment both Italy and France seem to be on the edge of it. By deflation I mean both falling aggregate demand and falling prices. So there is a risk of a downwards spiral which is different to the state of play in Spain where so far at least falling prices have been combined with a growing economy.
Just when the ECB may have thought that it had dealt with this issue then the perennial issue that is the Greek banking sector has returned to the news overnight. From Protothemanews.
Two systemic Greek banks, namely Alpha Bank and Eurobank, have already resorted to Emergency Liquidity Assistance (ELA) mechanism in order to boost their liquidity. The two banks submitted their requests for funding to the Bank of Greece on Thursday and, according to information, the remaining Greek banks will do the same in the next few days.
We await more news on this issue but more and more places are reporting that Alpha Bank and Eurobank have done this with their share prices down 7% and 9% respectively today. Er didn’t they pass the Euro area banking stress tests only a month or two ago?
The relationship between the ECB and the Greek banks was described by Rihanna a while back.
Now that it’s raining more than ever
Know that we’ll still have each other
You can stand under my umbrella
You can stand under my umbrella
What about expanding the balance sheet?
Today’s news does not help in this regard.
Accordingly, on 21 January 2015 EUR 9,650.00 million will be repaid in the tender 20110149 by 7 counterparties and EUR 4,214.00 million in the tender 20120034 by 13 counterparties.
As to the expansion efforts they totalled a bit less than 2 billion Euros last week.
In the central banking war that has now broken out the ECB finds itself in a right pickle. Some of this is an internal Euro area issue in the way that the political class has abandoned its role in economic policy and left it to an unelected central bank. On those grounds I have sympathy for it as the job is simply impossible. However in its treatment of inflation it is in quite a mess. After all in itself what is so bad about 0% inflation? Workers and consumers would certainly prefer it to it being above target. But you see this is not in the interests of the central banking mafia who have done their best to brainwash people so they can impose this.
The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.
Price stability is not provided by a 2% inflation rate and lies have a habit of haunting you which they are doing right now to the ECB and in the Euro area. Ironically some of its policies are working as for example the value of the Euro is falling and the falls in commodity and oil prices will help. But as I pointed out on Morning Money on Share Radio earlier the ECB may well have endgamed itself. After all it has called -0.2% for interest-rates a lower bound which would not go well with a further cut would it?
12:15pm update on France
According to Les Echoes the abandonment of the Swiss Franc cap puts many French municipalities in something of a pickle.
For local authorities, it is a new cold shower. The soaring Swiss franc puts a little more at risk the finances of thousand municipalities, departments and regions have subscribed toxic loans. “More than half of them have loans indexed to parity with the Swiss franc. This is very bad news and many elected officials are very concerned “regrets Christophe Greffet, the president of the association local actors against toxic loans (APCET). Itself is concerned in his department, Ain, which was a loan of € 9.8 million which rates increase from 8.5% to over 30% simply because of soaring over the Swiss franc. An additional cost of 2.5 million.
Perhaps someone might like to explain why they were borrowing in Swiss Francs in the first place!