Welcome to January 22nd 2015 which is likely to be known in future as ECB QE day where the ECB stands for European Central Bank and the QE for Quantitative Easing. Of course there is a small chance that it will not happen in which case it will be known for a while as ECB no-show day! Many eyes will turn to the policy announcements which arrive at 12:45pm UK time for interest-rates and at 1.30pm for the press conference when any extraordinary monetary measures will be announced such as QE. Also there can be some variety in the timing during the press conference as it is not always at its beginning that the changes are announced, sometimes ECB Presidents like to announce a change with something of a flourish during the press conference itself and on at least one occasion actual market purchases have started there and then. The other route taken is to make everybody wait for a fact sheet which is released after the press conference ends. Good job that’s all clear?!
Buy the rumour and sell the fact
The paragraph heading above has been a city aphorism for as long as I can recall and I am sure much longer! This is happening right now. The buy the rumour phase was where the bonds of the Euro area countries surged over the past weeks and months. The sell the fact stage has come over the past 24 hours where bond prices have fallen and yields risen in a complete reversal of the previous trend. For example the ten-year bond yield in Germany pushed back above 0.5% yesterday and the five-year yield which has spent the past week or two in negative territory has returned to a positive yield.
Also if we go much further afield there have been some substantial falls in Japanese Government Bonds this morning. The ten-year benchmark has risen back up to 0.32% after falling to 0.19% as recently as Monday. Profit-taking or panic? Only time will tell…
Where the ECB finds itself
This is quite simply between a rock and a hard place. If you look at the likely developments in 2015 then there will be three stimuli for the Euro area economy. These are the fall in the oil price which seems for now at least to have settled below US $50 for each of the two major benchmarks putting it some 54% lower than a year ago. Secondly we have the impact of past ECB actions on the money supply and earlier this week we were told this.
Further net easing of credit standards mainly driven by improving cost of funds…..Increase in demand for loans across loan categories with rise in firms’ loan demand largely driven by financing needs for fixed investment.
Also monetarists will be noting this.
with the narrow monetary aggregate M1 growing at an annual rate of 6.2% in October
Added to this we have the recent falls in the value of the Euro with the effective or trade-weighted exchange rate falling from the recent peak of 100.59 just over a month ago to 95.19 yesterday.
On this basis you might be thinking that the ECB should in fact do nothing today and there is a strong case for that if one looks at reality and applied logic. But instead we live in a world where media pressure looks likely to force them to do something leading to me to be reminded of this from the glam-rock band The Sweet.
Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
How did we get here?
With apologies to Talking Heads for twisting their lyrics we got here on two motorways or perhaps I should say autobahns. One is the way that the Euro area economy has struggled and stagnated overall. Last year was supposed to be the year of recovery and instead we saw struggles and stagnation with the year to the end of the third quarter only registering economic growth of 0.8%. The other has been from the ECB itself which targets consumer inflation at a rate of just below 2% and has been very proud of itself when it achieved that. Instead we note that it is now here.
Euro area annual inflation was -0.2% in December 2014, down from 0.3% in November. This was the lowest rate recorded since September 2009.
Even worse from the point of view of its inflation target is that the effect of the oil price fall has not fully filtered through and the secondary and tertiary impacts will of course be on their way too.
Thus if we look at it like that and turn to the central banking play book it would say ease.
Whilst the ECB may not have the “99 problems” that Jay-Z sung about it has quite a few to my mind. For a start the Euro area’s political establishment has in effect passed economic policy virtually entirely to it something which was reinforced by the recent European Court of Justice decision. In itself this means a transfer from democracy to a form of technocratic unelected government and it also leaves the ECB trying to do things for which it has no instruments or weapons.
Added to this is the issue of timing. You see if it wanted to influence economic events in early to mid-2015 it need to act at least a year ago and more realistically in late 2013. So it is out of phase and what it does today may be inappropriate at best when in impacts in 2016.
Of course not all Euro area countries are in the same situation and an example of the inequality has been provided this morning by the Italian statistics office.
With respect to the same month of the previous year the calendar adjusted industrial turnover index decreased by -1.6%.
What is expected today?
Yesterday there were heavy hints that the ECB QE programme would be of 50 billion Euros a month and extend well into 2016. In my opinion the total size has to end up being of the order of 1 trillion Euros as ECB President Mario Draghi has repeated this number again and again. If you have been playing a drinking game version of bingo you would have been regularly tipsy at ECB press conferences. However perhaps not all of the 1 trillion Euros will be announced today.
What is it expected to do?
Advocates of QE have changed the way that it supposedly benefits us a number of times in the credit crunch era as one claim gets redacted and replaced by another.For example one of the early Bank of England efforts was this.
This evidence suggests that the policy had economically
significant effects — equivalent to a 150 to 300 basis point cut in Bank Rate — but there is considerable uncertainty around the precise magnitude of the impact.
This has been replaced by this on the Bank of England website.
This process aims to directly increase private sector spending in the economy and return inflation to target.
Actually it is all the changes in the explanations which are eloquent. After all if QE has a powerful economic impact then after US $3.7 trillion from the United States, nearly 500 million Swiss France from the Swiss, £375 billion from the UK and more Yen than most people can imagine or count from the Bank of Japan we should be saved by now right? Oh wait a minute…..
The words of Buzz Lightyear come to mind today.
To Infinity! And Beyond!
Can we get off the monetary easing bandwagon or is it all about presentation and spin these days? The era of “open mouth operations” for monetary policy is clearly with us but let me think ahead here and pose a question. What plans does the ECB have for exiting QE? You should never start something that you can not finish and regular readers will remember me pointing this out about the Bank of England which will kindly prove my point today.
As set out in the MPC’s statement of 8 January, the MPC has agreed to make £4,350mn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 22 January 2015 of a gilt owned by the Asset Purchase Facility (APF).
Wasn’t it Limahl who sang about this topic?
(Aah, aah, aah)
(Aah, aah, aah)
Reach the stars
Fly a fantasy
Dream a dream
And what you see will be
I will be updating today’s edition as events progress and should nothing be announced then I would suggest that markets will be singing along to Bob Marley and the Wailers.
Exodus: Movement of Jah people! Oh-oh-oh, yea-eah!
Songs for ECB QE
We cannot allow this day to pass without a playlist so here are some suggestions.
Pump It Up by Elvis Costello and the Attractions
Pump Up The Volume by MARRS
Money,Money,Money by ABBA
Bills,Bills,Bills by Destiny’s Child
Wrecking Ball by Miley Cyrus
Bang,Bang by Jessie-J
You Can’t Always Get What You Want by the Rolling Stones
We Can Work It Out by the Beatles
Should it go wrong then there are these.
Help! by the Beatles
Misery by the Beatles
11:15 am update
The first addition is Money For Nothing by Dire Straits from Michael Hewson of CMC Markets.
12:45 pm update
We have the opening salvo from the ECB’s bazooka which is simultaneously something of a damp squib and a tease!
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.05%, 0.30% and -0.20% respectively.Further monetary policy measures will be communicated by the President of the ECB at a press conference starting at 2.30 p.m. CET today.
Boom!Here are the inital details of the new plan. The meat of the issue is in the first section and for the reasons stated above I think that this is a mistake.
The Governing Council of the European Central Bank (ECB) today announced an expanded asset purchase programme. Aimed at fulfilling the ECB’s price stability mandate, this programme will see the ECB add the purchase of sovereign bonds to its existing private sector asset purchase programmes in order to address the risks of a too prolonged period of low inflation.
The programme will encompass the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), which were both launched late last year. Combined monthly purchases will amount to €60 billion. They are intended to be carried out until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.
The ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy. In both cases, this contributes to an easing of financial conditions.
Second, the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). Accordingly , the interest rate applicable to future TLTRO operations will be equal to the rate on the Eurosystem’s main refinancing operations prevailing at the time when each TLTRO is conducted, thereby removing the 10 basis point spread over the MRO rate that applied to the first two TLTROs.
Third, in line with our forward guidance, we decided to keep the key ECB interest rates unchanged.
The “additional eligibility criteria” is something that seems likely to apply initially to Cyprus and Greece. Ironically these are the places which might actually benefit!
Also the ECB has opened a new front with this statement from Mario Draghi.
This is really big! “We will buy bonds with a negative yield”Advertisements