Better economic prospects for the Euro area come with ever more negative bond yields

There is plenty of economic news out of the Euro area for us to chew on and as ever we will ignore the politics, unless it directly affects the economics as looks like will happen in Italy and may do so in Greece. But let me open with not a new development but a continuation of something we looked at back on the 9th of April and 27th of March, as we considered how permanent a feature negative interest-rates will be and whether people will continue to be paid to issue debt?

Maintaining Low Interest Rate Environment Is Completely Justified And Necessary In Light Of Economic Situation ( @LiveSquawk )

That is from ECB Governing Council Member Francois Villeroy who is also Governor of the Bank of France who has been speaking this morning. As you can see he has no plans for changes as we note we can expect more of this and in fact so much so that we got an attempt at deflection from him as we continue the @LiveSquawk updates.

ECB’s Villeroy: ECB Needs Time To Assess Impact Of Negative Rates

Seeing as they started around five years ago that is a bit rich to say the least! It was on the 11th of June 2014 that the Deposit rate was cut to -0.1% and it was subsequently reduced to the current -0.4%. Also it contradicts what ECB President Mario Draghi has been telling us as on more than one ocassion he has claimed that a combination of ECB negative interest-rates and QE has added around 1.5% to Euro area GDP. This is a common event these days where central bankers are happy to bask in any favourable news but then deflect any problems elsewhere. Or if you prefer they behave like politicians.

The Banks

No doubt the Governor of the Bank of France was pleased he could quickly move on from the wider economy and get onto what really concerns a central banker which is the banks.

ECB’s Villeroy: Monetary Policy Also Has Favourable Effect For Banks

It often gets forgotten now but the large interest-rate cuts benefited the banks via the way that mortgage interest-rates were then cut. Also they benefited via their holdings of bonds from the sovereign and corporate QE. Also as those policies continued they boosted house prices as highlighted by the numbers from Eurostat below.

House prices rose by 4.2% in both the euro area and the EU in the fourth quarter of 2018 compared with the same quarter of the previous year.

As a broad sweep house prices started rising in the spring of 2015 and from 98 then have risen to 114 now.

And yet there is still as Taylor Swift would say “trouble,trouble,trouble” for banks.

ECB’s Villeroy: Impact Of Low Interest Rate On Banks Should Neither Be Ignored Nor Blown Out Of Proportion.

Okay but there was more.

ECB’s Villeroy: Main Prerequisite For Banks To Improve Profitability Is For Them To Put In Place Restructuring Strategies

Good luck with that as after all if that was what was happening we would hardly be here would we? The totem pole for banking in the Euro area is of course Deutsche Bank and this morning we see its share price is falling again ( 1%) to 6.37 Euros which compares to more like 13 Euros when the ECB began its negative interest-rate policy which speaks for itself.

That leads us into the current trap that banking often finds itself in the Euro area. The banks need more capital but the share price makes that expensive, especially for shareholders who have had to dip into their wallets and purses before.

Money Supply

The last couple of months have seen the money supply data turn into a bright spot for the Euro area economy. So let us get straight to the narrow money data which has worked so well as an indicator of economic prospects.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.4% in April, compared with 7.5% in March.

So not quite as improved as March but still an improvement overall. This is because the annual rate of growth fell to 6.2% in January after a generally declining sequence below 7% in the latter part of last year. Or if you prefer we are back to similar levels to last summer. Therefore I continue to expect Euro area economic growth to be of the order of the 0.4% we saw in the first quarter. The challenge to that comes from the external environment such as the trade wars and should we see a continuation of the weaker money supply data from the US.

We can now look at the impact of QE and negative interest-rates on the narrow money supply and see that it raised the annual rate of growth from about 5% to 11.7% quite quickly. As the money supply grew then rates of growth were likely to fall but we did see 9.7% in September 2017. Interestingly money supply growth seems to have been affected more by the reduction in QE than its end. Maybe that is because whilst the new purchases have stopped it is mot maturing and reinvestment is then taking place. For example this totalled 23.4 billion Euros in April.

Looking Further Ahead

The outlook a couple of years ahead continues to improve a little.

Annual growth rate of broad monetary aggregate M3 stood at 4.7% in April 2019, after 4.6% in March (revised from 4.5%)

We know that narrow money headed the opposite way leaving us noting quite a compositional change taking place.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 0.5% in April from -0.2% in March. The annual growth rate of marketable instruments (M3-M2) was -5.9% in April, compared with -5.7% in March.

There is also a structural breakdown of the supply side but that is unreliable and in the case of my home country the UK relying on it was a failure. So we are left with the view that two years ahead there will be an uptick but the catch is that it might be as much in inflation as in growth. For example it might follow the Iron Ore price which hit a six-year record in Australian Dollars earlier today.


The improvement we have been seeing in the money supply data seems now to be feeding into the official sentiment indicator.

In May 2019, the Economic Sentiment Indicator (ESI) increased in the euro area (by 1.2 points to 105.1)…..Industry confidence booked the first solid improvement (+1.4) in thirteen months, thanks to the sharpest increase in managers’ production expectations in 6 ½ years, as well as more favourable assessments of the stocks of finished products………..Consumer confidence firmed (+0.8), propelled by households’ brighter
expectations about the general economic situation,

This makes me look again at the remarks by the Governor of the Bank of France who seems to be preparing us for a continuation of the negative interest-rate policy or NIRP. As overall economic prospects have improved we have seen more negative bond yields rather than less as the biggest three Euro area economies ( Germany, France and Spain ) all have negative two year yields and only Spain’s 0.05% stops them have negative five-year yields as well. We only stop at the fourth largest economy because it is the special case called Italy where bond yields are rising again.

So here we are again listening to Coldplay.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble


This week on the trend for mortgage rates which as it happens applies to the Euro area as well as the UK.




2 thoughts on “Better economic prospects for the Euro area come with ever more negative bond yields

  1. Hello Shaun,

    well in truth it’s going to be groundhog day for IR for next 10 years or more , unless we have “events” !


    • Hi Forbin

      It is feels like that ever more. As we stand the most anyone has achieved in terms of “normalisation” is the US Federal Reserve which raised them to 2.5%. But whilst markets are of course not always right there is a clear message from the US ten-year note yield now being 2.27%. Was that it? If so the Euro area starts from a deposit rate of -0.4%.

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