The twin towers of the ECB in Frankfurt are probably a bit empty at the moment due to the summer holiday season, but for those that are there pretty much everything is going wrong. In a way it is symbolised by this.
NEW YORK, Aug 22 (Reuters) – The U.S. dollar rose across the board on Monday, driving the euro back below parity……..The euro fell following Russia’s announcement late on Friday of a three-day halt to European gas supplies via the Nord Stream 1 pipeline at the end of this month.
The Euro is feeling the strain and whilst the US Dollar is strong across the board at the moment, it has also been slip-sliding away versus the UK Pound £, which has gained about 0.5% versus it so far this week. A basic function of a central bank is to defend the currency and that is not going well. Another way of looking at it is that we are back to levels last seen in 2002 versus the US Dollar.
The Economic Situation
We can start with Germany where the Bundesbank monthly report brought some grim news. First on economic prospects.
Economic output in Germany stagnated in spring 2022……..According to the current assessment, German economic output in the third quarter is therefore likely to more or less stagnate again.
Their reasoning is below.
The economists write that catch-up and backlog effects in the use of previously restricted services will probably bolster private consumption in the third quarter as well. However, high price increases are further reducing households’ purchasing power and concerns about a looming shortage of gas in the winter are weighing on consumer sentiment, the experts explain.
Essentially the cost of living crisis is weighing on people as prices rise and they realise that worse is on its way. The same pattern is being seen by businesses.
High energy prices and concerns about a gas shortage also had an impact on enterprises. The Ifo business climate index declined significantly in July compared with the second quarter. Business expectations saw a particularly steep fall and were the lowest they had been since April 2020, the experts explain.
Looking further ahead it is a case of “it’s a gas,gas,gas” as the Rolling Stones put it.
According to the experts, economic developments in Germany will be affected in the third quarter and beyond by unfavourable developments in the gas market. Therefore, the economists believe that the probability of GDP declining in the approaching fourth quarter of 2022 and the first quarter of 2023 has increased considerably.
So if we translate the central banker speak they are expecting a recession and maybe a sharp one. At this stage the solution appears simple cut interest-rates and restart the QE bond buyer. A bit awkward as they have only just raised the former and ended the latter and as I am about to point out there is an elephant in the room.
Inflation
In some ways an even bigger bombshell from the Monthly Report came here.
The inflation rate could climb up to around 10% in the autumn, the experts write.
That really rather scotches any monetary policy response to the economic downturn for now. There are various factors here and the first is the expiry of the various government schemes which suppress recorded inflation.
The economists expect new records for the inflation rate in the autumn, with another marked rise expected once the measures contained in the relief package expire in September.
The language is interesting there as the statistics office has in the detail it has given suggested that each of the moves are only a 0.1% impact on inflation whereas this hints at more. Also they too will be noting the dip below parity with the US Dollar.
According to the report, the increase in the general statutory minimum wage and the depreciation of the euro will bring additional cost pressures in the coming months.
Plus there is this.
In addition, a levy on gas tariffs is to be introduced in October, while the VAT rate on gas is to be lowered at the same time.
This just looks confused from the German government as it raises one tax and cuts another at the same time.
Now let me add in more recent developments as this happened yesterday.
German 1-year forward power contract now at €666 per MWh
Nothing to worry about. ( @JavierBlas )
Poor old Javier took a week off and returned to find that the contract above was 36% higher.
The wider Euro Area
Germany is the biggest economic player but many of the issues above are generic. So if we start with the economic downturn.
August saw a second successive monthly reduction in
business activity across the euro area, according to early
PMI survey indicators, amid a further decline in new
orders. ( Markit )
This means that Markit thinks this.
The latest PMI data for the eurozone point to an
economy in contraction during the third quarter of the
year.
I think that they must have asked the inflation questions before the latest surge in energy costs.
That said, rates of inflation
at businesses slowed again over the month. Input costs
increased at the softest pace in close to a year, while
output charge inflation was the weakest in the year-to-date
I am no great fan of the PMI series but we know that central bankers are.
Bond Market Problems
This is a threefold issue for the ECB. Firstly bond yields have risen with even the ten-year yield of Germany at 1.3%. Now that is not very much but as ECB policy was keeping it negative for so long it is a change and if its bond market catches a cold well there is Italy with a ten-year yield of 3.65%. Secondly the ECB is manipulating reinvestments of its large sovereign bond portfolio to flatter the Italian position but the “spread” to Germany is over 2.3%. Thirdly there is a point that happens whenever QE is enacted on a large scale.
Poor liquidity has fuelled greater volatility, with bond prices swinging on ostensibly small developments and news. “[There’s] large pricing moves on not a lot and you also get a bit of dislocation,” said Lyn Graham-Taylor, senior rates strategist at Rabobank. ( Financial Times)
It is a point that I have made many times. If you dominate a market in the way that central banks have you create a false market, which would be illegal if anyone else did it. But then you have the issue that the market is affected once you withdraw which means they will come under pressure to restart QE.
Comment
As you can see the ECB is between an economic rock comprised of the oncoming downturn and a hard place represented by inflation. So on the one hand it should according to its own theories be cutting interest-rates back into negative territory and on the other it should be raising them. This is a problem I have raised many times where economics have become like junkies on central banking stimulus.
One of the props of the economy has gone as energy prices have soared.
Euro zone has a trade deficit on a scale never seen before. German manufacturing lost access to cheap Russian energy & thus its competitive edge, even as periphery debt makes ECB tightening impossible. ( RobinBrooksIIF)
At the end he returns to the problems the ECB has created for itself. Let me add another one which is this from September last year.
FRANKFURT, Sept 15 (Reuters) – A spike in euro zone inflation to above the European Central Bank’s target is a temporary “hump”, the ECB says –
Even worse it was followed by this.
The inflation outlook remains characterised by a hump in 2021 followed by more moderate rates in 2022 and 2023,” the ECB said last week.
Please remember that when they are described as “experts”
The situation is grim however let me finish by pointing out that we are probably being played by speculators right now in thin summer markets.
Day-ahead electricity prices in Europe are eye-watering, with lots of countries setting record highs for today. Notable to see the Nordics close to €400 per MWh, and Germany at €600. Before 2020, anything above €75-100 was considered expensive.
But even allowing for that there is quite a crunch coming.
Notayesmanseconomics's Blog 
After decades of German reluctance to help its EU neighbours by agreeing to a slackening of EU rules, because it might invoke the inflation bogeyman, it will be interesting to see just how much Germans will stand in the fight against their own inflation.
Spain has already initiated they eat humble pie.
*intimated
Looking at the weekly volatility of GBPEUR, once 1.21 goes, EUR will weaken rapidly with 1.30 on the cards. Just need a headline to give it a push.
So you think the animals behind the current inflation, endless wars financed by fiat money,the depiction of Russia as an enemy to justify increasingly unaffordable defence budgets,financial chaos, economic insanity, asset bubbles, housing bubbles,political correctness, the great climate hoax, project 2030, the Great Reset,CBDigital currencies- in the pipeline,ESG policies,covid lockdowns and mass vacinations, mass uncontrolled immigration – i.e population replacement, woke, hate speech legislation, cancel culture, the deliberate anti white/anti family/anti nationalist policies,pro EU integration, LGBTQ++++++++++ nonsense, transvestites reading nursery rhymes to infant schoolchildren, BLM, taking the knee, and the takeover of all media to support the above and silence, attack or delete anyone speaking out against it………….I could go on, will let the Euro – their currency of the European Union devised to destroy post war Europe will fail beofre sterling, a currency with a hundred year history of default and devaluation, and just let it happen?
Please supply the address of the planet you are currently residing on so I may respond.
OR perhaps all of the above and stuff I omitted is just a pure coincidence and just happens of its own accord not part of an overall plan?
careful , you said that bit out aloud, the Conga single knee pad rainbow police will be checking your pronouns shortly and your social credit may not exist next month so no lentil and bug soup for you!
Forbin,
PS: Post war European project is French ( which is why it will untimely fail) planned shackling of the German industrial machine. Remember they lost 3 times against the Germans. When the Germans finally realize they are being taken for patsies they will not be best pleased , at all .
In the mean time they will be starved of much needed energy and their military is handicapped by bureaucracy that is staggeringly incompetent and wasteful – again deliberate. Same for their electoral system and provinces.
Forbin,
For someone as intelligent as you, I am amazed you can come out with such nonsense, the Germans falling for such destructive policies and failing to see the eventual outcome? Come on, Merkel set up the political construct so that AFD or any party opposing the insane policies listed above could never get enough seats to stop it happening, hence the preponderance of “Green, Woke and politicallly correct” parties permanently in power in Germany.Hence my many posts ridiculing “the Germans will never stand for it” in reply to the endless destructive policies forced upon it by the EU.
By the time the German people(and the population of Europe and the UK eventually wake up) it will be far too late to reverse it.
Kevin
You’re talking rubbish, the stage is set for EUR collapse:
https://www.bloomberg.com/news/articles/2022-07-26/hedge-fund-edl-sees-euro-sliding-to-80-us-cents-in-bold-bet
“Notable to see the Nordics close to €400 per MWh, and Germany at €600. Before 2020, anything above €75-100 was considered expensive.”
I’ve seen the spike in gas prices analogised with beer @ £25 a pint, which brings me back to yesterday’s blog, if I may: there were a number of posts regarding the drop in production of zinc & aluminium, due to the high amounts of energy involved.
This seemed to go under the radar, as I was closely watching the response.
It seem that with the one smelter on care & maintenance, & at least 2 more on reduced production, this, if it spreads further, could be the worst problem of all.
As usual, the MIC will have first call, so reductions in productions are likely to hit the consumer zone.
Drink coca-cola? Great if you like it in PET bottles, but the cans are aluminium.
Do we want to see a massive rise in the production of plastic bottles, even if the costs do not ppreclude?
I use coke as a f’rinstance; all canned drinks, inc. beer & cider use aluminium or zinc or both.
Fruit juice cartons are cans in all but name, with a fine layer of aluminium as part of the “barrier layer”
Canned foods? Tend to be mild steel with barrier layers, so that’s tinned fish, beans, tomatoes, corned beef, spam…
The problem is that barrier layer technology is already the cheapest, most efficient way to preserve canned goods for years, so any replacement, bearing similar rises in production costs, is not going to be adopted.
This, to me, is a big, big worry.
PET? http://www.esbottle.com – my mate’s on it
farnesbarnes, that esbottle looks terrific, a real ecological step forward, but to replace 20,000 pet bottles per second + many more thousands of cans, immediately?
That’s not going to happen.
A wonderful idea for the future, I hope, but it has come too late for present troubles.
I would wish your mate every success.
Cheers Buzz
Can’t name names, but there are some huge European companies interested, and not just the beverage market.
If the company strapline isn’t Auf Weidersein PET they’re doing everything wrong! I give it to them for free.
On it! Awesome.
also Buzz I see many places dumping plastic bottles in favour of aluminium – just as ally goes up in price (!!)
Green strikes again !
interesting times indeed
Forbin
Are they the usual thin summer markets with Europe scrambling to fill reserves in readiness for winter?
Wouldn’t you have thought that, with present problems, even summer markets would be somewhat “thicker”?
EU doing pretty well on filling reserves at 77.4% as of 21/8/22 ( https://agsi.gie.eu/ ) on target for 80% before 1/10/22. Also three biggest storers Germany (80%), France (89%) & Italy (79.7%) all ahead of target fill so can afford to back off at these silly prices but of course the truth is they will have bought at far lower prices when they could. Quite frankly it doesn’t matter that much now if Nordstream 1 gets switched off anyhow as its only at 20% with other pipeline via Poland been at zero for months they’ve done pretty well in sourcing gas from elsewhere. This is pure speculation imv.
The UK is where the shit storm is going to be as we have bugger all storage so if prices don’t drop back we will say day ahead leccy prices at £666.
Hello Shaun,
Can you really print your way out of energy and resource shortages?
Doesnt reality have something to say about ?
Tough times ahead as the adults are not around anymore….
Forbin
Printing is one thing raising rates is another.
“So if we translate the central banker speak they are expecting a recession and maybe a sharp one. At this stage the solution appears simple cut interest-rates and restart the QE bond buyer. A bit awkward as they have only just raised the former and ended the latter and as I am about to point out there is an elephant in the room.”
This is a similar situation with the UK both of us are facing an energy crisis Europe in a worse state than the UK.
However UK manufacturing PMI missed forecasts of 51 and came in at 46 little wonder the UK stock market down again today.
But going back to interest rates the spike in energy is pushing up inflation and I don’t think you should be pushing up interest rates in these exceptional circumstances you will just punish manufacturing further.
No need for shortages if people are told teh reality of the situation and economise although there ought to be substantial demand destruction given the prices anyhow. My local pub says he won’t be opening Mondays for sure once heating season is on and will be looking at other hours. He will also reduce range as the chiller units cost alot to run Also given everybody still wants to wfh if i was an office mgr I would shut on Mondays as well. Of course what we really need is some coordination to actions like this so it balances across the week.
nickt,
I remember the time when pubs were only from about 10.30 am to 2.45 pm then 5pm to 10-30pm and that is all they needed to open.
Shops had a half day during the week and no opening on a Sunday.
Now I am not saying you need to introduce the same meassures but I agree you some business could close on a Monday like a pub or a shop to cut energy useage, there are lots of ways to do it elsewhere where there is a will there is a way.
good god, no Mondays and half day Friday , almost back to the 3 day week . remember that?
welcome back the 70’s !
anyone for a party 7 ?
Remember what Jasper Carrot thought
of Watneys Red Barrel?
NO NO to a Party 7 but most offices aren’t even on a 3 day week so whats the issue
“As you can see the ECB is between an economic rock comprised of the oncoming downturn and a hard place represented by inflation”.
Never mind the ECB so am I and so I suspect are most of us. I’m seeing my standard of living dropping like a brick thrown from Blackpool Tower and my discretionary spending vanishing. It hardly takes an expert to predict recession when it happens to enough people.
On the bright side I do admire your ability to write the word ‘expert’ and make it sound like utterly clueless cretin!
An expert= unknown drip under pressure.
Ex=unknown quantity
Spurt = A drip under pressure
Had to laugh at this bit: ‘A basic function of a central bank is to defend the currency’!
Hi DD
I do not blame you for laughing as so few actually do it. At the minute the Federal Reserve is doing so but not as a deliberate policy as unless it is forced to such as in the case of the FX swaps in March 2020 it mostly ignores the rest of the world. With commodities being priced in US Dollars currency moves are a smaller issue anyway.
I have noted a couple of the main central banks referring to currency levels which is a change. Today’s subject ( ECB) and the Bank of Canada.
According to the worldometer, Germany has 155 years of coal left at current consumption levels.
Using the Fischer–Tropsch synthesis it could be used for all kinds of useful things
https://lh3.googleusercontent.com/proxy/GnOHEq9wNsX4zD-zeStq_8NAxiWInGUJxGSwTtYPxo4rm2zxGghapKxhK5U7pvKJc-n0aXVVr-d6HRXw0QrEehpptl5HdMb4=w1200-h630-p-k-no-nu
Hi mwhite
It looks as though they are thinking along the same lines. From DW News yesterday.
“Germany is restarting another coal-fired reserve power plant next week as the country tries to save up its gas supplies for the coming winter.
The Heyden plant in Petershagen, near Hanover in northern Germany, is scheduled to return into service from August 29 until the end of April, operator Uniper said on Monday.
With a capacity of 875 megawatts, Heyden is one of the most powerful coal-fired power plants in Germany. It started operation in 1987.”
I note that they later say it will be temporary. I would imagine that is the “inflation is temporary” version of the word.
At least they have the coal plants to fire up our utterly useless politicians just wanted the photo opp blowing ours up before the boilers were even cold. And what worse is the majority of the population and mainstream media just don’t get how duped we’ve been.